In forex trading, we use candlesticks to show how the price of an instrument changes over a certain period of time.
Candlesticks may look complicated, but they’re actually really easy to understand. Let’s take a look.
Trading candlesticks explained
First of all, before we explain candlesticks, you need to understand the structure of a trading chart.
Charts come in different timeframes.
Common timeframes are M1, M5, M15, M30, H1, H4, D1.
The M stands for minute, the H stands for hour, and the D stands for day.
So for example, every candlestick on an M15 chart represents the movement in price within a 15-minute period. Easy.
Candlesticks come in two contrasting colors. These colors are typically red and green, but you could also see other combinations such as black and white.
In many trading software platforms, such as MetaTrader 4, it’s possible to change the colors to suit your preference. However, we’ll stick with green and red for this tutorial, as they’re probably the clearest and most common colors.
- A green candle is bullish, meaning that the price rose during that time period.
- A red candle is bearish, meaning that the price fell during that time period.
With a black and white color scheme, bullish candles are usually white, and bearish ones will be black.
Trading candlesticks have two key structural elements: bodies and wicks. The tops and bottoms of both parts each give us a key piece of information during the time period that the candlestick represents.
- The body shows us the price of the instrument when the time period started, and the price when it ended.
- The wicks show us the highest and lowest price of the instrument during that time period.
A bullish candlestick shows us that the price rose.
- The price at the top of the candlestick body tells us the price at the end of the given time period: the close price.
- The price at the bottom of the candlestick body tells us the price at the start of the given time period: the open price.
And on a bearish candlestick:
- The price at the top of the body tells us the price at the open.
- The price at the bottom of the body shows us the price at the close.
The meaning of the wick does not change. Regardless of whether or not the candle is bullish or bearish, the top of the wick is always the highest price, and the bottom is always the lowest price.
You may also hear the wick of the candlestick be referred to as the tail or shadow. These terms all mean the same thing. In this article, we’re sticking with ‘wick’, because it fits in nicely with the idea of candles and candlesticks.
Different candlestick structures
You may see a candlestick that doesn’t appear to have a wick at the top or at the bottom. This simply means that the price at the open or at the close was also the lowest or highest the price ever got during that timeframe.
A Doji candlestick has a very shallow body. It shows that the price at the open was almost the same as it was at the close. However, the wicks can be any length.
Doji is Japanese for “the same thing” – which is obviously a reference to the price. Here’s an example of a Doji candlestick:
The three-line strike
Candlesticks often make patterns on a trading part. These patterns may indicate where the price is going to go next. Needless to say, a huge amount of technical analysis involves analyzing candlestick patterns.
Here’s a really simple yet powerful candlestick pattern that’s easy for beginners to recognize: the three-line strike (3LS).
This consists of three candlesticks that all move in the direction of a trend, followed by a fourth candlestick that reverses the price direction and engulfs the three previous candles.
Here’s a bullish three-line strike:
And here’s a bearish three-line strike:
You should now be able to identify the key structural parts of trading candlesticks, and what they mean in terms of price. Well done!