How To Read Candlestick Charts

Candlestick Trading Forex

Hello Traders,

Reading Candlestick charts does not involve complex calculations…however, this would have been a different story if you were living 20-30 years ago where computers where not so advanced as today.

Today, your forex broker’s trading platform and chart gives you all the information you need about each individual candlestick that
forms in whatever timeframe.

But if you don’t know what a candlestick chart is then here is a simple explanation of what a candlestick chart is:

it is a graphical representation of price fluctuations for forex currency pairs for any given timeframe.

Here is the 7 step process on how to read candlestick charts:

STEP1: KNOW WHAT INFORMATION IS DISPLAYED BY A CANDLESTICK CHART

Ok, there are only 4 information displayed by a candlestick chart:

  1. the opening price
  2. the closing price
  3. the highest price &
  4. the lowest  price

So with these information, you know if the price has risen or fallen or has not moved much at all.

STEP2: CANDLESTICK CHARTS DISPLAY THE RELATIONSHIP BETWEEN THE OPEN, HIGH, LOW AND CLOSING PRICES OF A CURRENCY PAIR IN A GIVEN TIMEFRAME

  • if you have only closing prices, you wound never know what the opening price, the highest price and the lowest price is.
  • so how would you make an interpretation of where the market would be headed? You really cant-unless you know the relationship between the opening, the highest and the lowest price.
  • as a forex trader, you will use the relationship of the highs and lows of the candlesticks to make your analysis and trading decisions because candlestick charts offer identifiable patterns that can be used to predict or anticipate price movement.

STEP3: ANY CANDLESTICK CHART CAN ONLY CAN ONLY FALL INTO THESE TWO:BULLISH OR BEARHISH CHART

  1. In a candlestick chart, if a candlestick is bullish, it generally comes in a green colour. This simply means that the price, in that particular period opened at the lower price but when it closed, it closed above that opening price-meaning the price rose! That’s why it is green. Depending on your personal like, you can colour the candlestick to whatever colour you like as long as you know what each colour stand for. Some would have blue or white as bullish candlesticks on their charts. I prefer green, ok?
  2. A bearish candlestick chart is the exact opposite of a bullish candlestick chart: the opening price was higher, but when it close, it closer lower than the opening price-meaning, the price dropped or fell. The favourite colour for a bearish candlestick is red…makes sense, doesn’t it?

STEP4: HOW TO READ BULLISH CANDLESTICK FORMATIONS

These are the 5 main bullish candlestick patterns you should get to know:

  1. The Hammer
  2. The Piercing Line
  3. The Bullish Engulfing
  4. The Morning Star
  5. The Bullish Doji Star

 

STEP5:HOW TO READ BEARISH CANDLESTICK FORMATIONS

These are the 5 main bearish candlestick patterns you should also get to know:

  1. The inverted hammer or some call it the shooting star (looks like one though…)
  2. Than Hanging Man.
  3. Dark Cloud Cover
  4. Bearish Harami
  5. Bearish Engulfing Pattern

STETP6:HOW TO READ NEUTRAL CANDLESTICK FORMATIONS

There are also neutral candlestick formations that you have to be aware of:

  1. spinning tops
  2. the doji
  3. the double doji
  4. the harami pattern

STEP 7: HOW TO READ REVERSAL CANDLESTICK FORMATIONS

You also need to know about reversal candlestick patterns:

  1. Long legged doji
  2. the dragonfly doji
  3. the gravestone doji
  4. stars

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