Candlestick Chart Formation
The candlestick chart is made up of a series of ‘candlesticks’ which typically have a chunky body with vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or even longer.
The top of the wick is the highest point reached during the time period and the lowest point of the lower wick is the low. The top and bottom of the body are the opening and closing prices. If price rose during the period the body will be white (or green or blue if colored). The bottom of the body marks the opening price and its top marks the close. If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).
How To Use The Candlestick Chart In Forex Trading
A candlestick chart showing 5 or 15 minute candles over a period of several hours can provide the forex trader with many patterns on which he can base a system for determining when a trend is developing. For example, when the candle body is white or green and higher than the preceding candles, it indicates that buyers are very bullish. When it is black or red and lower than the preceding candles, it indicates that buyers are very bearish.
Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader.
Candlestick Chart: Patterns
Candlestick patterns are the basic indicators that helps a trader find ways of interpreting a candlestick chart. This is very useful for creating simple strategies (click here for Forex Strategies) that will tell you when a trend is forming so that you are ready to trade.
Candlesticks Charts have a form which shows the open, high, low and closing price of a currency, stock or commodity over a period. You can usually select the period that you want to show. 5 minutes is most common for day traders. For longer term trading you can select longer periods.
The body of the candlestick chart marks the difference between the open and close points. If it is white (or green/blue on a colored chart) the open is the lower boundary of the rectangular body and the price rose during the period you are considering. If is black (or red on a colored chart then the opening price is the top boundary and the price fell.
The wick is the name given to the vertical lines that typically stick up from the top and down from the bottom of the candle body. The top of the upper section of wick is the highest point that the price ever reached during the period. The bottom of the lower wick is the low.
The benefit of this type of analysis is that the trader can immediately see whether prices rose or fell over the period. A white or green candle shows a rising price or bearish tendency and a black or red candle shows a falling price or bullish tendency.
You can also see at a glance how the highs and lows relate to the opening and closing prices. You might have a candle that is completely solid, with no wick. This is called a Marubozu pattern. In this case the prices never went lower or higher than their opening and closing positions. If the candle is black or red, the opening price was the high and the closing price was the low. If it is white or green, the opening price was the low and the closing price was the high.
You might also have a candlestick chart that is all wick with just a small horizontal bar forming a cross. This pattern is called a Doji. In this case the opening and closing points were the same, and the wick shows how far the price went up and down before coming back to its starting point at the close.
A long body indicates a fairly steady trend either downward or upward. A long wick either top or bottom indicates a reversal.
For accurate trend indication a candlestick chart needs to be read in conjunction with the others that preceded it. Then you can create more complex candlestick patterns showing the likely trends to come.
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