Candlestick is a type of chart that usually available in all trading platforms. But it is also an extremely useful indicator as well.

candlestick

There are many indicators in forex trading, but there is only a handful that is as commonly used as a candlestick. Maybe you wonder, why candlestick? it is not an indicator, it is just a type of chart. Yes, that is true enough.

Candlestick is a type of chart that is usually available on all trading platforms. The different patterns are also extremely useful to identify opportunities in the market, as each candle represents different signals to help traders analyze the markets.

Therefore, we're going to learn the basics of understanding candlesticks and how to interpret their most common patterns.

 

The Basic of Reading Candlestick Charts

This is the one type of chart that I think every traders ought to understand. Understanding candlesticks will be extremely helpful for trader to understand price movement on the chart.

Furthermore, even if a trader said that he is trading without chart (naked trading), he usually is still relying on candlestick. Candlestick offers similar information to that of bar charts, but with relatively more attractive display and infinitely more informative.

Candlestick is also the easiest chart to be interpreted because each candle already supplies information about the strength of buy and sell, as well as its open and closed prices. So let's see the structure of the following candlestick.

CandlestickCandlestick Structure

Candlestick is established on data of high, low, and close prices. If in a certain time frame, close price is above open price, then transparent or white candlestick will be formed.

While if the close price is under open price, then black candlestick will be formed. The white or black part of a candlestick is being called as the body, and the vertical lines over or under it depicts high/low ranges and is called the shadow.

The upper shadow represents the highest price at a time (high), and the lower shadow represents the lowest price at a atime (low). Consequently, from a single candlestick, we can extract information about the value of high-low-closed- prices, the strength of buy/sell, and transaction volumes in a certain time frame, hereinafter learning the disposition of the ongoing trend.

what candlestick charts looks likeCandlestick Chart

The black and white candles body could be either long or short. The longer the candlestick body, the stronger the buy/sell that has occured. See the screenshot above; the white-bodied candlestick shows that prices were closed at a higher value than at opening, indicating an uptrend. And vice-versa.

 

3 Most Common Candlestick Patterns

Many kinds of candlesticks and candlestick patterns indicate different propensity on chart movements. Here are some that every trader needs to know.

 

Spinning Tops

If a spinning top appears, then it means that, at the time, there are not many buyers and sellers in the market. A spinning top candlestick often signifies a potential reversal or consolidation in the market. Traders interpret this pattern as a sign of uncertainty and consider it an indication to exercise caution. It suggests that the current trend may be losing momentum, and a potential change in direction could occur.


Spinning

Marubozu

If Marubozu appears on the chart, it means buyers (on white candles) or sellers (on black candles) are very dominant, so the ongoing trend (uptrend on whites, downtrend on blacks) is particularly strong. A Marubozu candlestick is a strong, decisive candlestick pattern indicating a significant market sentiment shift.

It is characterized by a candlestick with little to no upper or lower wick, meaning the opening or closing price is also the high or low of the period. The Marubozu candlestick pattern is a strong signal because it shows a clear and one-sided market sentiment. It suggests that the prevailing trend will likely continue in the same direction.


Marubozu

Doji

Doji is created due to the balance between buyers and sellers. The short body means that from opening to closing, prices remain unchanged. Consequently, the candle looks like a plus sign, a cross, or an inverted cross. Singularly, it is a neutral signal; therefore, upcoming movement is based on the previous candles and confirmation by future candles.

The Doji candlestick suggests that neither the buyers nor the sellers were able to establish dominance during the trading period. It represents a market situation where the opening and closing prices are virtually identical, reflecting uncertainty and a potential reversal or consolidation.

The significance of a Doji candlestick lies in its ability to provide valuable information about market sentiment and potential future price movements.

Doji

The candlestick, founded in Japan during the 17th century, is now widely used in the worldwide financial market due to its information-laden nature. There are many more variations of candlesticks apart from those three.

For example, traders usually find Harami, Hammer, Hanging Man, Star, Three white soldiers and Three black crows, etc. By studying the chart and noticing the trends related to emerging candles, we can predict the tendencies of upcoming price movement through candlesticks.