Candlestick appearance

Japanese candlesticks are formed using OPEN, CLOSE, HIGH and LOW for the price at specific time.

(When we say "specific time", we mean time measure (time frame) that a trader has chosen to trade in. For example, a trader can trade hourly charts, daily charts, weekly etc. When trading hourly charts, for example, each candlestick will represent 1 hour, which means it will be formed based on data collected during one hour period). Here are examples of different time frames describing same data:

Now let's go back to candlesticks. 

We have met this picture earlier, but now let's learn some further details about it.

The major part of the candlestick is its body which represents a range between OPEN and CLOSE prices.

When OPEN for the price is above CLOSE, a candlestick body is filled.

When OPEN for the price is below CLOSE, a candlestick body is hollow.

Bodies can be colored at trader's choice. One of the common set up which we are also going to use for our charts is "red and green". So, "red" will stay for filled candlestick giving a signal that price has dropped, and green will stay for hollow giving a signal that price has gone up.

Also we can see price SHADOWS — the extensions above and below the candle body. The very top of the shadow above is called HIGH, the very bottom of the shadow below is called LOW.

A bullish or a bearish candlestick... What does that mean?

These terms describe two opposing forces on the market: bulls are traders who push the price up, and bears — they pull price down. So, when the price confidently climbs up — bulls are winning the game and the market therefore is called "bullish market", when the price is falling down — bears are taking over — bearish market.

The size of the candlestick, the length of its shadows, positioning on the chart gives a trader clues about market behavior.

The size of the candlestick tells how strong buying or selling pressure is. A long big candlestick symbols of a strong market pressure (buying or selling), whereas a small size candlestick means that buyers and sellers are in consolidation and buying/selling pressure is weak.

Shadows (tails) of the candlestick reveal activity of buyers and sellers. The upper shadow shows activity of buyers towards pushing the price up. The lower shadow represents sellers' activity towards pulling the price down. Long shadows occur during high activity coming from both sides — sellers and buyers — as they try to turn the price into their direction.

A small upper shadow plus a big lower shadow tells a trader that in the beginning sellers were dominant and forced the price down, but fell under the pressure of buyers at the end of the trading session. A big upper shadow plus a small lower one indicates that at first buyers took over the trade and pushed the price up, but eventually forced to give up facing strong sellers' pressure.

A candlestick with no shadows indicated that buyers (in case of a green candle) or sellers (red candle) were dominant during the whole trading session.

A candlestick that posses a small or no body and at the same time has small shadows indicates indecisiveness between buyers and sellers and a very little trading — a weak, slow trading market.

Sourcing:
http://www.forex-charts-book.com

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Types of charts

There are three most commonly used types of charts: line chart, bar chart and candlestick chart. It is optional for a trader what chart type to use.

Line chart contains price's closing value at given time. Values are then connected in one line, which creates a picture / graph of price fluctuations.

Below is an example of a line chart:

Line charts are useful when making reviews over a long period of time.

Bar charts are also called OHLC (HLC) charts. An abbreviation "OHLC" stays for OPEN, HIGH, LOW and CLOSE.

Each segment of these charts — a bar — provides a trader with additional information such as high and low ask prices and also open and close prices for certain period of time. In other words, the whole trading range can be observed.

Here is a sketch of a bar:

The whole chart also becomes more informative.

Candlestick charts are an improved version of bar charts. It is Forex most popular and widely used chart type. And we are going to discover why.

Each bar of the chart is a candlestick, known also as Japanese candlestick (it was invented by Japanese). Because of its appearance candlestick delivers more information than any other line or bar method.

First let's take a look at candlestick itself:

Candlestick carries HIGH, LOW, OPEN, CLOSE for the price and possess a BODY. A color and size of the body supply traders with additional price details.

We are going to learn about different candlesticks later. Now let's take a general look at Forex candlestick chart:

This chart seems more alive and easier to apprehend visually. That's because a trader can quickly tell where the price went up, where it came down, when the price changed its direction and what happened there.

A candlestick chart reveals things that are not visible on other charts. It gives comprehensive information about price on the market and thus helps better understand and predict future price moves.

Sourcing:

http://www.forex-charts-book.com

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Candlesticks

Candlestick charting uses rich terminology to describe different candlestick formations.

Doji candle has no or an extremely short body and long shadow(s). It is formed when buyers were unable to overcome sellers' pressure and push the price any further from an open point, and at the same time, sellers met strong buyers' pressure and also didn't succeed in their efforts to push the price down from the open point. The result is a draw: open price = close price.





Doji candlestick signals of possible market turn / price reversal, especially when spotted after a long preceding candlestick (bearish or bullish) in a strong trending market.

However it can not be used along. The confirmation (next following candlestick) is needed to reassure that market has changed its direction.

Tip: If doji appears at previous support / resistance levels (e.g. trend line, price channels, fibonacci retracement, pivot points etc.) its importance gains additional strength.




Gravestone doji gives a strong signal when appears after a long bullish candlestick at the top of an uptrend. It indicates that although buyers were confidently trying to push the price up, eventually sellers gained enough strength to return the price to its open position.
A trader should consider taking profits and exiting if trading a long position, or place a tight stop below the close price.








A dragonfly candlestick has open, close and high: all at the top. It should be treated seriously when spotted at the bottom of a downtrend while following after long red candle, as it signals that buyers have got enough strength to return the price from its advancing low progress to the starting open point.

When trading short position a trader should think of an option to secure profits and close a position or set a protective stop tighter as a market can resume a U-turn.



Spinning top is more an indecisive candlestick, as neither buyers nor sellers had demonstrated their power and finished with zero progress.

When appears after a long preceding candlestick, this doji type always requires following confirmation (next candlestick should be bullish in the downtrend or bearish in the uptrend).






A spinning top candlestick also is an indicator of indecisiveness between buyers and sellers. The color of the body here is not important.

Several spinning tops going one after another indicate a current stand-off between bulls and bears. Found during a strong trend spinning tops "group" can signal of a possible price reversal.

However it could be also that a strong trend is only "resting" temporarely, and after a short consolidation, the price will resume its previous direction.





Hanging man and shooting star are bearish signals of potential price reversal.

Their distinctive features are:

1) position at the top of a uptrend;

2) really long shadows (2 times more than a real body or longer);

3) small body (color doesn't matter, however, red color would give stronger signal).

Long shadows of hanging man are results of strength of forming bears' pressure. Same as for the shooting star — it's apparent that bears managed to stop the price from advancing and seriously pulled it down.

Both candlestick patterns require further confirmation (following red candle) before opening new positions.




Hammer and inverted hammer candlesticks are result of a growing buyers' pressure when occur at the bottom of a downtrend.
Although these patterns are signs of a possible trend reversal, they need to be confirmed before taking actions.

Although these patterns are signs of a possible trend reversal, they need to be confirmed before taking actions.

The green color of a body for hammer as well as inverted hammer is considered as a much stronger bullish signal than the red one.




One final note to add: the bigger the time frame the more value a candlestick formation will have. For example, an hourly candlestick will "overweight" by its importance a candlestick from the 15 minute chart just because its strength is tested over a longer period of time and therefore proved to reflect a situation on the market more realistically.

In simple words, when trader predicts a next price move using hourly candlestick the likelihood for such prediction to become true is way higher than if same predictions was made relying on candlestick from 15 minute chart.



Sourcing:
http://www.forex-charts-book.com

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