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How to Read Price Bars Candlestick Charts

Now that we have learnt how to read price charts, the next step is for us to zoom in on the individual bars that make up the price charts.

Since these charts are called candlestick charts, the individual bars are called candlestick bars. For convenience, most people will also refer to them simply as price bars.

Each candlestick bar consists of 4 data points:

Open – this is the opening price of the bar, which refers to the first transaction which occurred in this time period.
Close – this is the closing price of the bar, which refers to the last transaction which occurred in this time period.
High – this refers to the highest transaction price which occurred in this time period.
Low – this refers to the lowest transaction price which occurred in this time period.

Based on these 4 data points, all candlestick bars will have 2 components:

Body – this is the “fat” part of the candle, and its length is determined by the distance between the open and close.
- White body – If the closing price is higher than the opening price, it means that prices moved up, and it represents bullishness.
- Black body – If the closing price is lower than the opening price, it means that prices moved down, and it represents bearishness.
Shadow – this shadow is the “thin” part of the candle, and represents the extreme moves of prices within the bar.
- Short shadow – this signals low volatility and less uncertainty.
- Long shadow – this signals high volatility and more uncertainty.

I will be covering more of this in my price action trading guide, so for now here are some simple rules for analysis.

Bullish factors:

A lot of long white bars

Short or no shadows on the top of bars

Long or no shadows on the bottom of bars

Bearish factors:

A lot of long black bars

Short or no shadows on the bottom of bars

Long or no shadows on the top of bars

thumbnail beginner guide to trading and TA

If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”

Spencer is an avid globetrotter who achieved financial freedom in his 20s, while trading & teaching across 70+ countries. As a former professional trader in private equity and proprietary funds, he has over 15 years of market experience, and has been featured on more than 20 occasions in the media.

How to Read Price Charts (Candlestick Charts)

As we mentioned in the previous chapter, there are buyers and sellers, and a transaction happens when both a buyer and seller agree to transact at a particular price.

As the number of buyers and sellers in the market vary, so does the supply and demand, which causes the price to change continuously.

A price chart is simply a way to visually represent all the transactions that take place for a particular product, over a certain period of time. By plotting it out, it makes it easier for us to study the price trends over time.

While there are many types of price charts, such as bar charts, line charts, renko charts, kagi charts, etc, the most commonly used chart nowadays is the candlestick chart, so I will be using it for all my examples.

In the example above, you can see that prices are plotted as the y-axis, while time is plotted as the x-axis, so as we view the chart from left to right, we are observing how prices change over time.

Since this is a daily chart, 1 bar represents 1 full day of transactions. In trading terminology, we will say that the chart timeframe is the daily timeframe.

Some common timeframes include M5 (5 minutes), M15 (15 minutes), M30 (30 minutes), H1 (1 hour), daily (1 day), weekly (1 week), monthly (1 month), etc.

In the same example above, you can see that if I switch to a 1 week (5 trading days) timeframe, all that data in the box will be compressed into 1 bar. And if I switch to a monthly timeframe, all the data in the 1 month box will be compressed into 1 bar.

If you look at the bottom of the chart, you will see red and green bars, these represent the volume, which is the number of transactions that occur in that period of time corresponding with the price change.

Generally, the bar is green if price closed higher (relative to the close of the prior bar), and it is red if the bar closed lower.

So this is how the same chart will look like as I toggle between the daily chart, weekly chart, and monthly chart.

As you go to a higher timeframe, you will notice that the chart gets “cleaner” and less granular, which makes it easier to study long-term trends by removing the noise, but on the downside it contains less data.

Personally, for my own trading, I like to stick to the daily chart, because it works well for swing trading.

If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”

How Much Capital Do I Need to Start Trading?

how much capital do you need to start trading

For new traders looking to start out their journey, what is the minimum amount of capital you will need to start trading?

What is the optimal amount of capital you should use to ensure that you take your trading seriously?

The tricky thing about this question is that it varies from person to person, there is no one correct number.

If you ask a multi-millionaire, he will think that starting with $10,000 is too little, but if you asking a student, he will say that $10,000 is his life savings.

So obviously the amount of starting capital will depend on your stage of life and your current net worth.

If you have played any game of chance such as poker, you will understand the concept of “skin in the game”.

If the bets are too tiny, no one will take the game seriously, because there is no real risk involved.

Similar to trading, if you capital is too small, and every trade gives you a profit or loss of less than 10 dollars, then you probably won’t take your trading decisions very seriously.

Hence, there needs to be a certain amount of money involved to make you take your trades seriously.

On the other hand, if the bets are too big, for example each bet is a few thousand dollars, you would most likely be too stressed about losing, and not be able to make rational decisions.

Similar to trading, if you start panicking the moment you place a trade, then most likely your trading size is too big.

So we need to tread a fine line to introduce the “right amount” of fear, so that you will take the decisions seriously, but not too much fear that it cripples you.

In conclusion, the answer to this question is quite simple – you should find an amount which is not so large that you cannot afford to lose, yet is not so small that you do not have any “skin in the game”.

If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”

Should I Start with Trading or Investing?

should you start with investing or trading

The first problem many people face is not knowing whether to use their money for investing or trading.

Since they usually start off with a fixed sum of money, they have to decide on one or the other to start off.

Many people will small sums of money then make the common mistake of “playing it safe”, perhaps after hearing stories of Warren Buffett or about how “risky” trading is, and then decide to just put their money in things like bonds or ETFs, with a low return of 1-5% a year.

The problem with this approach is that unless you have a large amount of money to start with, you will take a whole lifetime just to build a decent-sized portfolio.

For example, if you consistently grow your portfolio at a compounded rate of 3% every year with no losses, it would take you 24 years just to double your portfolio.

And what happens if you get caught in a market crash?

So if you are starting with a small sum of money, it definitely makes more sense to focus on trading at the start, which can give you 3-5% monthly cashflow, which you can then use to grow your long-term investment portfolio faster.

As a simple rule, I would suggest for you to focus on trading until you have at least $100,000 capital before you start looking to do investing.

And once you have hit that milestone, you can continue to do both trading and investing, because trading can provide monthly cashflow, while investing can provide long-term passive income, so they both complement each other.

If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”

How to Start Trading for Beginners

On a day to day basis, the price of every financial product moves up and down, for example you hear about stock prices moving up, or oil prices crashing, for different currencies appreciating or deprecating against one another.

At its core, learning how to trade is simply being able to make a profit from capturing these price moves.

If you buy a stock and it moves up, and you sell it at a higher price, you would have captured that price move and made a profit.

Do this multiple times successfully, and you would be able to make a full-time living off it.

Of course, not every trade is going to be profitable, because sometimes you might get it wrong.

But after making say 50-100 trades, if you are able to consistently make money, then it means you might have a winning trading system for how to trade in the markets.

If you have ever been to a casino, you will know that over the long run you will lose money because the odds are against you.

Although the casino’s edge is very small, over the long run and over a large number of transactions, it adds up to huge profits.

Knowing how to trade is somewhat similar.

If you can find an edge (through your analysis), exploit it over a large number of trades (money management), and can do it consistently without letting your emotions get in the way (mindset), then you will have a chance to become very successful in trading.

If you would like to learn how to get started in trading, also check out: “The Beginner’s Guide to Trading & Technical Analysis”