The Candlestick is absolutely key to understanding forex price action…
Candlestick Charts have become the norm in forex trading for the simple reason that most traders prefer them for the information they convey.You can use a simple line chart to great effect to do some things in forex trading, such as finding historic price support and resistance levels. And some people still prefer the old style bar charts:
Candlesticks are formed based on a single timeframe’s open, high, low and close values. For example, if you are looking at a chart of daily candlesticks, the candlestick previous to the current open candlestick will contain what the values for yesterday’s open, high, low and close were.The following diagram gives a quick breakdown of basic candlestick anatomy, with the parts of a candlestick labeled:
Candlesticks are excellent visual aids to current price action and market sentiment. Reading candlestick charts can give us the following powerful information at a glance:
- Support and Resistance levels formed by the wicks at either end. These form the boundaries of how far the bulls and the bears could push price in the session just finished.
- Volatility and/or Volume. This can be seen by the extent of the candle body. If the body is relatively long, it may indicate increasing interest, volatility and possible volume. If the real body is relatively short, it often indicates a lacklustre market in which neither the bulls nor the bears have gained the upper hand, and it may further indicate little volume of orders. Of course, it may also indicate a session in which price was very tightly contested, with a near match of buyers and sellers. But generally speaking, lots of interest in a currency will see an extended candle body.
- The open and close tell us where the bulk of the trading likely occurred. They also represent consensus views with regards to price. Where price opened tells us how the market valued the currency at the beginning of the session; where price closed tells us what the market valued the currency at when trading ceased for that particular session. Of themselves these values may represent little. However, used in conjunction with the levels of other candlesticks, as well as indications such as pivots, Fibonacci etc, this can be potent information.
- Forex Candlestick Glossary Chart. This is a chart of the major forex candlestick patterns that can be used in price action trading. You can click the image at the right to go to Forex Candlestick Glossary Chart
N.B. The Glossary is now available in PDF format as a Free Bonus to the course “The 7 Things You MUST Know about Forex Candlesticks!” It’s easy to print and pin above your workstation, and includes clickable links to a full explanation of each candle pattern >>>
- The difference between Forex candlesticks and candlesticks in other markets, e.g. Stock Markets. Click the following link to discover why Forex Candlesticks are different and how important it is when trading forex.
- The most important single candlestick, and possibly the best candlestick all round: the Rejection Candlestick. Also known as the pinbar, rejection bar and hammer. Click the following link for Rejection Candlestick
- Candlestick Addition. When is a candlestick like a Russian doll? All the time! Click the following link to discover Candlestick Addition
- Following on from candlestick addition, the concept of using two timeframes together to trade candlesticks. Click the following link to go to Trading Candlesticks Using More Than One Timeframe
- The difference between continuation patterns in forex candlesticks and reversal patterns. Click the following link to discover the difference between a forex candlestick continuation pattern and a reversal pattern
- More esoteric patterns: dark cloud cover candlestick, piercing pattern, black crows candlestick charting etc. Click here to go to Dark Cloud Cover Candlesticks and others.
- Doji Candles and their applications – Decisions & Indecisions! Click the following link to go to Doji Candles
- Steve Nison: where candlesticks trading in the Western world began. Click the following link to find out more about Steve Nison
- Completed Candlestick Patterns: why it is important to wait for candles to close before entering a trade
Probably just as important as candlesticks is understanding the issue of Forex Market Hours. Things like time of day, day of week, season of the year and other time related issues can make the difference between winning and losing. Click here to go to Forex Market Hours