Traders initially used candlesticks to record prices on an exchange or stock market. They display the high, low, and closing prices during a specific period (usually one day), creating the candlestick’s profile.
How to read a candlestick chart
The top of the candlestick reflects the opening price, while the bottom reflects the closing price. The High is marked with a vertical line from the top to the centre of bearish candles and from bottom to top for bullish ones, while Low is marked as a horizontal line at the very bottom or top of the body area, respectively.
The colour of the candlestick reflects the overall price action for that period. While there are no fixed rules for this, traders usually use one of the following conventions:
- Black candles indicate a fall in price
- White candles indicate a rise in price
- A hollow candle indicates unchanged prices
Do not be fooled by these definitions, though, since different charting services define colours differently. For instance, some will use red to denote falling prices and green to denote rising ones. The best way is to determine how your trading platform defines them and stick with that convention throughout your trading career.
Be sure to check the definition before each trade, though. You can also go into “Edit Symbol Data” or the equivalent option within your trading platform to check the colour associated with each value.
Getting Started With Candlestick Charts
Using a good charting service is key to your success. You can also sign up for a free trial and test drive different ones until you find one that suits your needs. Once you have chosen a charting service, your next step will be getting comfortable with its interface and navigating through time and price scales to get an overall picture of how prices behave during specific periods. In short – zoom in or out so that candlesticks cover at least 3 hours worth of data from left to right while respecting the scale of High and Low prices for that period.
Moving Averages and Candlesticks
Moving averages are an essential part of your overall trading strategy. You should find out which moving average works best for you and your time frame. Always keep in mind, though, that a moving average is merely another technical indicator. As such, it will not provide you with any information on its own. It is simply a guide to interpreting price action – its relationship to the moving average can tell you whether prices are likely to go up or down in the short term.
There is no golden rule of which moving average you should choose. People trade using all kinds of parameters. You can also try different types of moving averages for each parameter and see what works best for you. Try using MA with different parameters on various charts covering different time scales. The bottom line here is that no universal setting fits all. You must experiment and find what works best for you.
Understanding Candlestick Patterns
There are countless ways to interpret what different candles may mean, but here are some basic guidelines.
- Long white (or green) candles indicate that buyers were in control during that period, and prices rose.
- Long Black (or Red) candles indicate that sellers had control and prices fell.
- If there is no long wick either at the top or at the bottom, then it simply means that prices remained unchanged during that period.
- Prices, however, can change direction anytime, and a candle wick alone cannot be used as a good indicator. Saying this, if long wicks appear only on one side of a candle (one at top, one at bottom), this is often taken as an indication of where the next market may move towards, i.e. further rise following a long bottom wick or further fall following a long top wick.
Conclusion
Candlesticks are one of the most important tools in forex trading. Once you understand how to read them, they can be beneficial. New traders should use a reputable online broker from Saxo Bank and practise different trading strategies on a demo account before investing their money.