Traders and brokers rely on a range of tools to help them make decisions on investments. These tools include candlestick charts, which are financial charts used to easily track the way securities are moving. These are visual charts which make them quite easy to interpret in comparison to other financial information.
When you look at the charts, you will notice that they have rectangle shapes and lines in a way similar to candles with their wicks. The candlesticks will appear sequentially in a series as a pattern. Every candlestick within the pattern normally represents a day’s worth of price information about one currency pair. It is over time that these individual candlesticks form candlestick chart patterns. Traders read these patterns, using the information they provide to help make decisions pertaining to buying and selling their Forex pairs.
What the Candlestick Chart Pattern Communicates
To comprehend what a candlestick chart pattern communicates, one must begin by looking at each candlestick. The candlestick has four key pieces of data, including the opening price, high price, low price and closing price.
There are also colors that one should note, as these colors instantly communicate which is higher, the opening price or the closing price. A candlestick that is filled with black communicates that the closing price was lower than the opening price — which is known as bearish. A bearish engulfing candlestick chart pattern, for example, will communicate that there are more moves downward, which indicates a downward trend.
A candlestick that is filled with white or appears to be transparent indicates a closing price that is greater than the opening price, or a bullish candlestick. It communicates that buying pressure exists.
Then there are the ‘wicks’ of the candlestick, which appear as lines on both ends of the candlestick. They are also referred to as shadows. The wicks communicate the price action in the day, with the upper shadow revealing the highest price, and the lower shadow revealing the lowest price. Here you can see Joshua Martinez deciphering different candlestick formations and how they work:
Identifying Different Candlestick Chart Patterns
When you look at a candlestick chart, you will notice they form different patterns. These patterns are identified by the sizes of the candlesticks themselves as well as the sizes of the shadows. Take for example the “hanging man” candlestick chart pattern. This is a bearish reversal pattern that reveals a top or a resistance level. It has a short upper shadow and a long lower shadow while still being a small candlestick. It communicates that sellers have pushed the prices lower in the course of the session.
Breakout candlestick chart patterns reveal a market trade movement that is dramatic in nature. It will be a movement that is outside the typical trading areas and is normally indicative of a great increase in volume. These often happen following an unexpected event based on market fundamentals, and this event could be caused by either internal or external forces.
Learning how to understand candlestick chart patterns could help you make calculated decisions on when to buy or sell certain currency pairs. They are technical analysis tools that should be used as often as possible when trading the Forex market.