Reading candlestick charts in Forex trading - A beginner's guide

Understanding candlestick charts is a fundamental skill that every trader must know because this tool is available on all trading platforms, and many traders can generate significant income from Forex trading by primarily analyzing candlestick charts.

What is a candlestick chart

Candlestick chart is a graph that shows price movements over a specified period, consisting of:

• Open and close prices: The price range represented by the candlestick
• High and low prices: The wicks of the candle indicate the bounds of price fluctuations
• Bullish candlestick (Bullish): Appears when the closing price is higher than the opening price, indicating stronger buying pressure
• Bearish candlestick (Bearish): Appears when the closing price is lower than the opening price, indicating stronger selling pressure

Candlestick charts can be used across all timeframes, from 15 minutes, 1 hour, up to 1 week, depending on the trader’s preference.

Why do traders favor candlestick charts

Market Sentiment Indicator

Candlestick charts help visualize the battle between buying and selling forces through the shape of the candles and the length of the wicks, which cannot be seen in line or bar charts.

Easy to Understand and Clear

The patterns of candlestick charts are straightforward and can predict trend directions effectively, especially when combined with trend lines or support and resistance levels.

Long History of Use

Candlestick charts have been used in Japan for over 200 years, originally by rice traders analyzing rice prices in Osaka markets, demonstrating their proven effectiveness.

Basic candlestick patterns

Doji - Indecision Signal

A candlestick with open and close prices at the same level, indicating a balance between buying and selling forces. It may signal an upcoming trend reversal.

Doji Patterns:

• Standard Doji: Price moves up and down, then closes at the open price
• Gravestone Doji: Buying pressure surges but is pushed down by selling, closing at the open - a negative sign for an uptrend
• Dragonfly Doji: Selling pressure plunges but is pushed up by buying, closing at the open - a positive sign for a downtrend
• Four Price Doji: Shows very weak buying and selling forces; trading should be avoided

Marubozu - Clear dominance

A full-bodied candle with no wicks, indicating one side completely controls the market

• Bullish Marubozu: Open at the lowest, close at the highest - strong buying
• Bearish Marubozu: Open at the highest, close at the lowest - strong selling

Spinning Top - Short body with long wicks

Reflects market indecision, with no clear winner

• In an uptrend: Indicates weakening buying pressure, possibly reversing downward
• In a downtrend: Indicates weakening selling pressure, possibly reversing upward

Single candlestick patterns

Hammer & Hanging Man

Candles with a short body but a long lower wick

• Hammer (In a downtrend): Reversal signal - selling pressure has been shaken off, buying resumes
• Hanging Man (In an uptrend): Reversal signal - buying pressure has been shaken off, selling pressure enters

Inverted Hammer & Shooting Star

Candles with a short body but a long upper wick

• Inverted Hammer (In a downtrend): Reversal signal - buying activity halts
• Shooting Star (In an uptrend): Reversal signal - selling pressure dominates

Two-candlestick patterns

Engulfing Patterns - Engulfing

When one candle completely engulfs the previous candle

• Bullish Engulfing (Downtrend→Uptrend): A black candle followed by a larger white candle - clear reversal upward
• Bearish Engulfing (Uptrend→Downtrend): A white candle followed by a larger black candle - clear reversal downward

Tweezer Tops & Bottoms - Reversal Points

Two candles with upper (or lower) wicks at the same high/low

• Tweezer Tops (In an uptrend): Warning of a reversal downward
• Tweezer Bottoms (In a downtrend): Warning of a reversal upward

Three-candlestick patterns

Evening Star & Morning Star - Evening Star & Morning Star

Three candles with specific formations indicating a clear trend change

• Morning Star (Downtrend→Uptrend): A down candle - Doji - Long up candle - Reversal signal
• Evening Star (Uptrend→Downtrend): An up candle - Doji - Long down candle - Reversal signal

Three White Soldiers & Three Black Crows - Three-Pattern Sets

Three consecutive candles indicating trend exhaustion

• Three White Soldiers: Three consecutive upward candles, increasing in size - Strong buying
• Three Black Crows: Three consecutive downward candles, decreasing in size - Strong selling

Three Inside Up & Three Inside Down - Breakthrough Patterns

Three candles reflecting major trader sentiment shifts

• Three Inside Up (Downtrend→Uptrend): Long downward candle - Short candle that does not reach half - Long candle breaks above the first candle’s high
• Three Inside Down (Uptrend→Downtrend): Long upward candle - Short candle that does not reach half - Long candle breaks below the first candle’s low

Key points for trading candlestick charts

Characteristics of each candle:

• Long bullish candle indicates stronger buying pressure
• Long bearish candle indicates stronger selling pressure
• Short wicks show prices close to open and close levels
• Long wicks indicate fierce battles between buyers and sellers

Risk management:

Although candlestick charts are powerful tools, their success rate is not 100%. Consider other market factors such as economic data, news, and overall market conditions.

Another point: Forex trading involves risk; only invest money you can afford to lose.