Candlestick charts are used by a lot of forex traders when trading the markets and are generally seen as being more effective than bar charts. This is because they provide a little bit more information and can themselves act as a useful signal provider.
Forex candlesticks should not really be used in isolation to make trading decisions but when combined with specific technical indicators they can be very effective at predicting turning points or breakouts. In fact candlesticks are an excellent way of providing a trader with additional confirmation of a price move and act as a way of enforcing what other technical indicators are already saying.
Candlestick analysis is very popular but it is quite a complex subject so before I discuss which trading patterns are most useful, let me first of all discuss what a candlestick actually is.
When you plot a candlestick chart each individual candle basically represents what happened to the price of a currency during a particular time period. The body of the candle shows the opening and closing price and the two wicks show the high and low points during that period. A green candle indicates a bullish candle where the price rose and a red candle signifies a period where the closing price was lower than the opening price.
There’’s nothing revolutionary in this but the strong signals come when you start to see specific candlestick patterns. There are numerous different trading patterns to look out for, each of which has it’’s own specific meaning, but let me discuss a few of the more common candlestick patterns.
The first of which is hammer and hanging man patterns. Both of these look the same - a small body with a long wick hanging down from this body which is two or three times the length of the body. A hammer is present during a downtrend and a hanging man is present during an uptrend and both of them are good indicators that a reversal could be about to take place.
Another strong pattern is when you get a lot of consecutive small bars followed by one large bar. This is a good sign that a breakout is underway either upwards or downwards depending on the colour of the candle.
These are just a few candlestick patterns you should familiarise yourself with but there are lots more that you should learn. Candlestick patterns, when combined with other technical indicators, can be very effective at predicting price moves and are generally more useful than the basic bar charts that a lot of forex traders use.
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