Learn Forex – Charting – Candlesticks 101

Welcome fellow trader to this basic level tutorial on forex currency charts.

Thank you for stopping by. I hope I can teach you a little about candlesticks in the next few minutes.

Forex currency charts are usually represented in 1 of 3 different styles - Line charts, Bar charts and Candlestick charts.

There is a rarely used fourth type called "point and figure" charts. Many traders have not even heard of them, and its unlikely you will ever encounter them as a basic chart technician.

The most commonly used option for the currency markets is the candlestick chart.

To the trained eye, a candlestick chart can instantly tell a technical analyst the current state of the forex market.

As its name suggests, the candlestick chart is made up of a series of "candlestick" shaped markings, on a 2 axis graph, where the x-axis (the bottom line) is "time", and the y-axis (the vertical) is in some particular currency unit.

Every single candlestick represents all of the price action of the particular currency pair for a given unit of time.

If you are studying an "hourly" chart then each individual candlestick represents 1 hour worth of price action. So, each candle holds a significant amount of information if you know how to interpret it.

 

Here is a picture of a single bearish candle.

If you inspect the image you will notice that it comprises of 2 main parts ... a thicker "body" section, and, thin lines out the top and the bottom of the body (known as the "wicks").

There is a 3rd attribute of the candle that also needs to be noted, and that is the color of the body.

 
The Body of the Candlestick

The body is the thick portion of the candlestick that is usually the middle section.

The extremities of the body (ie. the top and bottom) tells us -

• the opening price (ie. the market price at the instant of the start of the time period),
   
• the closing price (ie. the market price at the last split second of the time period).

In the above figure the body is between B and C.

 
The Wicks of the Candlestick

The wicks are the thin lines that extend out of the top and the bottom of the body.

Not all candlesticks have wicks, and in fact a very special type of market condition will also make a candle that has no body. For the sake of our tutorial here we will assume we have a regular type of candlestick that has wicks on both sides, as in the above figure.

The top and bottom of the wicks tells us -

• the absolute maximum price that the market rallied to during the time period,
   
• the absolute minimum that the market dipped to during the time period.

In the above figure we see the wicks at A to B, and C to D

 
The Body Color of the Candlestick

Each and every candlestick on your chart will be 1 of 2 color options.

The actual colors themselves will depend on whatever charting package that you are using. Many charting packages actually let you specify your own colors.

One color will denote a "bull" candle ... ie. a candle that shows a rising (or rallying) market because its closing price is higher than its opening price for the given time period.

The alternate color denotes a "bear" market ... ie. the closing price is lower than the opening price, thus showing a falling (or dipping) market.

On my own charts (I use MetaTrader 4) I color my candles as "solid" for bear candles, and "hollow" for bull candles. It doesn't matter how you set your own up, as long as you have the 2 clear distinctions.

In figure above the candle is a bear candle.

 
The Full Story

OK ... with our new knowledge of candlesticks let us have a look at the exact story that the candlestick in above figure is telling to us.

The first thing we notice is that it is "solid" body, which as I mentioned above is what I use for bear candles, so we immediately know that the opening price is at the top of the body (in a bear candle the closing price is always lower than the opening price).

So, the market opened at 1.2500, and during the hour it oscillated between a maximum of 1.2550, and a minimum of 1.2350. We cannot tell the "order" in which these events happened during the time period ... ie. did it rally first and then dip, or did it dip first and then rally ... all we can tell is the "overall" story of the time period.

It then closed at 1.2400 at the end of the time period.

 
Self Study

Look at the candlestick below and determine its "story".

 

 
In Conclusion

Candlesticks are the basic building blocks of our forex currency charts.

An individual candlestick contains a wealth of information on its own, but, when observed in conjunction with other candlesticks (to form patterns) they become a very powerful tool in your technical analysis arsenal.

 

 
In our next tutorial in this series you will build on from here and cover the more important of the candlestick formations and patterns.

Thank you for reading, and I wish you every success for your efforts.