In the beginning of trying to understand the complexities of Forex trading, a new investor is going to be inundated with charts of every shape, size and time frame. All of these are designed to help a trader track trends and identify good starting positions. One of the most helpful for its depth of information is the candlestick chart.
The candlestick chart is your basic line graph intensified. It is easily identifiable by the thick vertical line with thinner lines protruding from the top and bottom. Those thinner lines, which are referred to as shadows or wicks, are telling you the range of the currency’s price during the time period while the thicker part, or real body, is representative of the range between the open and close price.
The candlestick line is able to give you a whole range of information about a currency in a small space on a chart. Starting from the top, the apex of the thinner line lets you know what the highest price of the currency was for that day. The top of real body is the price at which the currency opened or closed. You will know if that is the opening or closing price of the currency by the color of the real body. If it is black or red the currency was on a downtrend and closed lower, while white or green shows an uptrend, where the price of the currency was rising.
The lower level of the real body will again show you the open or close depending on its trend, while the lowest point of the thinner line is representative of the lowest price for that currency for that time period.
The Basic Candlestick Patterns
Candlesticks will form into different shapes, and can be great indicators as to what is about to happen with a currency.
- The Spinning Top: When you see a candlestick that has elongated shadows but a very short real body, you know that there was a lot of indecision about that currency among investors. The long shadows show that there was a lot of fluctuation in the price as both buyers and sellers fought it out, but the short body indicates that there was no real winner. Even though there was a great deal of activity, there was little change between the opening and closing price.
- Doji: You have to squint to pick out the doji in a trend chart. These are characterized by a body that is so short it is no more than a horizontal line cutting through the vertical one. These show that despite price moves, the currency opened and closed at almost the exact same price. The length of the vertical line and the candlestick body’s position on it are significant when looking at a doji.
The long legged doji has shadows on both ends, with the body located at close to dead center. This shows that there was basically a draw for that currency between buyers and sellers even though there was a lot of activity with it.
The dragonfly doji body sits on top of a long wick, while a gravestone body is at the very bottom. Dragonfly shows that the price was being pushed downwards, but eventually won out and closed close to its open, while the gravestone indicates that prices were being pushed upwards, but were finally exhausted and settled back down.
The last is the four price doji, which is nothing more than a horizontal line on a chart. This shows that there was hardly any interest at all in that particular currency during that time.
If you identify a doji, look closely at what was happening before it. If it forms after a strong uptrend, buyers are getting scarce and the currency is becoming weak. If you have invested in this currency, now is the time to sell before the price starts to drop. When they form after a downtrend, be ready for that reversal to jump in and buy cheap before the price starts to rise again.
- Marubozu: This particular candlestick is missing its wicks. The highs and lows for that time period were the same as its open and closing price. The white or green marubozu is a bullish candle, showing that the buyers were busy and in complete control of the currency’s price. Green or black Marubozu is a bearish candlestick where sellers were in control for that entire time period.
These are the basic patterns you will notice with candlesticks. My favorite to use when helping a new trader understand patterns in charts is a bit more advanced, but still easy to understand if you have already studied the basics.
Watching out For Hammer and Hanging Man
The hammer or hanging man looks almost like a dragonfly doji, but the body is more pronounced. Here you have to pay close attention the color of the body and the trend as they are great predicators for what is about to happen with the currency.
- The Hammer: The hammer is a bullish indicator, with a white or green body. And while it looks like a hammer, it really gets its name for its ability to show how the currency is hammering out at the bottom. Seen in a downtrend, the long wick of the hammer shows that sellers were trying really hard to keep the price down, but buyers are starting to win out.
When you see a hammer, start planning your entry. Once you see a white candle form after a hammer, you know that the reversal has begun. I tell new investors to be patient and wait for that indicator before jumping in and grabbing the discount price.
- The Hanging Man: The hanging man is an indicator that the currency price is about to drop. Buyers are starting to lose interest, while the sellers begin to win out. You will recognize the bearish hanging man by his short black head, sitting on top of a wick that is about three times the length of the body. If you have invested in this currency, now is the time to sell as a quick reversal is imminent.
The further you get in your Forex trading career, the more you will learn about the candlesticks and what the various forms, shapes and patterns are indicative of. This is one of the more critical points to study, as the candlesticks are providing you with very specific information at just a quick glance.
Casey Stubbs is the founder of WinnersEdgeTrading.com which is one of the most widely read forex sites on the web. Winners Edge Trading has trained thousands of people to trade the Forex markets.
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