Candlesticks Formation in Forex
- Overview
Candlesticks can pack more information into a single view than any other form of price chart. For this reason, they remain a perennial favorite with many traders.
The history of candlestick charts can be traced back to 18th century Japan where candlesticks were used by buyers and sellers in the rice markets.
Candlesticks are similar to bar charts and provide opening and closing values, current direction trends, and the high and low price for each reporting period.
how to read candlestick graph
The body length of the candlestick shows the relative change in the open and close rates for the reporting period – the longer the body, the more volatile the swing between the open and close rates.
The color of the candlestick body provides key information. A hollow candlestick means that the bottom of the body represents the opening rate, while the top shows the closing price. A filled candlestick, on the other hand, shows the opening rate at the top of the body and the closing rate at the bottom.
Therefore, a hollow candlestick shows a rising trend, while a filled candlestick points to a decreasing trend.
candlestick graph
Sample Candlestick chart
- COMMON CANDLESTICK PATTERNS
Candlestick patterns are seen by some traders as a form of rate direction signal. The following list includes some of the more popular patterns, and explains how to interpret the signal.
Doji Patterns
doji candlestick
A doji occurs when the opening and closing prices are basically the same price, resulting in a very small body. Note that the length of the upper and lower shadows (which reflect the intra-period prices) have no effect on the closing price.
The interpretation of the basic doji is that there is no clear direction for the market. This should make you wary until a stronger indication presents itself.
gravestone doji
Gravestone Doji
When the open and the close prices occur at the low of the reporting period, they create a gravestone doji. This pattern can signify that the top of the market (the resistance level) has been reached as there are no buyers willing to advance the price further so prices may start to reverse.
log-legged doji
Long-legged Doji
When the open and close prices occur at the top of the reporting period, the result is a long-legged doji. This pattern suggests that the market has reached the support price, and a reversal is likely.
- Two-Candlestick Patterns
spinning tops candlestick
Spinning Tops
Spinning tops consist of candlesticks with a small body that can be either hollow or filled. The small bodies indicate that for the reporting period, there has been very little difference between the opening and closing prices. For this reason, spinning tops are seen as a sign of indecision pointing to the increased likelihood of a market reversal.
hammer hanging man
Hammer and Hanging Man
Both these patterns have long lower shadows, but very small bodies and a very small or no upper shadow. They both suggest price uncertainty and you should look for confirmation that a price reversal is about to take place before acting. If the pattern appears at the bottom of a downtrend (hollow body), it is referred to as a hammer. If it appears at the top of an uptrend (filled body), it is known as a hanging man.
- Three-Candlestick Patterns
monring star candlestick
Morning and Evening Star
The morning star indicates that the price has reached a support level after a declining market. It appears as a small hollow-bodied candlestick that follows a declining, filled candlestick marking a turning point in the price. It is confirmed by a third candlestick showing a dramatic price increase.
evening star candlestick
Whereas the morning star is an optimistic signal, the evening star is a pessimistic signal that occurs at the end of a downward trend. It appears as a candlestick with a very small body that appears just before a major decline in prices.
shooting star candlestick
Shooting Star
A shooting star is a strong signal that a price run-up is about to come to a crashing halt. This is the pattern you should be on the look-out for after a prolonged price increase, and is capped by a candlestick with a small hollow body. This "shooting star" clearly shows the market is pausing to reflect on the current price runup.
