Candlestick charts: The ULTIMATE beginners guide to reading a candlestick chart
How to Read Forex Charts
With today's sophisticated financial market operating worldwide, world currencies now have their own distinct sets of resources for measuring their worth over time. The general Forex, or foreign exchange market, helps to promote the comparison of different world currencies against each other, and against other assets, to help individual traders and investors take advantage of conditional values for those currencies. One resource is in the form of currency charts that provide a visual demonstration of the worth of a currency against other assets. If you need to read currency charts in order to get a better idea of currency values, here are some of the basic steps involved in utilizing these financial tools.
Learning the Basics
Get access to up-to-date currency chart information.In order to read and benefit from currency charts, you'll need to get them from a legitimate provider.
- Most of the smaller traders and investors who profit from currency trading use charts that are offered directly from their brokerage services. New online brokerage services often include tools, like currency charts, in order to help their clients understand current pricing.
Select a time frame for your currency chart.One of the most important steps in using currency charts, or any other kind of financial chart, is to set a specific time frame. The values that you view are only relevant to the specific time frames that you establish for them. With a paper chart, you can crop the chart for your specified time frame, where online tools often enable the user to change the view to a specific time frame, for example, 1 day, 5 days, 1 month, 3 months, 6 months or 1 year.
Observe your currency chart for the desired time frame.You will see a line graph that represents changes in currency value over that period of time.
- Look at your line graph against your Y axis. The Y axis, or horizontal axis, for a currency chart most often indicates a comparative asset price. When a line fluctuates, it shows how your selected currency performs against the currency or asset that is represented in the Y axis.
- Check your X axis. The X axis for your currency chart represents your time frame. You will see that both of these axes have scaled, segmented values, where your line graph fluctuates in a variable way.
Look for specific chart structures.Advanced traders and others look for specific visuals in a currency chart to try to predict which way future prices will go.
- Understand candlestick charting to take advantage of this advanced financial resource. Candlestick charts show a range of traits for a specific trading day, with a top and bottom that illustrate price movement. Many currency charts include candlestick charting, especially online ones, and by observing these charts correctly, you can know much more about the price than just how it has changed over a period of time.
- Look for items like Fibonacci retracement. A Fibonacci retracement is a specific kind of price spike or dip where a reversal can signify a general trend. Read up on this sort of predictive tool and apply it to your currency chart observation.
- Look for movement against moving averages. Moving averages tell you how the price has changed over a longer time frame. These may be helpful when you are viewing your currency chart.
Reading Candlestick Charts
Understand what the chart consists of.There are no calculations required to interpret Candlestick Charts. They are a simple visual aid representing price movements in a given time period. Each candlestick reveals four vital pieces of information:
- the opening price, the closing price,
- the highest price and the lowest price the fluctuations during the time period of the candle.
- In much the same way as the familiar bar chart, a candle illustrates a given measure of time.
- The advantage of candlesticks is that they clearly denote the relationship between the opening and closing prices.
Understand that candlesticks display the relationship between the open, high, low and closing prices.This means that they cannot be used to chart securities that have only closing prices. Interpretation of Candlestick Charts is based on the analysis of patterns. Currency traders predominantly use the relationship of the highs and lows of the candlewicks over a given time period. However, Candlestick Charts offer identifiable patterns that can be used to anticipate price movements.
Learn the patterns.There are two types of candles: The Bullish Pattern Candle and the Bearish Pattern Candle:
- A white (empty body) represents a Bullish Pattern Candle. It is used/denotes when prices open near the low price and close near the period’s high price.
- A black (filled body) represents a Bearish Pattern Candle. It is used/signifies when prices open near the high price and close near the period’s low price.
Understand how to read the Bullish Candlestick Formations:
- The Hammer is a Bullish Pattern if it appears after a significant downtrend. If the line occurs after a significant uptrend, it is called a Hanging Man. A small body and a long wick identify the Hammer. The body can be empty of filled in
- The Pricing Line is a Bullish Pattern where the first candle is a long, Bear candle, followed by a long Bull candle. The Bull candle opens lower than the Bear's low, but closes more than halfway above the middle of the Bear candle's body.
- A Bullish Engulfing Line is a patter strongly Bullish if it occurs after a significant downtrend. It may also serve as a reversal pattern. It occurs when a small Bearish candle is engulfed by a large Bullish candle.
- The Morning Star is a Bullish Pattern signifying a potential bottom. The star indicates a possible reversal and the Bullish candle confirms this. The Star can be a Bullish or Bearish candle.
- In a Bullish Doji Star, the star indicates a reversal and a Doji indicates indecision. This pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation before trading a Doji Star.
Understand how to read the Bearish Candlestick Formations:
- A Long Bearish Candle occurs when prices open near the high and close lower, near the low.
- The Hanging Man pattern is Bearish if it occurs after a significant uptrend. If this pattern occurs after a significant downtrend, it is called a Hammer. A Hanging Man is identified by small candle bodies and a long wick below the bodies, and can be either Bearish or Bullish.
- Dark Cloud Cover is a Bearish Pattern that is more significant if the second candle's body is below the center of the previous candle's body.
Understand how to read Neutral Candlestick Formations.
- Spinning Tops is a neutral pattern that occurs when the distance between the high and low, and the distance between the open and close, are relatively small.
- A Doji candle implies indecision. The open and close are the same.
- A Double Doji (two adjacent Doji candles) implies that a forceful move will follow a breakout from the current indecision.
- The Harami pattern indicates a decrease in momentum. It occurs when a candle with a small body falls within the area of a larger body.
Understand how to read the Reversal Candlestick Formations:
- A Long-legged Doji often signifies a turning point. It occurs when the open and close are the same, and the range between the high and the low is relatively large.
- The Dragonfly Doji also signifies a turning point. It occurs when the open and close are the same, and the low is significantly lower than the open, high and closing prices.
- A Gravestone Doji occurs when the open, close, and low prices are the same, and the high is significantly higher than the open, close and low prices. It also signifies a turning point.
- Stars indicate reversals. A Star is a candle with a small, real body that occurs after a candle with a much larger, real body where the real bodies do not overlap. The wicks may overlap.
QuestionHow do I know when to enter a trade and exit?Top AnswererIt's not possible to give you a good answer. Successful forex traders will tell you there is an art and a science to it, a mix of knowledge, intuition, and luck. Even for experienced traders there's an element of gambling involved.Thanks!
QuestionWhat do "closing" and "opening" mean in Forex trading?Top AnswererThey are respectively the final and beginning prices of a specific currency in a trading day.Thanks!
QuestionWhat is the difference between stop loss, hold and take a profit?Top AnswererA "stop loss" is an instruction to a broker to sell a security you own before its price falls below a pre-determined point. "Hold" means to retain ownership of a security. "Take a profit" means to sell a security after it has risen in value above the price at which it was purchased.Thanks!
QuestionIf the prices represent opening and closing during the day, who and what decides when something opens and closes? Or is it just denoted by the time frames?wikiHow ContributorCommunity AnswerIf you are referring to the use of candlestick, which I suspect you are, the opening and closing is arbitrarily set by time frame in, say, one minute, five minutes, ten minutes, one hour, two hours, or one day. Your platform makes it available for your use as a decision tool.Thanks!
QuestionWhat is the right amount for the beginners to start with forex trading?Top AnswererInvest the minimum amount your broker will accept to begin with. Gain some experience before you invest more.Thanks!
QuestionI have downloaded a demo account but I have never placed a trade before. How do I do so?Top AnswererThanks!
QuestionHow do I see the right time to trade?Top AnswererThanks!
A Forex chart is a visual way to read price movements over a certain period. When you're looking at a Forex chart, you'll see rectangular symbols that look like candles - these indicate opening price and closing price. For the black ones, the top is the open price and the bottom is the closing price. For the white ones, it's the opposite. The little "sticks" on the top and bottom of each candle indicate the highest and lowest price fluctuations during that time period.
Video: Understanding Candlestick Charts for Beginners
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