Even though they were invented more than 200 years ago by a Japanese rice trader, most forex charts these days will display prices using candlesticks and they do so because candlesticks are able to provide much more information than a simple bar or line chart.
In fact, a candlestick chart is able to display the open, high, low and close of each bar and therefore shows the whole trading range for every period. Just by doing so, a forex trader is able to garner much more information from the market than usual and can even base trading decisions on the different patterns.
Guest post by FXTM
Each candle is made up of a body, which shows the opening and closing price of the time period, and a wick, which shows the highest and lowest price levels that the market touched. If the market closes higher than it opened, the body is thus colored white (or green) and if it closes lower than it opened the body is colored black (or red). If the market opens or closes at the high or low of the day, there is therefore no wick, just body visible.
A Doji is one of the more important candlestick patterns and occurs when the opening price is very close to the closing price, even though the low or high may have been very different. In this sense, there is typically very little body but a long wick. Doji’s show a market that has opened, gone higher and lower, rejected those levels and then finished where it started. As such, Doji’s show significant uncertainty in the market and indicate that a potential reversal may be near.
Another one to look out for is the ‘marubozu’ which can be either white (green) for when it is going up or black (red) for when it is going down. A white marubozu occurs when the open is the lowest price of the day and the close the highest. It therefore has no wick and is a very bullish signal since the price has closed near the highs of the day without ever going down. Three white marubozus in a row are an even more bullish signal and known as ‘three white soldiers’.
Similarly, a black marubozu occurs when the open is the highest price and the close is the lowest and is bearish for the market. Three black marubozus in a row are known as ‘three black crows’.
The hanging man pattern indicates a possible reversal and normally comes at the top of an uptrend. It occurs when the market opens high, is dragged downwards then finishes back near the highs. Although the candle has closed near to its highs, the long wick down indicates that sellers are finally joining the market and beginning to outnumber the buyers. If you see this signal in a chart be weary of a potential reversal event.