One of the many terms that you are going to come across when you begin to trade Forex, is candlesticks. A strange term when you think about it since it doesn’t seem like something that you would use while trading in currencies, candlesticks have nothing to do with décor and everything to do with Forex charts.
In Forex, candlesticks are used to indicate the movement of currency prices and they are most used to help traders map out the best possible trading strategies. Although they appear on the chart, they can only be understood if the trader knows how to read them.
Price charts are without a doubt the most useful and necessary chart of all the technical data presented to a trader. Without it, the trader will not be in a position to make good, profitable choices.
Luckily traders, including you, can gain access to all sorts of trading charts and, depending on the one you select, the data will be up to date and greatly beneficial.
Candlesticks are the default display for all Forex charts so you can expect to see them on every chart relating to Forex prices. If you don’t understand them right now, it is important that you take the time to carefully come to terms with them and how to get the most out of the data they represent.
The Forex candlestick chart will inform the trader of the perceptions relating to each currency price they are looking at. The candlestick chart will play a huge role in shaping the opinions of various trends.
As with most things Forex related, the data is not a guaranteed representation of what the market is going to do. Everything is based on opinions and interpretations of past events. This might sound like charts don’t help, but the data represented is almost always fairly accurate as the experience of traders doesn’t lie.
Once the trader begins learning about candlesticks and how to analyse them, it becomes quite easy to start to identify the various types of price action. And once you begin to understand them, you will find that they are more efficient than the other charts available.
The bonus about reading and fully understanding candlesticks is that you only have to learn to do it once. When you know what to look for and how to interpret it, you will be able to apply your knowledge to all of the other candlestick charts used in Forex and other financial markets.
A closer look at candlesticks
To understand what you are looking at, you need to know more about what it is that Candlesticks represent.
Candlesticks are created with 3 points, each of which represents either the wick, the open or the close. Not only will the shape of the candlesticks change with the movement of the prices, but so will the colours. Candles can be green, blue or red, and each colour has its own meaning.
When the close price is above the open, the candlestick will be either blue or green and should the price drop below the open, the candlestick will turn red. You can also change the time period represented by the candlesticks. For instance, if you have a daily setting, your candlesticks will only represent the data for the day you are looking at.
The creation of a new candle will initially only show the open price or the first traded price. The close price will be represented by the last price traded, which forms the final formation of the candle.
High prices are put, quite naturally, at the top of the candlestick, and become what is referred to as the wick. Should there be a lack of wick, the high price will either be the open for a bearish candle, or the close for a bullish candle.
Low prices are placed at the bottom of the candle, on the other wick. Much like the representation of the high prices, if there is no wick and the low price is open, the candle will be bullish while if the low price is closed and there is no wick, the candle will be bearish.
Why are these charts better?
Although there are countless styles out there, some easier to read than others, the candlestick chart is preferred because it is incredibly visual.
The bottom line is that these charts are exceptionally distinctive and they make the search for reliable data both quick and easy. Traders can waste no time, so the faster they can extract the information, the better it is for them.
There are 3 distinctive advantages related to these charts
Firstly, they are just easy to read, as we’ve already said. Secondly, they are more than capable of creating an easy to recognise pattern of information which again, just makes it faster for the trader to make their decisions. And finally, the chart is designed to display a range of data.
The downsides are that until the trader knows how to read and understand the data, they can easily misunderstand what it is that they are reading and although the charts are quite easy to read, they can end up displaying too much, which can, in turn, become confusing.
Patterns can tell a trader a lot about what it is that they are looking at, or looking for. These patterns can show up on CFDs, Stocks, Indices and Forex charts. The most popular candlestick patterns include:
- Three Black Crows
- Hanging Man
- Shooting Star
- Spinning Top
- Morning Star
- Dark Cloud
Each one is going to tell you something unique and different about the information that it has been designed to display so it is important that you take the time to learn as much as you can about each. And although these are among the most popular, there are many other patterns out there to also learn about.
This beginners guide is simply the basics but there is so much more to learn. So make sure that you take the time to read up on everything you possibly can about the wonderful world of Forex.
Frequently Asked Questions
What are forex candlesticks?
View the Beginners Guide to Forex Candlesticks by SA Shares here
Are forex candlesticks reliable?
Not all of them are reliable.
What are candlestick patterns?
It tells a trader what they are looking at/for.
What is a long wick in trading?
A wick longer than those shown by other candles on a chart indicates a larger than usual price variation.
What does a black candlestick in trading mean?
The close was higher than the prior close.