When traders want to check price action and the forex price movement over a defined period of time, then they refer to candlestick forex charts.
The candlestick chart exhibits the opening, closing, low and high points of that defined time period. In a daily chart, every candle represents a 24 hour time frame.
This candle contains information of the daily open and closing price, as well as highest and lowest prices during the day. However, as the currency markets are open for 24 hours, there is no real opening or closing price. Hence, a certain time is agreed upon as the daily opening and closing time.
Interpreting Candlestick Forex Charts
Interpreting candlestick charts is not too difficult. The main part of the candlestick is the body (or the rectangle between the opening point and the closing point).
The biggest advantage of using a candlestick chart is that information can be deduced easily with a quick glance, which may not be the case with bar or line graphs. You can quickly ascertain the difference between opening and closing prices. Your investment can also be protected through analysis of different patterns in the candlestick charts. The simplest patterns to analyze are the hammer and shooting star patterns.
This rectangle which displays the range between the opening and closing price is called the body or real body of the candlestick. If the closing price is above the open price, then an empty candlestick in white is shown. If the closing price is below the opening price, then a shaded candlestick (usually black) is shown.
Hammer Pattern in Candlestick Forex Charts
- One of the most important patterns that a forex trader should know is the hammer pattern. This is found within candlestick formations in charts.
- Hammer patterns in a candlestick formation can show reversal of trends. They gather at significant inflection points, and can predict a move in the reverse direction. The hammer pattern is named as such since the currency is hammering out a bottom.
- However, when you do detect a hammer pattern, do not immediately go and place an order for the currency. Wait for a confirmation of greater bullishness before taking this step.
- In the above hammer pattern, the trading price fell, but rebounded. Sellers were unable to bring the price down significantly. The long wick shows the extent of the rebound.
Shooting Star Pattern
In this formation, the candlestick shows that buyers have been pushing up prices at a high level, but have not been able to hold them up there. This formation also indicates that the buyers have struggled enough, and will not be able to push prices higher. Here, both buyers and sellers were unable to stamp their authority on the trade
The length of the candle’s wick is also important here. It illustrates as to how the buyers tried to push up prices, which were only struck down by the sellers. The longer the wick, the more likely is the possibility that the trend will go in the other direction.