How To Read Forex Candlestick Charts


forex candlestick

Many traders find candlestick charts the most visually appealing when viewing live forex charts. They are also very popular as they provide a variety of price action patterns used by traders all over the world. Black marubozus are significant candlestick patterns that give valuable insight into selling pressure. Black marubozus are rectangular candlesticks with little or no shadow at the top or bottom. These indicate selling pressure in a market and show that bears were calling the shots from the opening bell until the closing bell on the day. A marubozu trading strategy is especially valuable for significant support and resistance levels and may indicate that a potential price level is about to be hit.


It probably pushed up and turned green for a second and then sellers came back and said – “No, we’re pushing this down”. Hence, they pushed it down and it pushed below the open price of the red candle and it dropped, and as soon as it did that it would have turned red. So it closed at that point at the end of that five-minute period, where the close price was at the lower price. In technical analysis, candlestick patterns are often considered a lagging indicator because you need to wait until the close of a candle before entering a trade. This has many drawbacks, with the most important being that lagging indicators only record the results, so it leaves room for the trader to decide or speculate on the next price movements. If the asset closed higher than it opened, the body is hollow or unfilled, with the opening price at the bottom of the body and the closing price at the top.

Candlestick Chart vs. Bar Chart

Candlestick charts were first used by Japanese rice traders in the 18th century. They are similar to OHLC bars in the fact they also give the open, high, low and close values of a specific time period. However, candlestick charts have a box between the open and close price values.

Candlesticks patterns visually provide a clear and easy set of patterns that are highly accurate. By using candlesticks charts, mixing with some basic technical analysis, you can easily spot to see patterns that emerge in the market. Also, you can start taking profits from these patterns when you trade. If we line up several candlesticks, we can reproduce the progression of line charts by following the candlestick bodies as shown below. The candle shadows also show the severity of price fluctuations in each case. We, thus, get all the information that is essential for an effective price analysis at a glance.

The Japanese analogy is that it represents those who have died in battle. Dragonfly and gravestone dojis are two general exceptions to the assertion that dojis by themselves are neutral. In most Candle books you will see the dojis with a gap down or up in relation to the previous session. In Forex, nonetheless, the dojis will look a bit different as shown in the picture below. The candlestick chart’s origin lies in a Japanese method of technical analysis to read the price of rice contracts.

Bullish pin bar

The includes three consecutive long-bodied candles that opened in the real body of the previous candle and also closed lower than the previous candle too. The pattern will have a long upper wick, a small or no lower wick and a small real body that is near the low of the day. The price range is the difference between the highest and lowest price of a candle during its time period. In trading, the trend of the candlestick chart is critical and often shown with colors. Every day brings a whole host of headlines about the financial markets. Get daily investment insights and analysis from our financial experts.

In this section, 12 are dissected and studied, with the intention to offer you enough insight into a fascinating way to read price action. Once you learn how to correctly read candlestick patterns, you can use this skill as part of a broader trading strategy. This can improve the consistency of your market entries and your overall performance as a trader. In fact, candlestick charts had been used for centuries before the West developed the bar and point-and-figure charts we know and use today.

time frame

By this pattern, investors can observe the changes in the price movements and define an approximate peak of a stock price and the point where its price plummeted. Shooting star as already mentioned is one of the bearish pattern candlesticks. However, in this pattern, the red one followed by the three green bodies is called a shooting star, because it shows the highest price point in the chart.

Reading the Parts of a Candlestick

The classic pattern is formed by three candles although there are some variations as we will see in the Practice Chapter. The line chart is the simplest form of depicting price changes over a period of time. The line is graphed by depicting a series of single points, usually closing prices of the time interval. This simple charting method makes easier the assessment of the direction of a trend, or the comparison of the prices of multiple instruments on the same graph. The very concept of candlestick charts used in forex trading comes from Japanese rice farmers in the 18th century.

It was developed by Japanese merchants in the XVIII-XIX centuries. The psychology of market participants’ behaviour is determined by the supply/demand ratio, which, in turn, affects the price movements. As a rule, the asset prices move in cycles, because people behave similarly in certain situations. Each candlestick pattern has a specific interpretation that reflects the attitude of market participants.

Identifying trends, whether they are moving up, down or across and also knowing when they are about to reverse is really key to your Forex trading. No matter what asset you are trading, you need to know how to follow charts. The ability to read trading charts is part and parcel of trading, and the more you understand about technical analysis, the better a trader you can become. Except for the bullish and bearish patterns, there are continuous patterns that are showing stability in the prices. One of the examples of continuation candlestick patterns is Doji, which is reckoned as a neutral signal.

One of the most common types is a candlestick with short shadows. Candlesticks with short shadows indicate that most trading action was confined near the open and close. Volatility indicators, such as ATR and Bollinger Bands, help traders measure the rate of price fluctuations in an underlying asset. This can help traders to filter out which markets to trade with an appropriate strategy. For instance, a risk-averse trader will look to trade low volatility markets or to utilise low stake amounts in high volatility markets.

Which candlestick indicates buy?

A black or filled candlestick means the closing price for the period was less than the opening price; hence, it is bearish and indicates selling pressure. Meanwhile, a white or hollow candlestick means that the closing price was greater than the opening price. This is bullish and shows buying pressure.

These are called “shooting stars” and are the exact opposite of hammers in appearance. Shooting stars indicate a possible reversal in an uptrend, especially when you see one appear when you are looking at at least 1 week of candlesticks that show the market going up. Your chart shows how the exchange rate between the two currencies changed over time.

However, like many beginners, I had no idea what a candlestick was. The truth of the matter is that a candlestick chart has the same information as a bar chart. But, for the record, I now use candlestick charts in my stock, Forex, and Futures day trading and swing trading. Evening star candlestick patterns usually occur at the top of an uptrend and signify that a trend reversal is about to occur. Evening stars consist of three candlesticks, with the first candlestick having a significantly large green or white body, indicating that prices closed higher than the opening level. The second candlestick opens higher after a gap, meaning that there is continued buying pressure in the market.

  • With long candlesticks signaling a very active session and short candlesticks hinting at a stable market, you get a quicker reaction to the changes on the chart.
  • We recommend you to visit our trading for beginners section for more articles on how to trade Forex and CFDs.
  • The top or bottom of the candlestick body will indicate the open price, depending on whether the asset moves higher or lower during the five-minute period.
  • It indicates a strong buying pressure, as the price is pushed up to or above the mid-price of the previous day.
  • When a doji appear at the high, it is considered to be a stronger signal.

On an arithmetic chart equal vertical distances represent equal price ranges – seen usually by means of a grid in the background of a chart. The arithmetic scale is also the most appropriate to apply technical analysis tools and detect chartist patterns because of its quantitative nature. Besides the arithmetic scale, the Forex world has also adopted the Japanese candlestick charts as a medium to access a quantitative as well as a qualitative view of the market. They were chosen among other types of charts – the two most common being the “line chart” and the “bar chart” – because of their attributes as we shall see throughout this chapter. In the case of the red candle and according to stock charts candlestick patterns here’s what happened.

When strung together with a line, we can see the general price movement of a currency pair over a period of time. With a chart, it is easy to identify and analyze a currency pair’s movements, patterns, and tendencies. Charts are user-friendly since it’s pretty easy to understand how price movements are presented over time since it’s sooooo visual. The red bars are known as seller bars as the closing price is below the opening price.

Best forex candlestick patterns

However, it can become a significant indicator of reversal if certain conditions in the market are implemented. Both of them show the performance of a price within a certain period. Like a candlestick on a weekly timeframe, a bar demonstrates how the price was moving during a week, from Monday to Friday. It’s difficult to pinpoint the most important indicator on any chart. Certainly, the trend line and support/resistance levels are something that’s critically important, and some traders who rely on these levels when trading would consider them to be the most important. Market cycle indicators, such as Elliot Waves, help traders to anticipate the various phases of price development including the rise, peak, fall, and trough.

What is the golden rule in forex?

This is one of the most crucial aspects of forex trading. Many traders fail to heed this important advice: never invest more than 2% of your available capital on any individual trade. Doing so puts you at significant risk of loss.

Short-sell triggers signal when the low of the hanging man candlestick is breached with trail stops placed above the high of the hanging man candle. You may want to test the environment with virtual money with a Demo account. I accept FBS Agreement conditions and Privacy policy and accept all risks inherent with trading operations on the world financial markets. On the chart of JP225, a shooting star after an uptrend showed the change of a trend’s direction. Alternatively, a candlestick without a lower shadow is known as “shaven bottom”. This type of candlestick demonstrates that buyers dominate the market.

candle patterns

However, if the same pattern appeared during a longstanding downtrend, it may not necessarily mean bearish trend continuation. Let’s look at a few more patterns in black and white, which are also common colors for candlestick charts. ​A bearish harami is a small real body completely inside the previous day’s real body. This is not so much a pattern to act on, but it could be one to watch. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.

The next candlestick opens above but then closes below the midpoint of the prior bullish candle. The longer is the bearish candlestick, the stronger is the trend reversal down. You see from theBTCUSD daily chart below that, following a long consolidation in a sideways channel, the price has formed a key support level. A series of bullish hammer patterns appeared there, following which, the market reached a new price high. The smaller the time frame you use, the closer you look into the price action of the asset.

Before you can read a Candlestick chart, you must understand the basic structure of a single candle. Each Candlestick accounts for a specified time period; it could be 1 minute, 60 minute, Daily, Weekly exc. As Japanese rice traders discovered centuries ago, investors’ emotions surrounding the trading of an asset have a major impact on that asset’s movement. Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move.

Traders can take this as a good sign to enter into a long position of an instrument. The piercing pattern can mark a potential short-term reversal from downward to an upward trend, and is generally identified as a two-day pattern. On the first day the candle opens near the high and closes near the low with an average sized trading range. When the second day begins there is a gap down, where the opening will be near the low and close near the high. The high price is found at the top of the shadow , this indicates the highest price during the period.


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