Learn Forex Trading Lesson 11 – Reading Candlesticks

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In this tutorial we will explore the types of candlesticks that can form in charts, what is happening in the market to cause the candlestick to appear and what signs we can read from the candlestick in order to act and trade successfully.

Forex Trading CandlesticksIn broad terms, candlesticks provide an indication of whether a curency is being bought or sold.   In general, a long body is showing that the buying or selling activity is more intense. Conversely, a short candlestick body is showing little price movement and represents consolidation in the market. 

Consequently, a series of long white candlesticks is an indication of a Bull (buyer) market, whereas a series of long black candlesticks tell a story of a Bear (seller) market.

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Forex Marubozu CandlestickIt will not be uncommon to see one of the Marubozu candlestick form in a Bull or Bear market. A Marubozu candlestick has no shadows (the stick part) and the high and low of the candlestick represents the open and close for the currency. A White Marubozu forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. Black Marubozu form when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade.

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Forex Candlestick ShadowsValuable information can be gleened from the shadows on candlesticks. The session high and low are represented by the upper and lower shadows respectively. Trading that was confined near the open and close produce short shadow candlesticks. Trading where proces extended well past the open and close produce long shadow candlesticks.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session, and bid prices higher. However, sellers later forced prices down from their highs, and the weak close created a long upper shadow. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

Forex Spinning TopsThe name of Spinning Tops is given to candlesticks with a long upper shadow, long lower shadow and small real body. Spinning tops represent indecision. A small, hollow or filled, body indicates minimal movement from market open to market close, while the long shadows show us how active the bulls and bears were during the session. Prices moved quite significantly at both ends of the spectrum during the session although they opened and closed with little change. Buyers nor sellers achieved dominance during the session resulting in a standoff. Weakness among the bull traders, and a potential trend interruption, is signified by a spinning top after a long white candlestick.  After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Forex DojiDoji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security’s open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word “Doji” refers to both the singular and plural form.

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Ideally, but not necessarily, the open and close should be equal. While a doji with an equal open and close would be considered more robust, it is more important to capture the essence of the candlestick. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing.

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Forex Long Candle and DojiThe relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.

After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the uptrend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick’s open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.

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Forex Long Legged Doji

Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session’s opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open.

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Forex Dragon Fly DojiDragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a “T” with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.

The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.

Forex Gravestone DojiGravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down “T” with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.

As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.

In this tutorial, we have looked at the different types of candlestick that form through certain behaviours in the currency market.   When these candlesticks are plotted on to a trading chart, they start to tell a story of what is happening in the market.   It is then up to us, the trader, to read the signs and act on them for our own benefit.

In a future tutorial we will start to look at more complex candlestick patterns and what these mean to the market.

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