Reading Candlestick Charts

Introduction to Candlestick Charts

Candlestick charts are the most widely used chart type among forex traders worldwide. Originating in 18th-century Japan where they were used to track rice prices, candlestick charts provide a wealth of information at a glance — making them far more powerful than simple line charts.

Each candlestick represents a specific time period, which you can customise: 1 minute, 5 minutes, 15 minutes, 1 hour, 4 hours, daily, weekly, or monthly. A daily candlestick, for example, shows all the price action that occurred during one trading day compressed into a single visual element.

Anatomy of a Candlestick

Every candlestick has four key data points:

• Open — the price at which the period started.
• Close — the price at which the period ended.
• High — the highest price reached during the period.
• Low — the lowest price reached during the period.

The rectangular body of the candle spans from the open to the close. If the close is higher than the open (a bullish candle), the body is typically shown in green or white. If the close is lower than the open (a bearish candle), the body is shown in red or black. The thin lines extending above and below the body are called wicks or shadows, representing the high and low.

Key Candlestick Patterns

Certain candlestick formations signal potential reversals or continuations in price direction. Some of the most important patterns to learn include:

• Doji — the open and close are nearly equal, creating a very small body. Signals indecision in the market.
• Hammer & Hanging Man — small body with a long lower wick. Signals potential reversal depending on context.
• Engulfing Pattern — a large candle whose body completely engulfs the previous candle. A bullish engulfing signals upward reversal; bearish engulfing signals downward reversal.
• Shooting Star — small body with a long upper wick, occurring after an uptrend. Signals potential bearish reversal.

It is important to note that no single candlestick pattern should be traded in isolation. Always confirm signals with other tools such as support/resistance levels, trend direction, and volume.

Practical Application

Open your trading platform and switch to a daily chart of EUR/USD. Practice identifying bullish and bearish candles. Look for any of the patterns described above and note the price action that followed. This type of pattern recognition becomes faster with practice and is a fundamental skill for all technical traders.

Summary

Candlestick charts are your primary window into market psychology. You now understand how to read them and recognise key patterns. In the final lesson of this course, we will bring everything together and guide you through placing your very first demo trade.