Candlesticks, Trends, Support and Resistance: Three Essential Chart-Reading Skills

Price charts are the most direct tool for understanding a market. Reading them requires three core skills: candlesticks show which side had the upper hand during each period; trends show the market's overall direction; and support and resistance identify areas where price may pause, reverse or break through. Learn them separately, then use them together.

Part One: Candlesticks

1. The Four Prices in a Candlestick

Candlestick charts originated in Japan's rice markets in the 18th century and later became one of the most widely used chart types worldwide. Each candle represents price changes over a period such as 1 minute, 1 hour or 1 day, depending on the selected chart timeframe. MT5 offers 21 timeframes.

Each candle contains four prices:

1. Open: the price at the start of the period
2. Close: the price at the end of the period
3. High: the highest price reached during the period
4. Low: the lowest price reached during the period

The section between the opening and closing prices is the body. The thin lines above and below it are the wicks, or shadows, marking the high and low.

1. Bullish candle, often green or white: the close is above the open, so price rose during the period
2. Bearish candle, often red or black: the close is below the open, so price fell during the period

2. What to Look for in a Candle

A candle shows the balance between buyers and sellers during that period. Look at four things:

1. Body size: a long body indicates a clear advantage for one side; a short body suggests a close contest
2. Wicks relative to the body: a long wick shows that price reached a level but was pushed back. A long lower wick indicates buying interest below; a long upper wick indicates selling pressure above
3. The close within the candle's range: a close near the high shows buyers remained in control to the end; a close near the low shows sellers remained in control
4. Its relationship to the wider move: the same candle can mean something very different during an advance and after a prolonged decline

3. Common Single-Candle Patterns

Note the hammer and hanging man, and the inverted hammer and shooting star. Their shapes are the same, but their names and meanings differ according to where they appear.

4. Common Multi-Candle Patterns

5. The Limits of Candlesticks

1. Location matters more than shape. A pattern near key support or resistance is more informative than the same pattern in the middle of a move
2. Patterns need confirmation. After a bullish pattern, the signal is more reliable if the next candle breaks above the pattern's high
3. Candles show what happened, not why. A candle cannot explain why its open and close were close together or far apart
4. Do not rely on one signal alone. Markets do not always follow patterns; several reasons pointing in the same direction provide stronger context

Part Two: Trends

6. Three Market States

Prices rarely move in straight lines. They zigzag, rising to a high, pulling back to a low and then continuing. Trends are identified by the relative positions of those highs and lows.

1. Uptrend: each high is above the previous high, forming higher highs, and each low is above the previous low, forming higher lows. Buyers dominate
2. Downtrend: each high is below the previous high, forming lower highs, and each low is below the previous low, forming lower lows. Sellers dominate
3. Sideways market, or range: highs and lows have no clear directional pattern, and price moves back and forth within a broadly horizontal range

How do you identify highs and lows? A common definition is that a candle forms a swing high if its high is above those of the adjacent candles on either side. It forms a swing low if its low is below those of its neighbours. Connecting these points makes market structure clearer.

7. Drawing Trendlines

1. Uptrend line: connect two or more successively higher lows
2. Downtrend line: connect two or more successively lower highs

A few rules for drawing trendlines:

1. Two points draw a line; three confirm it. A line connecting only two points is provisional. It gains validity when price returns a third time and reacts to it
2. Do not draw through candle bodies. A line can connect wick tips, but a line passing through the bodies of many candles is poorly drawn
3. Very steep trendlines are unreliable. They are easily broken
4. Start on a higher timeframe. Daily or 4-hour charts help filter intraday noise

Draw a parallel line through the highs on the other side of an uptrend to create a channel. Its lower boundary can be viewed as a potential buying area and its upper boundary as a potential selling area.

8. Viewing Trends Across Timeframes

The same market can look very different across timeframes. A move that looks like a sharp sell-off on a 5-minute chart may be a normal pullback on the daily chart.

A simple top-down sequence is:

The principle is to use higher timeframes for direction and lower timeframes for entries.

9. When Does a Trend End?

A trend is not itself a buy or sell signal. It indicates which side of the market to favour. What warrants particular attention is a break in structure:

1. In an uptrend, price fails to form another higher low and instead breaks below the previous low
2. In a downtrend, price fails to form another lower high and instead breaks above the previous high
3. Price closes clearly on the other side of the trendline, with the candle body beyond it

At that point, the appropriate response is to exit or reassess, rather than continue holding in the hope that price returns.

Part Three: Support and Resistance

10. What Are Support and Resistance?

1. Support is an area below the current price where sufficient buying interest can stop a decline, like a floor
2. Resistance is an area above the current price where sufficient selling pressure can stop a rise, like a ceiling

The same price level acts as support when price is above it and resistance when price is below it.

When price touches or briefly moves through a level before turning back, it is testing that level.

11. Why Do They Form?

Support and resistance arise from traders' memories of past prices and the orders that gather around them:

1. When price falls to a previous rebound area, buyers who see it as cheap may enter, while short sellers may take profits. Buy orders cluster and the decline slows
2. When price rises to a previous rejection area, holders of long positions may take profits or exit at break-even, while new sellers enter. Sell orders cluster and the advance slows
3. Many traders watching and acting at the same level can reinforce the effect

12. Support and Resistance Are Zones, Not Single Lines

Price rarely stops at precisely the same level every time. It often moves slightly beyond it or turns just before it. It is therefore more practical to treat support and resistance as zones:

1. Place the centre of the zone where candle bodies cluster
2. Extend its edges to nearby wick tips

Choose one drawing method at a time and apply it consistently.

13. Role Reversal

Broken support often becomes resistance, while broken resistance often becomes support.

After price breaks below support, traders who bought there are left in losing positions. If price rebounds to that area, many may sell to break even, turning it into resistance. The reverse also applies.

14. Finding Key Levels

1. Choose the timeframe and lookback period: recent months for shorter-term trading and a year or more for longer-term trading
2. Mark clear swing highs and lows where price visibly changed direction
3. Find levels with repeated reactions: areas where price paused or reversed several times, with those reactions spread over time
4. Draw lines and widen them into zones
5. Assess their strength using the table below
6. Keep only the nearest and most important levels. Too many lines make the chart harder to read

Five factors can help assess a level's strength:

There are two views on the number of tests, and both are worth understanding. One holds that a level becomes stronger each time price tests it without breaking through. The other holds that each test consumes some of the orders resting there. If price repeatedly returns to a level and each rebound weakens, buying or selling interest may be getting absorbed, making a break more likely. Assess the number of tests together with the strength of the rebounds.

Two other common types of level:

1. Round numbers: prices ending in 00 or 50, such as 1.10000 and 1.10500, often attract clusters of orders and stronger reactions when reached
2. Dynamic levels from indicators: commonly used 50-day and 200-day moving averages, along with Fibonacci retracement levels, can provide additional context. When they overlap with horizontal levels, the area deserves closer attention

Avoid filling the chart with indicators. A few tools and one consistent set of rules are more useful than a dozen conflicting signals.

15. Three Approaches at Support and Resistance

When price reaches a key level, there are usually three situations:

A few key points:

1. Do not enter on the first touch alone. Wait for evidence of rejection, such as a long wick, a rapid reversal or a breakout that fails to hold
2. Waiting for a retest after a breakout is more cautious. A retest can reduce false-breakout risk, but if price never returns, you may miss the move
3. Watch for false breakouts. A move through a zone followed by a close back inside it is a false breakout. Waiting for a candle close is safer than chasing an intraperiod breach
4. Place stops outside the zone rather than exactly on the line. The zone provides a natural barrier; place the stop beyond it

Example using invented prices: an instrument has repeatedly found support at 100–102. Price returns to the zone and forms a hammer with a long lower wick. A buy is opened at 103, with a stop below the zone at 99 and a target at the next resistance level of 112.

1. Risk per unit: 103 − 99 = 4
2. Potential reward per unit: 112 − 103 = 9
3. Risk-to-reward ratio: approximately 1 : 2.25

16. When Do Support and Resistance Fail?

Support and resistance express probabilities, not guarantees. Pay particular attention when:

1. Price closes decisively beyond the zone with the candle body on the other side, indicating that the balance of forces has changed
2. Major news changes supply and demand. Data releases or unexpected events can send price straight through a level
3. A level becomes outdated. If price has moved into a very different range, old levels become less relevant; more recent levels matter more
4. Price reaches an all-time high or low. With no historical levels above or below, estimates must rely on tools such as trendlines and round numbers

Part Four: Combining the Three Skills

Together, the three skills provide a clear sequence for reading a chart:

1. First, identify the trend: on a higher timeframe such as the daily chart, is the market rising, falling or ranging?
2. Next, locate the levels: where is the nearest key support or resistance in relation to the trend direction?
3. Finally, read the candles: when price reaches that level, is there a confirmation signal?

A complete illustrative example: a currency pair is in a daily uptrend, forming higher highs and higher lows. Price pulls back to a support zone that has held several times. On the third test, it briefly breaks below, quickly recovers and forms a bullish engulfing candle.

1. A beginner's approach: buy immediately after spotting the engulfing pattern
2. A more disciplined approach: wait until the following day for price to break above the engulfing candle's high, then enter. Place the stop below the support zone and target the next resistance above

The second approach gives up some of the initial profit in exchange for more confirmation and a higher probability of success, while providing a clear location for the stop.

Remember that support and resistance are most useful for identifying where to accept that a trade is wrong, rather than predicting that price must rebound.

Summary

1. Candlesticks: four prices; assess the body, wicks, closing position and location. Patterns matter most at key levels and after confirmation
2. Trends: examine the sequence of highs and lows. Two points draw a trendline; three confirm it. Higher timeframes set direction; lower timeframes refine entries
3. Support and resistance: zones rather than single lines, with roles reversing after breaks. Assess strength through the number and timing of reactions, their force, volume and timeframe
4. Use them together: follow the trend, identify key levels, wait for candle confirmation and place the stop beyond the level

Chart-reading ability develops through repeated practice. The more charts you examine and annotate, the easier these structures become to recognise. Practise marking levels and executing trades on a demo account before applying them to live trading.

Risk warning: CFDs are leveraged products. Price movements may cause losses greater than expected, and CFDs are not suitable for all investors. This lesson is for educational purposes only and does not constitute investment advice. All price movements and prices in this lesson are illustrative and do not represent actual market conditions for any instrument.