Candlesticks are graphical representations of the price fluctuations of a currency pair. A candlestick can represent any period of time. A currency trader’s software can provide charts representing time frames from five minutes, up to one week per candlestick. Here is how to read them.
Steps
- Understand what the chart consists of. There are no calculations required to interpret Candlestick Charts. They are a simple visual aid representing price movements in a given time period. Each candlestick reveals four vital pieces of information:
- the opening price, the closing price,
- the highest price and the lowest price the fluctuations during the time period of the candle.
- In much the same way as the familiar bar chart, a candle illustrates a given measure of time.
- The advantage of candlesticks is that they clearly denote the relationship between the opening and closing prices.
- Understand that candlesticks display the relationship between the open, high, low and closing prices. This means that they cannot be used to chart securities that have only closing prices. Interpretation of Candlestick Charts is based on the analysis of patterns. Currency traders predominantly use the relationship of the highs and lows of the candlewicks over a given time period. However, Candlestick Charts offer identifiable patterns that can be used to anticipate price movements.
- Learn the patterns. There are two types of candles: The Bullish Pattern Candle and the Bearish Pattern Candle:
- A white (empty body) represents a Bullish Pattern Candle. It is used/denotes when prices open near the low price and close near the period’s high price.
- A black (filled body) represents a Bearish Pattern Candle. It is used/signifies when prices open near the high price and close near the period’s low price.
- Understand how to read the Bullish Candlestick Formations:
- The Hammer is a Bullish Pattern if it appears after a significant downtrend. If the line occurs after a significant uptrend, it is called a Hanging Man. A small body and a long wick identify the Hammer. The body can be empty of filled in
- The Pricing Line is a Bullish Pattern where the first candle is a long, Bear candle, followed by a long Bull candle. The Bull candle opens lower than the Bear's low, but closes more than halfway above the middle of the Bear candle's body.
- A Bullish Engulfing Line is a patter strongly Bullish if it occurs after a significant downtrend. It may also serve as a reversal pattern. It occurs when a small Bearish candle is engulfed by a large Bullish candle.
- The Morning Star is a Bullish Pattern signifying a potential bottom. The star indicates a possible reversal and the Bullish candle confirms this. The Star can be a Bullish or Bearish candle.
- In a Bullish Doji Star, the star indicates a reversal and a Doji indicates indecision. This pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation before trading a Doji Star.
- Understand how to read the Bearish Candlestick Formations:
- A Long Bearish Candle occurs when prices open near the high and close lower, near the low.
- The Hanging Man pattern is Bearish if it occurs after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. A Hanging Man is identified by small candle bodies and a long wick below the bodies, and can be either Bearish or Bullish.
- Dark Cloud Cover is a Bearish Pattern that is more significant if the second candle's body is below the center of the previous candle's body.
- Understand how to read Neutral Candlestick Formations.
- Spinning Tops is a neutral pattern that occurs when the distance between the high and low, and the distance between the open and close, are relatively small.
- A Doji candle implies indecision. The open and close are the same.
- A Double Doji (two adjacent Doji candles) implies that a forceful move will follow a breakout from the current indecision.
- The Harami pattern indicates a decrease in momentum. It occurs when a candle with a small body falls within the area of a larger body.
- Understand how to read the Reversal Candlestick Formations:
- A Long-legged Doji often signifies a turning point. It occurs when the open and close are the same, and the range between the high and the low is relatively large.
- The Dragonfly Doji also signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high and closing prices.
- A Gravestone Doji occurs when the open, close, and low prices are the same, and the high is significantly higher than the open, close and low prices. It also signifies a turning point.
- Stars indicate reversals. A Star is a candle with a small, real body that occurs after a candle with a much larger, real body where the real bodies do not overlap. The wicks may overlap.
Tips
- Forex trading involves significant risk of loss and is not suitable for everyone. Trading in foreign exchange is speculative and may involve the loss of principal. The high degree of leverage can work against you as well as for you. The possibility exists that you could sustain a loss of some or all of your initial investment, and therefore, you should not invest money that you cannot afford to lose.
Article provided by wikiHow, a wiki how-to manual.
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