How to read Forex charts

Published: 03rd December 2008
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There are three most commonly used types of Forex charts: line chart, bar chart and candlestick chart. Candlestick chart is the most popular and widely used chart type. A candlestick chart shows things that are not visible on other charts. It gives comprehensive information about price on the Forex market and thus helps better understand and predict future price moves.

Each bar of the chart is a candlestick known also as Japanese candlestick. Because of its appearance candlestick delivers more information than any other line or bar method.

Candlestick carries High, Low, Open and Close for the price at specific time and possesses a Body. A color and the size of the body supply traders with additional price details.

The major part of the candlestick, the body, represents a range between Open and Close prices.

When Open for the price is above Close, a candlestick body is filled (gold).

When Open for the price is below Close, a candlestick body is hollow.

One of the common set up which we are going to use for our charts is gold and white. So "gold" will stay for the filled candlestick giving a signal that the price has dropped and "white" will stay for hollow giving a signal that the price has gone up.

The "gold" and "white" candlesticks also describe two opposing forces on the market: buyers and sellers (also called bulls and bears). Bulls (buyers) are Forex traders who push the price up and bears (sellers) pull price down. So the gold and white candlesticks show who is in control on the market at the time.

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 the pressure is weak.

Shadows (tails or wicks) of the candlestick show the activity of buyers and sellers. The upper shadow shows activity of buyers towards pushing up the price. The lower shadow represents seller's activity 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 Forex 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 1st buyers took over the trade and pushed the price up, but eventually forced to give up facing strong pressure of sellers.

A candlestick with no shadows indicated that buyers (in case of a white candle) or sellers (gold 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.

Doji candles have no or an extremely short body and long shadows. 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.

The very first look at a newly opened chart usually gives Forex traders a little or no clue what the market is currently doing. So the Forex trader must reorganize a wavy indefinite graph into a very clear picture to be able to trade.

Analysis usually starts with understanding the trend. The gold rule of trading says "Always trade with the trend" ... or at least try to.


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