Forex Charts & Candlestick Basics.

‘Candlesticks Made Easy’

Types of Forex Charts.

There are three commonly used Forex charts:

1. Line chart

2. Bar Chart

3. Candlesticks

In this article, we’ll discuss in detail the candlesticks because they are easy to read and interpret.

Candlestick Basics

Now that you know what candlestick charts look like, it’s time to learn candlestick patterns and how you can use them to your advantage. Candlesticks reveal a lot of useful information about the market that you can use to make profit, so learning how to read them is vital.

First, let’s learn how to read information provided by a candle.

Bullish Candle: A bullish candle is a long candle that forms when the price goes up(green candle above). In financial markets, the term bullish refers to and long move. Opening a long position means buying/expecting the rates to go up.

Bearish Candle: Bearish candles form when the price moves down(red candle). The term bearish refers to a short move. Opening a short positions means selling/expecting rates to fall.

Real Body: The body is the space between the open and close of the candle. If the body is white or green, it means the candle closed higher than it opened. If it is red, it closed lower than it opened.

Example 1: You’re watching a GBP/JPY 1 hr chart. The candle opens at 142.200 and moves up by 100 pips to close at 142.300 giving you a bullish (white/green) body.

Example 2: You’re watching a EUR/USD 1 hr chart. The candle opens at 1.3900 and moves down by 100 pips to close at 1.3800 giving you a bearish (red) body.

Wicks aka Shadows: I prefer to use the term wicks since candles actually have them! The upper/lower wicks represent the highest/lowest points the candle reached during the time it was open.

Reading Candlestick Patterns

All candles are born neutral.

The line above is a newly open candle. It is neutral, brand new and has yet to move up or down. After opening, they can grow to become either bullish or bearish, or neither. raders don’t know what a candle will become when it is born. They can speculate but they can never truly know what a candle is until it dies (closes).

After a candle is born the battle begins. The bulls and bears fight it out whilst the candle shows us who is winning. If the buyers are stronger, you will see the candle move up and form a bullish white/green candle. But if the sellers become stronger, you will see the candle move down and form a bearish red candle.

Bullish Candles

A Bullish candle has a bullish body, i.e. the candle has opened and closed at a higher price. If it has a strong bullish body, it is a strong bullish candle. If it has a small bullish body, it is a weak bullish candle.The candle not only tells you the price — it tells you the bulls are winning and their power. These bullish candles tell us there are more buyers than sellers and the strength of one over the other.

This is critical information in the Forex market. If your system tells you to go short but the candle is clearly bullish it might be a good idea to hold off on the short. Why would you go short when there are more buyers in the market? Reading candlestick patterns enables you to better assess price in any situation.

Bearish Candles

A bearish candle has a bearish body, i.e. the candle has opened and closed at a lower price. It tells you that there are more sellers in the market than there are buyers. It tells you the sellers are in control, so here a long position may not be a great idea.

Wicks

Wicks show us the highs and lows but in certain cases reading them reveals very useful information. Here we learn about the battle between bulls and bears and their relation to wicks.

If a strong bullish candle suggest that the bulls are in control of the market, what does a bearish candle with a large upper wick and a small bearish body suggest?

Small lower wick, small bearish body, and larger upper wick: This candle tells us that at some point in this candle’s life the bulls tried to push the price up. That is what the long upper wick tells us. However, before the candle closed the bears took over and pushed price back down. This is represented by the bearish body.

Large lower wick, small bullish body, and small upper wick: This candle tells us that at some point in this candle’s life the bears tried to push the price down. That is what the long lower wick tells us. However, before the candle closed the bulls took over and pushed the price back up.

The Basic Candlestick Patterns

1. Spinning Tops:

Candlesticks with a long upper shadow, a long lower shadow and a small body are called spinning tops. This pattern indicates indecision between buyers and sellers.

Spinning Tops are critical in predicting reversals as they often occur when a trend is coming to an end.

If a Spinning Top appears during a bullish trend it indicates to us that bears could be taking back control and potentially end the trend. Until the Spinning Top formed, the bulls were in total control. But now, the Spinning Top suggests to us that the bears are fighting back and the bulls are struggling to continue their bullish trend.

2. Dojis:

Dojis come in different shapes and sizes but they are all characterized by having no body. This means price closed at the same place that price opened.

A Doji is also a form of indecision and it is similar to a Spinning Top. Whenever you see a Doji on your chart you know there is a strong fight going on between the bulls and bears. No side outright wins this fight so it closes at the open or at least very near it.

3. Hammer and Hanging man:

The hammer and hanging man look exactly alike but have totally different meanings depending on past price action. Both have little bodies (black or white), long lower shadows, and short or absent upper shadows.

The hammer is a bullish reversal pattern that forms during a downtrend. When price is falling, hammers signal that the bottom is near and price will start rising again. The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger.

The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level. When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers. The long lower shadow shows that sellers pushed prices lower during the session.

Inverted Hammer and Shooting Star:

The inverted hammer and shooting star also look identical. The only difference between them is whether you’re in a downtrend or uptrend.

An inverted hammer is a bullish reversal candlestick.

A shooting star is a bearish reversal candlestick.

The inverted hammer occurs when price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher. However, sellers saw this and attempted to push price back down but the buyers still managed to close near the open.

Since the sellers weren’t able to close the price any lower, this is a good indication there are no more sellers and the buyers might take control.

The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.

Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom.

This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left.

4. Engulfing Candles

The bullish engulfing pattern is a two candlestick pattern that signals a strong up move may be coming.It happens when a bearish candle is immediately followed by a larger bullish candle. This second candle “engulfs” the bearish candle, which means buyers overpowered the sellers and a possible move up could occur.

On the other hand, the bearish engulfing pattern is the opposite of the bullish pattern. This type of candlestick pattern occurs when the bullish candle is immediately followed by a bearish candle that completely “engulfs” it. This means that sellers overpowered the buyers and that a strong move down could happen.

5. Tweezer Bottoms and Tops:

This type of dual candlestick patterns, that look like a pair of tweezers, are usually spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur. The most effective Tweezers have the following characteristics:

• The first candlestick is the same as the overall trend. If price is moving up, then the first candle should be bullish.
• The second candlestick is opposite the overall trend. If price is moving up, then the second candle should be bearish.
• The shadows of the candlesticks should be of equal length.
• Tweezer Tops should have the same highs, while Tweezer Bottoms should have the same lows.

6. Evening and Morning Stars

The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a trend. They are reversal patterns that can be recognized through three characteristics. We’ll use the Evening Star Pattern on the right as an example of what you may see:

• The first candlestick is a bullish candle, which is part of a recent uptrend.
• The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish.
• The third candlestick acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.

7. Three White Soldiers and Black Crows:

The three white soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signaling a reversal has occurred. This type of triple candlestick pattern is considered as one of the most potent in-yo-face bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.

The first of the three soldiers is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

For the pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body. Also, the second candlestick should close near its high, leaving a small or non-existent upper wick.

For the three white soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.

The three black crows candlestick pattern is just the opposite of the three white soldiers. It is formed when three bearish candles follow a strong UPTREND, indicating that a reversal is in the works.