Welcome to QCTC’s very first lesson. I know you may hate me for my extensive writing, but you can relax here, this lesson will be mostly images-only. I love you, sarcasm!

Let’s do this!

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1. Candlestick chart’s introduction

Firstly, a little show of the most significant thing about this chart. See the next image.

A line graph where a point on X axis has exactly one value Y and a candlestick chart where a point of an interval on X axis represents a range of Y values
You should recognize that line graph on the left – this kind of graph is a representation of mathematical function – for every point on X axis, there is exactly one value on Y. Now look at the candlestick chart on the right and perhaps you see that it looks quite similar. But, in reality, it provides a different (extended) representation of data. Without going to any more details, the main trait of a “chart” is that for a point on X axis, there can be multiple Y values – a point on X can be assigned a range of values instead of just one. Candlestick chart is formed by candlesticks and each candlestick captures a certain range of values on X axis. If X axis is Time and Y is Price, candlestick chart shows ranges of prices that appeared at different time intervals.

Ok, that was just a comparison so that you understand that a candlestick chart is nothing magical. Here is a more detailed image of a candlestick chart.

A candlestick chart with highlighted candlesticks
Every candlestick chart is formed by candlesticks. Every candlestick depicts how the price moved during candlestick’s time frame (interval).

A candlestick chart is a chart formed by CANDLESTICKS (instead of points which form a line graph). Duh! A candlestick is an element of this chart that assings a range of values on vertical axis (Price) to a specific range on horizontal axis (Time). In different words, a candlestick chart shows ranges of prices that appeared at different time intervals. Or, simply, a candlestick chart shows how the price changed over time.

So, why is it that thing called a “candlestick”? It might be pretty obvious, it looks like a candlestick – yup, that thing formed by a candle and a wick (cotton string) in the middle.

2. First look at candlesticks and their use in trading

Why would this candlestick chart be used in trading? Because of the way candlesticks represent data which suits trading very much.

To explain how candlesticks work, let’s take a look at the market of Bitcoin as an example. At certain point in time – let’s say on 12th December 2017, Wednesday, 15:01, a new candlestick’s TIME INTERVAL starts. People want to buy Bitcoin for a specific price. What price? Well, the last price, for which Bitcoin was sold, was e.g. 15000 USD.

  1. The new BUYERs want to BUY Bitcoin, some want to pay 15000 USD for Bitcoin (just like the last BUYER did), some 15100 USD, others even 15200 USD, but there are also those who want to BUY for less (these BUYERs think 15000 is too much), let’s say 14900 USD. These prices are the maximum prices the BUYERs are willing to pay – if a SELLER SELLs for less, good for the BUYER. If you are asking yourself, why would someone pay more that 15000 USD (the last purchase) for Bitcoin? Well, it depends on the SELLERs, a SELLER has to SELL for a BUYER to be able to BUY, if a BUYER offers a high enouhg price, the SELLER will SELL more likely. During the candlestick’s TIME INTERVAL, these BUYERs make these BUY orders with their specific prices.
  2. The SELLERs of Bitcoin will SELL if the provided price is high enough. Maybe even for less if they feel people will not want to spend that much money for Bitcoin. A few SELLERs want to SELL Bitcoin for 15200, some SELLERs for 15100, some for 15000, others believe Bitcoin is going to fall very quickly at this point, they want to SELL for even for less – 14950 USD. But none of the SELLERs wants to SELL for less than 14950 USD (per Bitcoin)! These prices are the minimum prices the SELLERs are willing to SELL for – if a BUYER makes an order for a higher price, good for the SELLER. During the candlestick’s TIME INTERVAL, these SELLERs make these SELL orders with their specific prices.
  3. During the candlestick’s TIME INTERVAL, some orders are FILLED (a SELLER SELLs to a BUYER), some are not – there was no SELLER who was willing to SELL to the BUYER willing to pay 14900 USD at max for Bitcoin. The FIRST FILLED order during the candlestick’s TIME INTERVAL had a price of 15000 USD. As Bitcoin tends to rise, the LAST FILLED order had a price of 15200 USD.

From all of the FILLED orders during the candlestick’s TIME INTERVAL, we can extract 4 imporant pieces of information. These are:

  1. OPENING price – the price of the FIRST FILLED order during a candlestick’s TIME INTERVAL,
  2. CLOSING price – the price of the LAST FILLED order during a candlestick’s TIME INTERVAL,
  3. HIGHEST price – the highest price of all orders FILLED during the candlestick’s TIME INTERVAL,
  4. LOWEST price – the lowest price of all orders FILLED during the candlestick’s TIME INTERVAL.

These 4 pieces of information are what forms a single candlestick. Nothing more!

The candlestick from our example Bitcoin market situation would look something like this – see the following image.

Candlestick with equal closing price and highest price of 15200 USD, opening price of 15000 USD and lowest price of 14950 USD
The candlestick from the example Bitcoin situation. The closing price equals the highest price, so there is no upper shadow!

That fat (rectangular) part – the REAL BODY – of a candlestick represents the range of prices between the OPENING and CLOSING price during the candlestick’s TIME INTERVAL. The thin part (looking like a stick coming out of a rectangle) – the SHADOW – represents the range of prices above or below the OPENING and CLOSING price up to the HIGHEST and LOWEST price during the candlestick’s TIME INTERVAL.

Oh yes, I highlighted the term TIME INTERVAL in my example. It would be quite impractical (and also impossible) to measure the market’s current situation during every single millisecond (or even a smaller unit). The chart would get overfilled with candlesticks and it would have no information value. Instead, each candlestick of a candlestick chart is set to GO ON for a certain LONGER period of time (1 minute/hour/day/…). Basically, in case of a 1-minute-long TIME INTERVAL, a candlestick of our candlestick chart shows what orders were FILLED in that 1 minute, another candlestick shows the situation during the next minute, etc.

New candlesticks are formed real-time! When the TIME INTERVAL starts, the candlestick looks like something. When its TIME INTERVAL ends, the candlestick may look completely different! In other words, if a candlestick has a 1-minute TIME INTERVAL, the last two seconds of this TIME INTERVAL can change the whole candlestick. It does not have to change that much, nevertheless, it can!

Whatever tool you use to preview the current situation on the market, I am sure it allows you to set the TIME INTERVAL of the displayed candlestick chart yourself. This setting influences all the displayed candlesticks of the chart. A look at the chart with candlesticks that are 1-day-long gives you a better perspective of the market’s rise or fall than a 1-minute-long TIME INTERVAL.

One last note, TIME INTERVAL has another name (term) – TIME FRAME. These two terms are equal. I heard TIME FRAME being used more often but that word “frame” has always been quite confusing for me. Nevertheless, I use TIME FRAME only in the images to refer to the INTERVAL.

3. Candlesticks in detail

As already mentioned, every candlestick has a thick (rectangular) part, called a REAL BODY, and a thin part, called a SHADOW.

There are two types of candlesticks. There are BULLISH candlesticks and BEARISH candlesticks. If you never heard the words BULLISH or BEARISH before, do not worry, neither did I when I started. These words are quite historical.

  • BULLISH – Bulls are those market participants that believe the price will go higher. Therefore, BULLISH represents the situation where the CLOSING price of a candlestick is higher than the OPENING price – the price climbed up during a candlestick’s TIME INTERVAL.
  • BEARISH – Bears are those market participants that believe the price will go lower. Therefore, BEARISH represents the situation where the CLOSING price of a candlestick is lower than the OPENING price – the price fell down during a candlestick’s TIME INTERVAL.

BULLISH and BEARISH candlesticks have different appearance in a candlestick chart. You need to distinguish between them as they help you understand the market’s flow. Here come the images!

Bullish candlesticks whose opening price is lower than closing price
Description of bullish candlesticks that come in 2 colours – green or white (with black-border).
Bearish candlesticks whose opening price is higher than closing price
Description of bearish candlesticks that come in 2 colours – red or black.

Candlesticks can have really wacky appearances. If a BULLISH candlestick has only the REAL BODY and no SHADOW, this is completely valid, it just means that the HIGHEST price is the same as the CLOSING price and the LOWEST price is the same as the OPENING price. It applies vice versa (LOWEST is CLOSING, HIGHEST is OPENING) for a BEARISH candlestick.

The UPPER SHADOW and the LOWER SHADOW of a candlestick can have different lengths and so can the REAL BODY. You can predict a lot about the market by looking for certain specific candlesticks. The most foretelling candlesticks are called PIN BARs. PIN BARs have one SHADOW longer than the other and it is called a TAIL. The TAIL of a PIN BAR represents a rejected price range. In order to consider a CANDLESTICK to be a PIN BAR, the TAIL should have a length of at least half of the candlestick’s price range (price range is calculated – “HIGHEST price”-(minus)”LOWEST price”). See the next image. What do these two PIN BARs say?

  • BULLISH PIN BAR – Shows rejection of lower prices and indicates that the price will rise. Basically, a BULLISH PIN BAR represents that situation when price started falling (SELLERs wanted to SELL a lot, started a selling rally) but, thanks to the extreme initiative and pressure from the BUYERs (a lot of them really wanted to BUY before the price rises again, others just saw the huge gains so they hopped on the train), the price rose back above its opening price. BULLISH PIN BAR tells you that the people want to BUY!
  • BEARISH PIN BAR – Shows rejection of higher prices and indicates that the price will fall. Basically, a BEARISH PIN BAR represents that situation when the price started rising (BUYERs wanted to BUY, started a buying rally) but, thanks to the extreme initiative and pressure from the SELLERs (a lot of them really wanted to SELL before the price falls again, others just saw the huge losses on the way down, so they left the train too), it fell under its opening price. BEARISH PIN BAR tells you that the people want to SELL!
Bullish and bearish pin bars are candlesticks with a shadow longer than half of the price range.
Description of bullish and bearish pin bar. The longer shadow (the pin) between the opening price and the highest price of a pin bar is called a tail. The tail should be at least as long as half of the candlestick’s price range.

At the beginning, we talked about candlestick’s TIME INTERVAL. You must understand that this TIME INTERVAL really influences your look at the chart. A BULLISH PIN BAR in a candlestick chart with 1-day-long TIME INTERVAL means much better news than a BULLISH PIN BAR in a candlestick chart with 1-minute-long TIME INTERVAL. Exchanges allow you to set the TIME INTERVAL of the displayed candlestick chart, use this to your own advantage!

Warning
I am sure I said this already, the crypto world is a crazy place, crypto trading included. Do not take the information about candlesticks as a guarantee that the market will change accordingly. The market can change extremely fast. PIN BARs are just hints, no guarantees! You must watch the market much longer to analyze whether these “hints” are justified or not.

4. Candlestick chart’s finale

Previously, we looked at candlesticks as individual entities – if you understand those, there is not really anything more to teach you. So, as the last thing in this lesson, I would just like to present a candlestick chart as a whole.

When looking at a chart, you cannot really do much about it, it is just a display of the current market situation. What you can do – you can analyze the chart and decide whether to buy or sell. In order to do that, sometimes, you have to see the bigger picture. So, whenever you open an exchange, you might be given an option to change two parameters of the displayed chart.

  1. Candlestick TIME FRAME (INTERVAL) – this is that good old candlestick’s TIME INTERVAL. It is a period of time that every single candlestick captures and, based on the FILLED orders during this period, a candlestick gets its OPENING, CLOSING, HIGHEST and LOWEST price information.
  2. Chart TIME FRAME (INTERVAL) – This is the sum of the TIME INTERVALs of all displayed candlesticks of the chart. Many times, you will not be able to directly change the chart’s TIME INTERVAL as this setting is connected to the candlesticks’ TIME INTERVAL. If the chart displays a fixed amount of candlesticks (e.g. GDAX exchange always displays exactly 60 candlesticks), the chart’s TIME INTERVAL is given by the equation “chart’s number of candlesticks”x(multiplied by)”candlestick’s TIME INTERVAL” (in case of GDAX and an 1-hour-long candlestick TIME INTERVAL, the chart’s TIME INTERVAL would be 60 hours).
Candlestick chart is a graph with 2 axes - horizontal axis represents time, vertical represents price
Candlestick chart is a chart that shows a number of candlesticks. Every candlestick represents a change of price that occured in an interval – this interval is the same for all candlesticks. These intervals are candlestick time frames. The sum of all shown candlestick time frames equals the chart time frame.

Ok, I guess that is it, we are almost done. To summarize how you should interpret a candlestick chart, here is one more example. See the image below!

Candlestick chart shown at time between 3:50pm and 4:15pm and 5-minute-long candlestick time frames
An example of how a candlestick chart is interpreted. One candlestick’s opening, closing, highest and lowest price are shown in detail. REMEMBER THIS as every single crypto exchange shows the chart this way!

5. Lesson 1 is over!

Now you know how to read candlestick charts. Every single exchange uses these charts, so knowing about them is a must.

The next lesson will be about different types of trading ORDERS. Link below!

If you do not want to continue to the next lesson right now, you can also return to the Quick Crypto Trading Course navigation page with the following link.

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