A Candlestick chart is an important tool in financial technical analysis. It is used to monitor price movements and understand the psychology of traders. In this article, we will explore the concept of candlestick charts and learn how to read them effectively. Let’s learn with Learn Forex Trading to improve performance during the trading process.
Overview of candlestick chart
In technical analysis, candlestick charts play a very important role. This is a tool that helps traders evaluate trends and find entry and exit points during trading. Compared to other types of charts, candlestick charts give users a more detailed view of prices and market trends.
What is a candlestick chart?
A candlestick chart is simply a chart containing independent candles. It is used by traders to analyze price action. The price action of each candle involves determining exactly where the price opens and where it closes. At the same time, it also determines the high and low prices for a specific period of time.
Price action provides financial markets with signs of trends and reversals. For example, groups of candles can create patterns on forex charts. It indicates a reversal or continuation of the trend. Candles can also create independent formations, which can indicate buying or selling opportunities in the market.
The time that each candle depicts depends on the time frame chosen by the trader. The daily timeframe is a popular choice. So each candle will depict the open, close, high, and low of the day. The different components of each candle can assist in predicting price direction. For example, if the candle closes below the open, it may indicate further price decline.
In addition to understanding candlestick charts, investors can refer to chart forex gold. This is a type of chart showing gold prices that helps traders identify and trade gold effectively.
See more: Gold prices worldwide: Things should know
Basic components of Forex candlestick chart
The Candlestick chart is composed of thousands of diverse candles. Each candle describes price fluctuations over a specific period of time. Can range from seconds to years. To understand how to read candlestick charts, it is important to first understand the structure of a candle.
Each candle is an important tool that shows detailed information about the price of an asset. It includes the opening price, closing price, highest and lowest price over a period of time. Each candle consists of two main components:
- Candle body: This is the wider part of the candle, representing the opening price and closing price.
- Candle shadow: This is the part attached to the top and bottom of the candle body. It shows the highest and lowest prices over a certain period of time.
To understand the detailed structure of a candle, we need to learn about the prices expressed in each candle:
- Opening price: The asset price recorded for the first time in a specific time period.
- Peak price: The highest price recorded in a specific time period.
- Bottom price: The lowest price recorded in a specific time period.
- Closing price: The last recorded asset price during a specific period of time.
Time frames of Forex candlestick patterns
When a candlestick pattern forms on the price chart and is built using different time frames, combined with technical indicators such as RSI, and Bollinger bands, investors can confirm trends easily and make appropriate trading decisions.
Choosing the ideal time frame for a candlestick chart will depend on each individual’s needs. Short-term traders often prefer short time frames such as:
- 1-minute frame (1m)
- 5-minute frame (5m)
- 15-minute frame (15m)
- 1-hour frame (1h)
On the contrary, long-term traders or investors often prefer to use charts with larger time frames:
- 4-hour frame (4h)
- 1 day frame (1D)
- 1 week frame (1W)
- 1-month frame (1M)
Short time frames can provide more detailed information about price movements within a day. While longer time frames can help identify larger trends.
Compare the Forex candlestick chart with a bar chart
Alike:
- Provides information about the high price, low price, opening price, and closing price of an asset in a specific time unit.
- Applied to analyze trends, identify price patterns, and make trading decisions.
Disagree:
Bar chart:
- Display price data through vertical columns.
- Easy to understand, suitable for beginners.
candlestick chart:
- Use candles to represent price data.
- Provides detailed information about the difference between the opening and closing prices of an asset, assisting technical analysts in identifying reversal signals.
- Higher complexity, suitable for experienced investors.
Common types of forex candlestick charts
The lines in the candlestick chart often appear in the form of candles. Including Doji Candles, Marubozu Candles, Candles with long lower wicks, and Candles with long wicks above. By understanding them clearly, investors can apply technical analysis. From there, it is possible to recognize the market’s reversal trend.
Candlestick chart forex type Doji
Doji candlestick is a single Japanese candlestick pattern with equal opening and closing prices. This causes the candle body to become small. If observed on a graph, it may look like a horizontal line. It has a beard that can be short or long.
Doji candlestick shows a strong confrontation between buyers and sellers. However, no dominant party controls the market. Its characteristic is that the opening and closing prices are almost equal. This pattern often appears at important resistance and support areas, or at the top/bottom of the price trend. That could be a sign of a reversal in the market.
Strong candlestick chart (Marubozu)
A strong candle is a type of candle that only has a body without a shadow. It represents the strength of buying or selling power in the market. At the same time, it also implies the possibility of continuation or reversal of the price trend.
To make correct trading decisions, investors need to continue analyzing additional factors. To be able to identify reversal or continuation signals:
- If a red-strength candle appears after a series of price increases. This could be a downtrend reversal signal.
- On the contrary, if a strong green candle appears after a series of declines. This could be a sign of an uptrend reversal.
- When a red-strength candle appears during a downtrend. This may predict continued price declines.
- On the contrary, if a blue-strength candle appears during an uptrend, it can be a sign that the uptrend will continue.
A type of candle with a long beard at the bottom
Candles with long lower wicks, when appearing after a downtrend, are known as “Hammer Candles”. Conversely, when it appears after an uptrend, it is called a “Hanging Man Candle”. This candle has a short body and a long shadow, reaching about 2-3 times the length of the candle’s body. Therefore, creating a long whisker below demonstrates the strong power of pushing prices down from the selling side. Then the buyers are pushing the price up again.
Recognize trend reversal signals when:
- The long wick candle below is red in color and appears with an increasing price trend. This could be a downtrend reversal signal.
- On the contrary, if the long candlestick below is green, it appears in a downtrend. This could be a sign of an uptrend reversal.
The type of candle with a long beard on top
The candle with the long wick above, appearing after a downtrend, is known as the “Inverted Hammer Candle”. On the contrary, when it appears after an uptrend, it is called a “Shooting Star Candle”. This candle has a short body, the shadow is 2-3 times longer than the candle’s body. The long wick is located above the candle’s body. This shows that the price is pushed up by the buyer, then the seller pushes the price down.
Investors can recognize reversal signals when:
- The long-wick candle above is red and appears during an uptrend. That could be a sign of a downtrend reversal.
- On the contrary, if the long-wick candlestick above, colored blue, appears in a downtrend. This could be a signal of an uptrend reversal.
In addition, investors can learn and refer to the Inside Bar candlestick. This is a quite popular candlestick pattern and is used effectively by many traders.
See more: Instructions for registering an XTB account
Detailed instructions on how to read candlestick charts forex
To read a candlestick chart in the Forex market, you need to understand how it represents the price of a currency pair over a specific period of time. Here is a basic guide on how to read Forex candlestick charts :
Understanding the structure of a candle:
- Candle body: Wider part, showing the difference between the opening price and closing price.
- Candle Shadow: The thin part that extends from both ends of the candle body. It shows the highest and lowest prices during that period.
Color of candle:
- Blue (or white) candles usually represent price increases during that period.
- Red (or black) candles usually represent a decrease in price during that period.
Identifying candlestick patterns:
- Reversal Candlestick Patterns: When a series of candlesticks are stacked on top of each other, patterns such as head and shoulders reversals, triangles, or double tops can form, providing signals of an impending change in trend.
Determine the right time frame: Choose a time frame (15 minutes, 1 hour, 1 day, etc.) that suits your trading strategy and investment goals.
Combine with other technical indicators: Use indicators such as RSI, and MACD. Or maybe Bollinger bands to confirm the signal from the candlestick chart.
Pay attention to support and resistance zones: Identify support and resistance zones on the chart, where sudden changes in price trends may occur.
Conclude
Above, Learn Forex Trading has provided useful information on how to read and analyze candlestick charts. Adding knowledge about candlestick patterns is extremely important. New investors need to strengthen their forex knowledge to be able to build strategies and take advantage of trading signals to invest in stocks more effectively and easily.
Frequently asked questions
What is a candlestick chart?
A candlestick chart is a visual means of displaying stock or other asset price data. Use candlesticks to represent opening, closing, high and low prices.
What types of candles often appear on the chart?
Common candlestick types include Doji, Hammer, Hanging Man, Inverted Hammer, Shooting Star, and many others.
How to identify the trend from candlestick charts?
The trend can be determined by observing a succession of green (bullish) candles. Or red (bearish) and special candlestick patterns like reversal patterns.
