Understanding candlesticks in forex trading

For so long, whenever a person thinks of trading or investing in forex markets, they immediately picture a wall of numbers on their screens. If you have been doing forex for any time, you will understand that numbers can only tell us so much and that charting is where most critical analysis comes from. This article will be looking at candlesticks and how best to utilise them when trading currencies in the foreign exchange market.

Candlestick charts present a very similar appearance to bar charts. Still, some critical differences between the two types of graphs make it easier for traders to read candlestick charts than traditional bar graphs. Let’s begin by comparing a typical candlestick with its equivalent bar graph,

This example shows how a candlestick can convey more information than a bar graph. From the bar graph alone, it isn’t possible to tell whether the currency pair surged during the session before looking at price action at either open or close points. However, with candlesticks, you are provided with this information immediately on opening the chart; no extra work is required. It gives traders an easy way of determining whether they should be considering buying or selling a currency based on past price action.

One of the most common mistakes that newer traders make when using candlestick charts is to assume that this additional information allows them to read every candle precisely the same way as its equivalent bar graph. However, there are significant differences that you must take into account when trading.

The hammer

It tells us that price opened near or at its high point before falling into an eventual close around its open. If this were a bar graph, it would show us the same thing, but what are some critical differences with candlesticks? A hammer will have both an upper and lower wick which would not be present on a bar chart. The upper wick shows us where price began to increase before stopping suddenly, while the lower tells us about any downwards movement during this uptrend. If you combine these two points, you can see that this candle shows us a period where the price increased before falling back near its opening, something which is not immediately apparent from the bar graph.

Marubozu candles

It tells us that prices opened and closed at precisely the same level during the session without any increase or decrease. This pattern will usually occur in markets that have been very stable throughout, and traders will often use it as a sign of future strength for when they begin looking to buy. If you were short on this currency pair and looked at this candle when considering closing your position, you would probably think again, considering how static it seems.

The final candle pattern: a Doji

It indicates that the price opened and closed at precisely the same level during this session without any increase or decrease. The pattern usually shows up when there is uncertainty in the market and creates an opportunity for traders to enter with long and short positions depending on their view of future price action. If you were looking to sell and saw one of these candles, it would probably make you reconsider your strategy as they often precede bullish movement.

Bottom line

We have seen some critical differences between candlestick charts and bar graphs that can help us determine how best to trade specific currency pairs. When choosing between the two options, it is essential to consider the nature of the market you are trading in and whether candlesticks will give you many advantages when placing your orders.

I hope this article has provided some helpful insight in understanding what they are, how they work and how you can use them to make better trades.

Saxo forex broker is the perfect place to start forex trading, have a look and find out what they can offer you.

Related Posts