Candlestick Charts in Forex Trading - Beginner Training Guide

A deep understanding of reading Forex charts is a fundamental skill that cannot be overlooked for those aiming to become professionals in the currency exchange market. Many Forex traders can generate significant profits solely by analyzing candlestick charts. This article aims to explain how to read and interpret candlestick charts, which are common tools reflecting price behavior across all trading platforms.

Basic Structure of Candlesticks

Each candlestick represents four key price points: opening price, closing price, highest price, and lowest price within a specified period. This method of viewing Forex charts is effective because it can be applied to any timeframe, whether it’s a 15-minute chart, an hourly chart, or even weekly.

Colors and Meanings of Candlesticks:

When the closing price is higher than the opening price, the candlestick is shown in white, called Bullish. This indicates that buying pressure exceeds selling pressure. If the candlestick is tall, it means buyers have strong control of the market.

When the closing price is lower than the opening price, the candlestick is shown in black, called Bearish. This indicates that selling pressure exceeds buying pressure. A tall candlestick suggests sellers have strong control of the market.

Wicks and Their Significance:

The small lines extending from the body of the candlestick are called wicks or shadows, indicating price fluctuations. Short wicks show minimal price movement, while long wicks indicate significant price swings, ultimately closing near the opening price.

Benefits of Using Candlestick Charts in Trading

Market Sentiment Reflection

Candlestick charts clearly display traders’ psychology regarding currency pairs. The length of the candlestick and the shape of the wicks reveal buyer or seller confidence, providing information not visible in other chart types like line charts or simple bar charts.

Clear Pattern Recognition

Patterns on candlestick charts have distinct shapes, helping traders forecast future price movements. When combined with other tools such as trend lines or resistance zones, the accuracy of predictions increases significantly.

Long-standing Usage History

This technique originated in Japan over two centuries ago, where rice traders used it to study rice price changes in Osaka markets. Extensive experience in using candlestick charts has proven their effectiveness.

Basic Candlestick Patterns

Doji - Sign of Pause

A Doji forms when the opening and closing prices are equal, indicating a balance between buyers and sellers. This often appears before a trend reversal.

Different Types of Doji:

Gravestone Doji - Long upper wick with little or no lower wick, showing buyers attempted to push prices higher but sellers ultimately brought prices down. It may signal a bearish reversal.

Dragonfly Doji - Long lower wick with little or no upper wick, indicating sellers tried to lower prices but buyers pushed back up. It may signal a bullish reversal.

Four Price Doji - Occurs during intense trading with no clear dominance from buyers or sellers; avoid trading during this pattern.

Interpreting Doji in Context:

When a Doji appears after a strong bullish candle, it warns that buying momentum may be waning. Traders should wait for confirmation from subsequent candles before acting.

When a Doji appears after a strong bearish candle, it warns that selling pressure may be easing. Confirmation from subsequent candles is recommended.

Marubozu - Sign of Dominance

A Marubozu candle has no wicks, indicating no price reversal during that period.

Bullish Marubozu - Open equals the lowest price, close equals the highest price, showing full control by buyers from start to finish.

Bearish Marubozu - Open equals the highest price, close equals the lowest price, indicating full control by sellers.

Spinning Top - Sign of Indecision

This candle has a short body but long upper and lower wicks, reflecting strong tug-of-war between buyers and sellers without a clear winner.

In an uptrend, a Spinning Top suggests buying momentum may be weakening, hinting at a potential reversal.

In a downtrend, it indicates selling momentum may be fading, signaling a possible bounce.

Single Candlestick Patterns

Hammer and Hanging Man - Reversal Hopes

Hammer appears in a downtrend, with a long lower wick and a short body. It signals that sellers attempted to push prices down but buyers managed to recover, possibly indicating a bullish reversal. Confirmation from the next candle is advised.

Hanging Man appears in an uptrend, with a long lower wick and a short body. It suggests buyers tried to push prices higher but sellers managed to bring prices down, possibly indicating a bearish reversal. Confirmation from the next candle is recommended.

Inverted Hammer and Shooting Star - Breakout Signals

Inverted Hammer appears in a downtrend, with a long upper wick and a short body. It shows buyers attempted to lift prices despite selling pressure, hinting at a potential upward move.

Shooting Star appears in an uptrend, with a long upper wick and a short body. It indicates sellers tried to push prices down, suggesting a possible downward reversal.

Two-Candlestick Patterns

Engulfing Patterns - Reversal Signals

Bullish Engulfing consists of a small bearish candle followed by a larger bullish candle that completely engulfs the previous one. It signals a shift from seller dominance to buyer dominance.

Bearish Engulfing involves a small bullish candle followed by a larger bearish candle that engulfs the previous one, indicating a change from buyer to seller control.

Tweezer Patterns - Equal Reversals

Tweezer Tops feature a bullish candle followed by a bearish candle with matching wick lengths, indicating strong resistance and potential reversal.

Tweezer Bottoms consist of a bearish candle followed by a bullish candle with matching wick lengths, signaling strong support and possible upward reversal.

Three-Candlestick Patterns

Evening Star and Morning Star - Reversal Stars

Morning Star indicates a bullish reversal:

• First candle: strong bearish candle
• Second candle: Doji or small candle
• Third candle: strong bullish candle closing more than halfway into the first candle’s body, confirming reversal

Evening Star indicates a bearish reversal:

• First candle: strong bullish candle
• Second candle: Doji or small candle
• Third candle: strong bearish candle closing more than halfway into the first candle’s body, confirming reversal

Three White Soldiers and Three Black Crows - Trend Strength Indicators

Three White Soldiers: three consecutive bullish candles, each larger than the previous, confirming strong upward momentum.

Three Black Crows: three consecutive bearish candles, each larger than the previous, confirming strong downward momentum.

Three Inside Up and Three Inside Down - Reversal Confirmation

Three Inside Up:

• First: strong bearish candle
• Second: smaller bullish candle within the first’s range
• Third: bullish candle closing above the high of the first, confirming bullish reversal

Three Inside Down:

• First: strong bullish candle
• Second: smaller bearish candle within the first’s range
• Third: bearish candle closing below the low of the first, confirming bearish reversal

Summary of Key Points

Basic Characteristics of Forex Charts:

White (or hollow) candles occur when the close is higher than the open, reflecting buyer dominance. Longer candles indicate stronger buying pressure.

Black (or filled) candles occur when the close is lower than the open, reflecting seller dominance. Longer candles indicate stronger selling pressure.

Wicks indicate price swings; short wicks suggest minor fluctuations, long wicks indicate significant reversals.

Pattern Classification:

Single patterns: Doji, Marubozu, Spinning Top, Hammer, Hanging Man, Inverted Hammer, Shooting Star

Double patterns: Bullish Engulfing, Bearish Engulfing, Tweezer Tops, Tweezer Bottoms

Triple patterns: Morning Star, Evening Star, Three White Soldiers, Three Black Crows, Three Inside Up, Three Inside Down

Usage Notes:

The success rate of candlestick patterns generally does not exceed 50% when used alone. Therefore, safe trading requires careful decision-making, considering economic news, fundamental factors, and overall market conditions. Training and strict risk management are key to success in Forex trading.