While nothing is a sure thing in trading, you can access a world of insights into market movements through the charts and indicators available on your platforms. One of the most commonly used is the candlestick chart, which visually represents price movements of a currency or other asset in a way that’s quick and easy to interpret. Here, we show you how to read and interpret these useful markers.
Composition of the candlestick
Candlesticks commonly represent the previous price movements of a currency over a day, although it can also represent other time periods. The graphic element has three specific features: an open price represented by the top of the candle’s body, a close price represented by the bottom of the candle’s body and an upper and lower wick (or shadow) that extend above and below the candle’s body. These wicks indicate the extremes of the currency’s price for that period, and can help us to understand changes in momentum over time.
Colours or blocking
The colour or blocking of the candlesticks provides information too. A red candlestick indicates a downward movement in price, while a blue candlestick indicates an upward movement. In other charts this may be signified by an empty body if the price moved up between open and close, and a filled body if the price went down in that period.
Learning to read candlestick charts
With a little patience it can be quite easy to become a natural at interpreting the daily candlestick charts. These graphics can essentially be used to assess the emotional conditions of the market. If a price is bullish or bearish and momentum is strong, the candles will tend to have long bodies. If a price fluctuates during the day but closes around the same place, this can indicate a trend coming to an end.
Useful candlestick terms
There is a range of candlestick patterns and terms, but amongst the most common are:
· A spinning top is a candlestick formation where the body of the candlestick is small but the wicks are long. It represents a day when price fluctuated wildly but settled close to its starting price.
· Doji lines often look like a cross because the open and close markers are so close together. Technical traders often look for Doji lines as a signal of a reversal pattern, or slowing trend.
· A Gravestone Doji displays an upward wick with the open/close marks at the bottom, while a Dragonfly Doji is the opposite with the open/close marks sitting at the top.
To keep building your Forex knowledge base, be sure to register for our regular webinars where we cover the basics along with more advanced trading principles.