Cryptocurrency Trading 101: Candlestick Price Charts

One of the most fundamental pieces of cryptocurrency trading is understanding how to reach charts.

Without the ability to reach a chart, it’s impractical for us to believe we could be successful at trading in the long term. We must ensure we are making educated decisions based on the most accurate data possible.

First and foremost, candlestick charts are the primary method utilized by millions of traders to determine the proper timing for a trade. Candlestick charts are the way the traders determine the current and historical price of an asset.

This article will answer our most pressing questions regarding candlestick charts. Some of these questions include:

  • What is a candlestick?

  • How do we read a candlestick chart?

  • How is a candlestick calculated?

What is a candlestick?

Before we can read a candlestick chart in full, we must first understand the components of a single candlestick. After we grasp the core concepts of a candlestick, we will be able to combine individual candlesticks to construct a chart.

Another way that traders sometimes refer to candlestick charts is “OHLCV” charts. OHLCV stands for Open, High, Low, Close, and Volume. Since charts don’t always include the volume, the “V” in the acronym is sometimes left out.

In fact, the candlesticks themselves do not include the trading volume, so we will only need to concern ourselves with the Open, High, Low, and Close elements for the candlestick. The Volume aspect of OHLCV charts is typically displayed underneath the candlesticks. In the screenshot at the top of this article, you can see the Volume on Coinbase Pro is displayed as faint spikes at the bottom of the chart section.

Let’s break down the O, H, L, C, and V components further.

 
This illustration depicts the important elements of a candlestick.
This illustration depicts the important elements of a candlestick.

Open Price (O)

The Open Price is the price of the asset at the start of the candlestick period. More specifically, it is the price of the first trade that was made in that period.

Example: Imagine we had a 1-day candlestick period. The open price would be the price of the first trade that day. As an example, if the first trade for the BTC/USD trading pair was for $8,000.00 at 12:01 AM today, the Open Price for today’s BTC/USD candlestick would be $8,000.00.

High Price (H)

This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the highest price of any trade.
This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the highest price of any trade.

The High Price is the highest price of any trade made during a candlestick period. That means no matter how the price increased or decreased over the period, the trade with the maximum price in the period is marked as the High Price.

Notice the High Price is not necessarily always different than the Open Price, Close Price, or even the Low Price.

In the illustration to the right, we see an example of how the High Price is the same as the Open Price. This indicates the Open Price was the highest price of any trade completed in the candlestick period.

Low Price (L)

This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the lowest price of any trade.
This candlestick demonstrates what it would look like if the first trade in the candlestick period was also the lowest price of any trade.

The Low Price is the lowest price of any trade made during a specific candlestick period. Regardless of how the price goes up or down over the course of a candlestick period, the trade with the lowest price will be marked as the Low Price.

Notice it is possible for the low price to be the same as the Open Price, Close Price, or even the High Price.

In the illustration to the right, we demonstrate an example of a candlestick that has the Open Price and Low Price as the same. This suggests the first trade in the candlestick period was the lowest price of any trade in the period.

Close Price (C)

The Close Price is the last trade in a candlestick period. This closing price completes the candlestick and represents the price of an asset at the end of the time interval.

The relation of the Close Price to the Open Price also determines the color of a candlestick. When the closing price is higher than the opening price, the candlestick is colored green. If the closing price is lower than the opening price, the candlestick is colored red.

A closing price above the opening price means the asset increased in price over the candlestick period. On the other hand, a closing price lower than the opening price means the asset decreased in price over the candlestick period.

Note: Some exchanges or charting tools will use other colors besides green or red. In those cases, we need to check to see which color represents an increase in price and which represents a decrease in price.

Volume (V)

Although Volume is not included within the components of a candlestick, we will still take a moment to discuss the importance of Volume.

Volume is the total amount that was trading during the period of a candlestick. Most often, this volume is displayed in terms of the base currency. That means for a trading pair like BTC/USDT, the volume would be in terms of BTC.

The Volume is calculated by summing the amount included in each individual trade.

How do we read candlestick charts?

Now that we have an understanding of the different components of an individual candlestick, it’s time to put our knowledge to the test by reading a full candlestick chart. In the following image, we can see a chart that was taken from Coinbase Pro.

Price run.png

The green arrow is not part of the chart. It was added to show the trend during that section in the graph.

We can see there was a long run of continuously green candlesticks. This occurrence represents an increasing price for the asset. After each green candlestick, the price of the asset was higher than when it began the candlestick.

Similar to increasing trends, we can also see how the graph looks when the price of an asset decreases.

The above image highlights a flash crash. In less than one hour, the price went from just over $9,500 to a low of nearly $8,000 before climbing back to around $8,750.

We can see the long tail that reaches the level marked as “low”. That means the price went all the way down to that point, before rising back up to the closing value marked “close”.

That entire price movement happened in less than 1 hour since we can see the “1h” interval is selected in the top left corner of the graph. That means each individual candlestick includes exactly 1 hour’s worth of trades.

How are candlesticks calculated?

As time goes by, candlesticks are constructed by taking individual trades that are executed on the exchange for a particular trading pair and grouping them with other trades that happened in the same time interval. A single candlestick is typically not just one trade, but a collection of trades.

A 1-hour candlestick chart would, therefore, be constructed by grouping all trades every hour into a single candlestick. Whether 10 trades or 100,000 trades happened in that one hour, all of the trades would be combined into a single candlestick.

The last candlestick in the chart is the most current time interval that is not yet complete. If you watch the graph on an exchange, you will notice the last candlestick will continue to move and change as new trades are executed. Once the time period is complete, the candlestick will close and start the next candlestick.

The way we calculate each of the elements in a candlestick is as follows:

  • Open – The price of the first trade in a time period.

  • High – The highest price of any trade in a time period.

  • Low – The lowest price of any trade in a time period.

  • Close – The price of the last trade in the time period.

The time intervals that are used to calculate the candlesticks can typically be changed by the user. Most exchanges support options for 1m, 15m, 1h, 6h, and 1d candlestick charts.

A 1-day candlestick chart would take the first trade after midnight as the open price, the highest trade of the day as the high, the lowest trade of the day as the low, and the last trade before midnight the next day as the close.

The full list of popular time periods for candlestick charts includes:

  • 1m (1 minute)

  • 5m (5 minutes)

  • 15m (15 minutes)

  • 1h (1 hour)

  • 4h (4 hours)

  • 6h (6 hours)

  • 1d (1 day)

  • 1w (1 week)

Congratulations! We can now successfully read candlestick charts and begin evaluating the price of an asset over time. 

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