How to Read Forex Candlestick Patterns

It is always easier to understand a picture than to understand the written word. Graphs are a pictorial look at the problem we are solving. Many types of graphs can be used. There is a bar graph, a line graph, a columnar graph, and a pie chart. Although many of these graphs can be helpful in Forex, there is a type of graph that is very useful in Forex trading. This graphing method is not one taught in schools. It is only used in stock markets. The graph is called candlesticks

How do you read candlesticks in forex?

Reading candlestick charts

This graphing method called candlestick, originated in Japan a few centuries ago. Munehisa Homma is the man who is responsible for the development of candlesticks in graphing. He realized that there is more to a commodity than value alone. The price of products is important, and will not often reflect the value. He was a rice trader and made a fortune using the candlestick graph to predict the value and price of rice in the market. 

When reading candlestick charts, upward and downward trends can be seen even with a cursory glance as they use different colors. Usually, the color blue or green will show an upward trend. Red is used to indicate a downward trend. We all know that a red pen is often used in school to highlight mistakes or low marks. We associate red with bad. A downward trend in the stock market is not doing well. When reading candlestick charts, it is easy to pick up the nasty stock market trends. 

We owe a lot of our mystical knowledge to the East. It is not surprising to see it when we are reading candlesticks. We come across the concept of Ying and Yang. The upward trends are Yang, and the downward trends then become Ying as Ying and Yang reflect different qualities of the commodity in question. 

We also find mystical terminology when discovering how to read candlestick charts. Many of the patterns have a whimsical description. Some of the terms are self-explanatory. With some thought, you can understand how they came about.

Some of the terminology:

  • Dark cloud over refers to a situation that is not healthy.
  • Evening star. Venus is evident in the dark. Dark symbolizes things that are not in a good place.
  • Morning star. Mercury is called the morning star. Our mornings represent new beginnings. It is time to look forward to a better situation. 

When you are reading candlestick charts, your understanding of candlesticks means you need to understand some candlestick patterns:

  • A Maribozu Candlestick applies to one candlestick in your graph that is very long.
  • A Doji Candlestick implies that the market is exhausted. It is slowing down. It does not refer to a trend that is going to change direction soon. A Doji candlestick is used when the open and closing markets are the same. There is no length to the candlestick. A dragonfly Doji represents a market that opened strong but declined during trading but then recovered to close at the same position as it opened. 

There are four different types of Doji patterns.  

  • The plain Doji is in the shape of a cross. 
  • The Gravestone Doji is a horizontal line with a line (the wick) stretching out vertically. It looks like an inverted “T”.
  • The Dragonfly Doji is the reverse of the Gravestone Doji and looks like a “T”.
  • A Long Legged Doji looks like a combination of the Gravestone Doji and the Dragonfly Doji. It looks like a cross but has long lines (wicks) extending vertically up and down. The wicks are more prominent than the plain Doji.

Doji candlesticks have a shadow (also called a wick or a tail).

  • Spinning Top Candlestick has a small body with long shadows that extend up and down. It represents a market that does not know which way it will move.
  • Engulfing pattern usually follows the Doji or Spinning top. It serves as an indicator of the trend of your commodity. If the bottom of the candlestick dips lower than the preceding one, it indicates a downward trend and vice versa if it climbs higher than the previous one. It is called an engulfing pattern as the sheer size of it is longer than the preceding candle. 
  • A Piercing pattern happens when the forex pair is in a downward spiral. The closing point of this candle has a line that passes midway through the previous candle.
  • Dark Cloud Cover pattern follows an upward trend candle, but it indicates a downward trend is possible. 
  • The Harami pattern is always a smaller candle than the previous one, with its highest (and lowest) points being lower (or higher) than the previous one. It indicates a hesitation in the market – a place where it is uncertain whether the next candle follows an upward or downward trend. 
  • Hammer candlestick pattern. This candlestick starts near the top of the previous one indicating the market opening price. The hammer pattern will indicate when the market drops during trading; but then recovers and closes in a more positive state than when it opened.
  • The hanging man candlestick is opposite to the Hammer pattern. It starts at the top of the previous one and has a long tail wick. It illustrates a potential dip in the market trend. 
  • The shooting star pattern indicates a possible rise in the Forex pair. It has a long upward wick and an almost imperceptible downward wick. 

Reading candlestick charts helps us to interpret trends in the marketplace. 

How do you read a candlestick chart for beginners?

In the previous section, there was a brief discussion of each type of candlestick. That brief discussion was suitable for those who have been interpreting candlesticks for a while. In other words, it is not okay for a beginner. We need to help the beginner to: 

  • Read a candle chart, 
  • Distinguish between a bar chart (or any of the charting methods used) and a candlestick chart.
  • Understand the different techniques that go into a candlestick chart.

Reading candlestick charts

A physical candle has a wick. The market candles also have wicks. The wicks can extend up or down or have wicks on both the top and the bottom. The bottom wicks are usually called tails. A candle is a rectangle on the candlestick chart. A blue (or green) colored rectangle shows a happy market. This rectangle shows a market that is climbing. A red rectangle represents an unhappy market as the value is declining. The extending wick indicates how the market is trending.

This section leads you on a path to understanding candlesticks. A candlestick is a colored rectangle with wicks, shadows, and tails. 

When reading candlestick charts, the rectangle’s height incites the growth during the trading on that day. When there is little or no trading, the rectangle is virtually non-existent and shows up as a thick horizontal line on the chart. The thickness depends on how far apart the opening and closing prices are. 

When trading has taken place, the top of the wick represents the highest [price achieved during the trading period. The bottom of the tail represents the lowest price during trading. 

The rectangle (candle) consists of three parts:

  • If the price increased, the opening price is on the bottom. It is at the top if the price decreased.
  • The closing price is at the bottom of a downward spiral but at the top if the price has increased. 
  • The rectangle is known as the “real body”. The bigger (or smaller) the rectangle gives you a good idea of how fast (or slow) the selected pair has grown (or shrunk)
  • When the rectangle increases, it is known as a bullish candle.
  • When the price decreases, it is known as a bearish candle. 
  • Candlestick charts are drawn when you wish to illustrate many timelines, sometimes as little as 5 minutes or as much as months.
  • A candle represents the action of a Forex pair over a particular period. 

How to read candle charts

Bar, Column, and Line charts will give a good overall look at what is happening with your commodity. But that is all they are – an overview. They do not hone in on the action. They may be color-coded but not enough to glean important information. With Candlestick charts, a glance can tell you whether or not a trade is in a good place. Red shows it is going down, and green (or blue) shows it is moving up. Reading candlestick charts gives you a visual representation, so you already have a better understanding. 

The next thing you need to take note of is what time period is represented. Each candle represents a time period. Each rectangle represents an opening and closing value during that time period. The bigger the rectangle, the bigger the difference between opening and closing periods. If there has been no movement in the time, we get a Doji candle – a small black rectangle with no discernable height.

It may seem a bit confusing when a graph refers to shadows or tails or wicks, but in the simplest terms, a wick goes up from the top of the rectangle. A tail goes down from the bottom of a rectangle. However, a wick and a tail be called shadows. In some cases, a broker may call both a wick. Essentially all stand for a line extending from the rectangle. 

The shadow indicates the strength (or weakness) of the transaction. It incorporates the highest (or lowest) amount that the transaction realized during the trading period. 

The longer the shadow, the more action has transpired. If a candlestick has no shadow, then all transactions occurred within the upper and lower limits of the rectangle. In other words, nothing significant happened to that Forex pair during the relative trading hours.

Any Forex trader needs to learn how to read candlestick charts. As they gain experience, they will learn to rely less on second-party advisors. A beginner will gain confidence as they learn to read candlestick charts. They learn to understand suggestions that their broker makes. They will gain confidence to expand their daily trading. The understanding will bring more excitement into their trading lives as they learn how to read candlestick charts. They will be able to compare their daily activity with the actual events of their chosen Forex pairs. 

Reading candlestick charts depends on knowing and understanding the symbolism. 

Beginners need not be too concerned with the various patterns found in Candlestick charts. To break it down into steps, the beginner needs to know:

  • Red rectangles are not good. They signify a drop in the investment.
  • Green (or blue) rectangles are good because the trade between their selected Forex pair is going well.
  • A small rectangle signifies that there has been little difference between the opening and closing price. 
  • A large rectangle indicates that there is a significant gap between the opening and closing price. 
  • A tiny, almost non-existent rectangle (just a thick straight, horizontal line) means that nothing is going on.
  • Wicks, tails, and shadows indicate how much trading occurred during that day and in what direction the trading extended. In other words, it explains what went on in the body of the rectangle. For example, trading may have leaped right outside the rectangle and then descended to below the closing price, or it might have crept below the rectangle and then come back to an amount inside the rectangle.

Hopefully, a lot of the mystic about reading candlestick charts has gone and is understood by the elite and beginner user. 

Which candlestick pattern is bullish in forex?

Any trading needs to understand the terminology, Bullish and Bearish.

So first of all what is bullish? A trader needs to consider if their investment will climb. If it increases, it is known as a bullish market. When reading candlestick charts, the bullish market is colored green or blue. 

A bearish market indicates that in all probability the Forex pair is declining in value. When reading candlestick charts, The rectangle will be colored red.

Reading candlestick charts enables the trader to see at a glance whether or not the trade is bullish. The height of the wicks will also help the trader to see how active the Forex pair has been in the selected time frame. 

A trader can be defined as either a Bullish trader or a Bearish trader. An investment can also be referred to as a Bullish investment or a Bearish investment. 

If you are a Bullish investor you are optimistic that the Forex pair you have invested in will increase. You are the type of investor who has seen a continued upward trend in your selected Forex pair and you decide to move in with your investment in that pair or increase your investment in the pair. 

The Bearish investor is pessimistic about the Forex pair recovering. They will pull out when the Forex pair value is declining. If they have not started to invest they will look for a better Forex pair, a pair that is increasing in value. 

On a bit of a sidetrack, it is interesting to discover how these terms originated, the bull versus the bear. There is some discrepancy about which term came first, Most believe that it was the bear, but that is unimportant.

The terms refer to how the two animals attack. The bull charges its prey with its head down, horns forward. When it connects with the prey (or matador!) it attacks by flipping its head up and raising its horns. A bear attacks by swiping its paw downwards. So bulls flip-up (an upward trend in trading) and the bear swipes down (a downward trend in trading).

The bullish investor is optimistic. They must, however, be careful not to let their optimism ride regardless of what is happening. They need to be unsentimental. They need to keep an eye on the countries that their Forex pair represents. Bad news (Unforeseen election results, riots, natural disasters) in the second of the pair could send their investments plummeting.

The bullish investor needs to learn how to read candlestick graphs. The highs and lows should be tracked using a straight line called a trend line and if this trend continues to rise it is time for the bullish investor to climb on the bandwagon. 

This article discusses the terms used in trading Forex. This terminology exists throughout the stock market. We can look at individual investments or stock. If the investment or stock generally goes up it is a bulls market. If the stock or investment goes down it is a bears market.

The entire stock exchange could be summed up as a bulls or bears market. When there is a catastrophic event in America the entire stock exchange has been affected. Any forex pair featuring the United States Dollar will be adversely affected. When there is good news the bullish market takes off. 

You as a trader can be bullish in certain pairs and bearish in others. The aim is to come out on top and have your bullish tendencies win through. Analyst reports will help you to become bullish in most of your undertakings. But even analysts can be wrong. Do your research and watch for that upward trend in your Forex pair. 

Most investors aspire to be bullish. Being bullish means that you are riding the crest of the wave and accumulating funds. But just as a wave crashes on the beach, you need to get out of the market before your investments turn. Watch the patterns on the candlestick graph. It is common for the graph to dip sometimes but it needs to be followed by an upward trend. Don’t sell too quickly or you could inspire a downward trend in your pair. Any action in the market can affect the performance of your pair. You need to look at how your Forex pair performs over the long term. Reading a candlestick graph where the periods are set to days or months rather than minutes will give a good view of the market. 

There are several things that savvy Forex investors must do if they want to remain bullish investors.

  • Select your Forex pairs only after doing your homework. Which trends are climbing? Is a dip in trends followed by a high, preferable higher than the last high? 
  • Once you have selected your pair, watch the news. Most Forex platforms include a news link that will alert you to any cataclysmic events that may affect your investment.
  • Make reading candlestick charts part of your day. 
  • Understand (even if just the basics) the structure of candlestick charts.
  • Set your bullish sites in an upward direction. 

In conclusion, be optimistic, be a bull but use the tools that are available particularly Candlestick charts.