What could possibly be more important to a technical Forex trader than their price charts? Your perception of price will ultimately help shape your opinions of trends, determine entries, and more. With this in mind it becomes absolutely critical to understand what you are seeing on your trading monitor. More often than not Forex charts are defaulted with candlestick charts which differ greatly from the more traditional bar chart and the more exotic renko charts that you may come across in your trading career. Surprisingly after learning to analyze candlesticks, traders often find they are able to quickly identify different types of price action that they could not quickly identify before with othertypes of charts.
To begin with, traders need to understand exactly how to read candlesticks before adding them into an existing trading strategy. So let’s get started learning about how to read a candlestick chart!
How to Read Candles
The image below represents the design of a typical candlestick. There are three specific points (open, close, wicks) that are used in the creation of a price candle. The first points we need to consider are the candles open and close prices. These points identify where price began and concluded for a selected period and will construct the body of a candle. If you are viewing a daily chart for instance, these points will represent the daily open and close price. It is important to note the color of the body of a candlestick (red for down and blue for up). Knowing this, candlesticks can help us quickly identify if the market is trading higher or lower for a selected time frame.
Next we have the wicks of our candlesticks, which may also be referred to as the candles shadow. These points are vital as they show the extremes in price for a specific charting period. The wicks are quickly identifiable as they are visually thinner than the body of the candlestick. This is where the strength of candlesticks becomes apparent. Candlesticks can help us keep our eye on market momentum and away from the static of price extremes.
Uses in Trading
As you can now see, candlesticks are easy to read with a little bit of practice. Once you understand the basics, they have the ability to open up an array of trading opportunities. While a trader may not employ candlestick analysis alone in their strategies, Forex professionals do use them to gauge market sentiment and market direction. Now that you are familiarized with the basics your next step is to continue learning by reviewing candle patterns, such as the bullish engulfing pattern, which can be used in conjuncture with a strong trending market.
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