Candlestick charts are one of the most popular and widely used tools in the forex trading world. They are a visual representation of price movement and provide valuable information about market trends, price action, and potential trading opportunities. However, reading a candlestick chart can be daunting for beginners. In this article, we will explain how to read a candlestick on a forex trade and the information it provides.
What are candlestick charts?
Candlestick charts were first used by Japanese rice traders in the 1700s. They are a type of price chart that displays the open, high, low, and close prices of an asset over a specific time period. Each candlestick represents a specific time frame, such as one hour, four hours, or a day. The candlestick is formed by a rectangular body and two wicks, also known as shadows or tails.
The body of the candlestick represents the opening and closing prices of the asset, with the color of the body indicating whether the price moved up or down during the time period. If the closing price is higher than the opening price, the candlestick will be green or white, indicating a bullish or positive movement. If the closing price is lower than the opening price, the candlestick will be red or black, indicating a bearish or negative movement.
The wicks or shadows of the candlestick represent the highest and lowest prices reached during the time period. The upper wick represents the highest price, and the lower wick represents the lowest price. The length of the wicks shows the volatility of the asset during the time period.
Reading a candlestick chart
Now that we understand the basic structure of a candlestick, let’s look at how to read a candlestick chart. We will use a daily chart of EUR/USD as an example.
In the chart below, each candlestick represents one day of trading. The green candlesticks indicate bullish or positive movement, while the red candlesticks indicate bearish or negative movement.
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The first thing to notice is the trend of the market. In this chart, we can see that the currency pair has been in a downtrend since mid-February. This is indicated by the series of red candlesticks, with lower highs and lower lows.
Next, we can look at individual candlesticks to see the price action during each day. Let’s look at the candlestick on April 6th. The body of the candlestick is green, indicating that the closing price was higher than the opening price. The upper wick is long, indicating that the price reached a high of 1.1918 during the day. The lower wick is short, indicating that the price did not reach a low below the opening price of 1.1815. This candlestick suggests that buyers were in control during the day, pushing the price higher.
On the other hand, let’s look at the candlestick on April 8th. The body of the candlestick is red, indicating that the closing price was lower than the opening price. The lower wick is long, indicating that the price reached a low of 1.1752 during the day. The upper wick is short, indicating that the price did not reach a high above the opening price of 1.1806. This candlestick suggests that sellers were in control during the day, pushing the price lower.
Using candlesticks in forex trading
Candlestick charts provide valuable information to forex traders. By understanding the structure of the candlestick and reading the chart, traders can identify trends, support and resistance levels, and potential trading opportunities.
For example, if a trader sees a series of green candlesticks, indicating a bullish trend, they may look for buying opportunities. Conversely, if a trader sees a series of red candlesticks, indicating a bearish trend, they may look for selling opportunities.
Traders can also use candlesticks to identify support and resistance levels. A support level is a price level where buyers are likely to enter the market and push the price higher. A resistance level is a price level where sellers are likely to enter the market and push the price lower. Traders can look for candlestick patterns at these levels to confirm their validity and potential trading opportunities.
Conclusion
Candlestick charts are a valuable tool for forex traders. By understanding the structure of the candlestick and reading the chart, traders can identify trends, support and resistance levels, and potential trading opportunities. With practice, traders can use candlesticks to enhance their trading strategies and make more informed trading decisions.
