How to Use Candlestick Forex Charts

How to Use Candlestick Forex Charts

A lot of new forex traders have never seen a candlestick chart before.  This is due to it predominantly being used in financial trading analysis.  The candlestick chart has actually been around for over 100 years and was used for many years by the Japanese before it came to the West.  The candlestick chart is one of the most popular of the forex charts and is used by most traders.  One reason for the popularity is the short-term outlooks that the chart displays.  Some new traders find these charts difficult to understand so it is important that you learn as much about them as you can.

The Candlestick Forex Charts Components

When you first look at the candlestick chart you may be confused about what it is telling you.  While the chart looks similar to the line chart there are candlesticks which often throw new traders.  The information that this chart provides is the market open price, the highs and lows as well as the closing price.  All this information is displayed in the ‘candlestick’ part of the chart.

The widest part of the candlestick chart is called the real body.  The real body is the visual representation of the open and close price of the currency pair.  If the body is filled in red or black then the closing price is lower than the opening price.  However, if the body is clear or green then the closing price is higher than the opening.

On the top and bottom of the body there are shadows which also look like the wicks of the candle.  These shadows are the visual representation of the low and high prices for the day or period of time.  If the body is filled in and the upper shadow is short then the open on the day was close to the high of the day.  A short upper shadow with a clear body means that the close of the day was close to the high of the day.

Candlesticks or Bar Charts?

Many new traders wonder about which chart they should be using.  In many countries the bar chart is more popular than the candlestick.  The biggest difference between these two charts is the relationship between closing and opening positions.  The bar chart focuses more on the difference between the closing prices over a period of time.  The candlestick chart is focused on the opening and closing prices of the same time period.

Basic Chart Patterns

When you use a candlestick chart you need to know about the basic patterns you could find.  The two you should know first are the spinning tops and the Doji lines.  Spinning tops are small bodies in either colour located very close together.  With this pattern there will be a tight trading range and this pattern shows that the market is neutral.

The Doji lines are periods of time when the opening and closing prices of a currency pair are very close together.  The length of the shadows with this pattern may vary.

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