Understanding Forex through Candlestick Charting - A Beginner Trader's Guide

Why Learn Candlestick Charts in Forex

If you want to succeed in the Forex world, reading candlestick charts is an essential basic skill. This tool is available on all trading platforms, and many traders generate significant profits by solely analyzing candlestick charts.

What Are Candlestick Charts

Candlestick charts are tools that display Forex price movements over a specified period. Each candlestick provides 4 pieces of information:

• Opening price (Open)
• Closing price (Close)
• Highest price (High)
• Lowest price (Low)

They can be used on any timeframe, from 15 minutes, one hour, or even one week.

How to Read Basic Forex Candlesticks

Color and Meaning

White candlestick (Bullish) - Occurs when the closing price is higher than the opening price, indicating buying strength. If the candlestick is long, the buying pressure is very strong.

Black candlestick (Bearish) - Occurs when the closing price is lower than the opening price, indicating selling strength. If the candlestick is long, the selling pressure is very strong.

Wick and Body

Short wick = little price fluctuation between open and close, shows a relatively quiet market.

Long wick = high price volatility, indicating fierce battles between buyers and sellers, but ultimately closing near the opening price.

Advantages of Candlestick Charts in Forex

⊙ Clear market sentiment

Candlestick charts show the battle between buying and selling forces in real-time, unlike line or simple bar charts that provide less information.

⊙ Easy to understand with clear patterns

When combined with other tools such as trend lines or support-resistance levels, you can improve your entry and exit points.

⊙ Proven effectiveness

Candlestick charts have been used for over 200 years, dating back to Japanese rice traders analyzing rice markets in Osaka, and remain a trusted method today.

Basic Candlestick Patterns

Once you understand the basics, the next step is to recognize various patterns indicating trend reversals or continuations.

Doji – Signals Hesitation

A candlestick where the open and close prices are the same, indicating balanced buying and selling forces. It may signal a trend change.

Four types of Doji:

• Standard Doji – Fluctuates up and down before closing at the same price
• Gravestone Doji – Attempts to rise but gets pushed down; may mark the end of an uptrend
• Dragonfly Doji – Drops low but then pulls back up; may mark the end of a downtrend
• Four Price Doji – Price is at extremes; trading should be avoided

Marubozu – Extreme momentum

Candles with no wicks at all, body fills the entire candle.

• Marubozu White = Full buying strength; open at the low and close at the high
• Marubozu Black = Full selling strength; open at the high and close at the low

Spinning Top – Indecision

Short body with long wicks on both ends, indicating no clear dominance.

• In an uptrend: Buying momentum weakens, possible reversal.
• In a downtrend: Selling momentum weakens, possible reversal.

Single Candle Reversal Patterns

Hammer & Hanging Man

Hammer (In a downtrend) – Sharp decline but closes high, indicating possible buying comeback and a trend reversal.

Hanging Man (In an uptrend) – Looks like a Hammer but appears in an uptrend, indicating selling pressure and a potential reversal down.

Inverted Hammer & Shooting Star

Inverted Hammer (In a downtrend) – Sharp rise but closes low, suggesting buying attempts, potential reversal upward.

Shooting Star (In an uptrend) – Sharp rise but closes low, indicating possible reversal downward.

Two-Candle Reversal Patterns

Bullish & Bearish Engulfing

Bullish Engulfing – A black candle followed by a larger white candle that engulfs the previous one, indicating a strong reversal upward.

Bearish Engulfing – A white candle followed by a larger black candle that engulfs the previous one, indicating a strong reversal downward.

Tweezer Tops & Bottoms

Tweezer Tops – Two wicks of similar high, possibly signaling a top and reversal down.

Tweezer Bottoms – Two wicks of similar low but different colors, possibly signaling a bottom and reversal up.

Three-Candle Reversal Patterns – More Reliable Signals

Morning Star & Evening Star

Morning Star – Clear reversal upward: long black candle → Doji below → white candle closing more than half the Doji, signaling a strong buy.

Evening Star – Clear reversal downward: long white candle → Doji above → black candle closing more than half the Doji, signaling a strong sell.

Three White Soldiers & Black Crows

Three White Soldiers – Three consecutive white candles, each higher than the previous, indicating a strong uptrend.

Three Black Crows – Three consecutive black candles, each lower than the previous, indicating a strong downtrend.

Three Inside Up & Down

Three Inside Up – Long red candle → small candle inside → closes above the first candle, confirming a reversal up.

Three Inside Down – Long green candle → small candle inside → closes below the first candle, confirming a reversal down.

Key Principles for Using Forex Candlestick Charts

Remember the signals

• White + Short wick = Strong buying, market in momentum
• Black + Short wick = Strong selling, market in momentum
• Long wicks on both sides = No clear winner; wait for next signals

Don’t decide based on a single candle

Candlestick analysis alone can be misleading; always wait for confirmation from the next candle and consider support-resistance levels.

Success rate only 50%

No matter the pattern, success is rarely over 50%. Relying solely on perfect charts is not enough; study fundamental data, news, and risk management.

Summary

Candlestick charts are powerful tools, but require deep understanding. Practice often, and once skilled, combine with other analysis methods for better decision-making.

Investing involves risks. Consult professionals before trading.