One of the most important aspects of forex trading is how to read candlesticks. Candlesticks are price charts that chart either high/low or open/close for a given period. You can think of them as bar graphs with different colors, depending on whether it’s a daily, hourly, or five-minute candle you’re looking at.
It should note that past performance does not necessarily predict future results. However, if you know what every candlestick color signifies, you can use that information to your advantage. Below are descriptions for each color, along with an example image:
The black/red candle represented when the closing price was lower than the opening price. It represents bearish sentiment and indicates the price is likely to go downwards.
The green/red candle signified when the closing price was higher than the opening price. It shows bullish sentiment and suggests that the price will likely go up.
Close Near Lows (Spinning Top)
If you’re looking at a daily candle, then it means that prices were closed near lows for that day. It can also mean that prices couldn’t close or stay above basic resistance levels, which signals towards possible future downward movement.
Open Near Highs (Doji)
When you see this on a daily candle, it means prices were opened near highs for that day but were unable to close above resistance levels. It implies a lack of momentum in the direction prices is trending, leading to an upcoming reversal.
Long/Short Legged Doji
A long-legged doji is a large gap between the opening and closing price, with little difference between the high and low price. It means that buyers were not able to push prices upwards past their initial price target, but also, sellers aren’t able to drive prices any lower either. It suggests indecision among market participants, resulting in a breakout or temporary trend reversal.
One-Sided Engulfing (Bearish)
The one-sided engulfing bearish candlestick pattern shows strong bearish sentiment building up over time since it’s a daily candle. It signifies that the day’s opening price is lower than the previous day’s low, but the close was higher than the previous day’s high. It shows bullish sentiment building up towards the end of the trading period, resulting in an upcoming price reversal.
Other Engulfing (Bullish)
This pattern shows strong bullish sentiment where there are two consecutive days where prices close on highs, with each successive day having a higher high and closing/opening price. It suggests that bullish momentum is likely to continue since buyers can drive prices higher over time.
Long Line Candle
A long line candle shows strong bullish sentiment since it has a great distance between the open price and the closing price, signifying that buyers could drive prices up further than previous days.
This pattern signals possible bearish sentiment building up over time if it’s at the top of an uptrend (bull market) or signals downward momentum building up if at the bottom of a downtrend (bear market). It signifies indecision among market participants with weak momentum indicated by the lower shadow (or wick) below the bar’s body.
The hammer is similar to the hanging man but has two downward shadows since the price could not go below the opening price. This pattern signifies indecision among market participants with weak momentum indicated by the lower shadow below the bar’s body.
These are just a few candlestick patterns that appear on daily candles in forex trading; you can find out what every candlestick color signifies and use that information to your advantage. If you’re not familiar with all of them, try studying some of the most common ones so you’ll be better prepared for when they appear.
Understanding how to read chart patterns is an essential part of trading more effectively and improving your success ratio. Just remember that no indicator or technical analysis strategy is perfect, which means you should always have stop-loss orders in place just in case your idea doesn’t work out.