A forex candle is a technical indicator used in forex trading. A candlestick will pack perhaps more information in one single glance than any other type of price chart. As a result of this, a forex candle remains very popular with the forex traders. The history of using candle as a measurement tool could be traced to the early eighteenth century when candlesticks were used in Japan by the sellers and buyers in the country’s rice markets to measure the price trends.
Reading Forex Candle Charts
A candlestick will reveal the changes taking place in the opening and the closing rates for a reporting period in its body length. When its body is long, it is considered to have a volatile swing between the opening and the closing rates. The color on the body of a candlestick will offer important information. A hollow type of a forex candle will mean that its bottom will indicate the opening rate and its top will indicate the closing rate. A candlestick which looks filled will show the opening price at its top and the closing price will be at its bottom. A hollow candle will show a trend that is on the rise while a filled candle will indicate a trend that is on the decline.
There are three important points which are studied in the creation of a forex candle – they are the opening price, the closing price and the wicks. The opening and the closing prices will identify where the price started and ended for a predetermined period and this goes into shaping the body of the candle. The body color of the candlestick is important – it will be red when price is going down and blue when it is going up. An understanding of a forex candle will help the traders from quickly identifying whether the market is trading lower or higher for a time frame that has been selected. The wicks determine the shadow area of the candle. Wicks are important because they indicate the price extremes for a specified period. They can be identified easily as they are thinner than the body of the candle. Candlesticks can help traders in keeping an eye on the momentum of the market and away from the price extremes.
Some Common Patterns in Candlesticks
Traders see the patterns made by candlesticks as signals for the direction that the exchange rate is taking. The common and popular patterns are –
• Doji Patterns – This pattern is established when the opening and the closing prices are the same. It results in a very small body of the candle. The length of both the upper and the lower shadows reflecting the prices during the intra-period have virtually no effect on the price at the time of the closing.
• Spinning Tops – These are candlesticks with small bodies. They can either be filled or they can be hollow. Smaller bodies point out that there has been not much of a difference during the reporting period between the opening and the closing prices.
• Hanging man and hammers – These patterns contains longer shadows at the lower parts. These candles have small bodies and there are no shadows on the upper portions, representing uncertainty in the price movement and indicate a possible a possible price reversal. When the pattern appears at the hollow body with a downward trend, it is known as a hammer candle and if it appears at the top indicating an upward trend with a filled body, it is referred to as a hanging man.
• Morning and Evening Stars – The morning star tells that the price has almost reached a support level after a downward trend in the market. It will look like a small candlestick with a hollow body. It will follow a filled but a declining candlestick to mark a turning point in prices. This is confirmed by another candlestick that shows a dramatic increase in the prices. The morning start is looked at as an optimistic sign. The evening star is a pessimistic sight as it occurs at the far end of a downward trend.
• Shooting Star – This is quiet a strong signal that a run-up in the price is likely to come to a halt. Traders are on the lookout for such a pattern after a prolonged increase in the prices. It is capped by a candle with a small and a hollow body.
Once the traders get to understand the basics of reading a forex candle, they will have the capability of opening up a whole range of trading opportunities. Many traders like to employ the candlestick analysis in their forex strategies. They use the forex candle in gauging the market direction of the price and the market sentiment.