Most exchanges employ what's known as a “candlestick chart.” These combine elements of both bar graphs and trend-line charts in order to show both an at-a-glance look at a currency's range of value on a given day and its trends over longer periods of time. Candlestick charts aren't unique to Wall Street, nor are they new at all. They were developed in Japan in the 1600s to follow the price of rice, their most precious commodity at the time. They've been a popular market-tracking tool ever since, and are common in stock and commodity exchanges. To the new investor, candlestick charts can be a little confusing at first. That's why we've decided to devote this article to a closer look at the interpretation of candlestick charts.
Let's start with the “micro” side of the chart: the candlestick itself. This is a vertically-oriented bar that represents the highs and lows of a currency's value in one trading day. This bar can be interpreted in the following ways, depending on the type of trading day it portrays:
- In a day (or other specific time period) where the market closed at a higher value than when it opened (known as a bull market), the bottom horizontal line of the bar represents the day's opening value, and the top line of the bar shows where it closed for the day. Most exchanges will shade the candlestick green in a bull market.
- If the currency has had a bear market day (or other specific time period) —where its value ends the day at a lower value than it had when the market opened—the top line of the bar denotes the market's open, and the bottom line shows where it closed. The candlestick for a bear market is shaded red by most exchanges.
In both bull and bear markets, the candlestick will have a thin line extending both upward and downward from that day's candlestick, thus giving it a “wick” at both ends. The top of this line rises to show the highest trading value the currency reached on that day; conversely, the line dropping downward shows the lowest value hit during the same period.
Candlestick charts also give investors a look at the “macro” level, or a currency's trend of performance over an extended period of time. As the time period represented by a candlestick ends, that candlestick is placed on a chart to the right of the one representing the period before it. As these candlesticks stack up, upward or downward trends can easily be seen, representing extended bull or bear markets, respectively. On occasion, some exchanges will show a line that connects the average trading prices over longer periods of time. This line will trace through the candlesticks, giving a clear trend line for the digital currency type in question.
We've given you the basic candlestick chart elements and translations here, but there are nuances and patterns for the more advanced investors, as well. StockCharts.com has compiled a detailed glossary of patterns that can form on a candlestick chart, and we highly recommend it as a tool and guide for the more advanced investor.
This article has presented the essentials for reading and interpreting candlestick charts. They're fairly easy to learn and understand, and with the information they provide, you'll be able to make better market-guided decisions regarding your digital currency investment. The better you're able to keep tabs on the currency or currencies of your choice, the more likely your return on investment will improve.
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