Trading Candlesticks

What is a Candlestick?

A candlestick is a visual representation of an assets price movement over a given time period. This might sound simple, but candlestick charts are vital to the field of technical analysis as it enables traders to interpret price movements, trends, and market sentiment instantly allowing for informed decision making.

There is so much more to a trading chart than what first meets the eye. A typical trading chart is made up of numerous candlesticks which all form together to show the general movement of pricing, but when you look at an individual candlestick on a more granular level, a whole new story is revealed.

Components of a Candlestick:

A candle stick has 4 key features:

• The open price is the first price for a given time duration. If you're examining a one-minute chart, for example, this will be the beginning of the minute's value.
• High Price: The high price is the highest price available for trading during time period.
• Low Price: The low price is the lowest price available for trading within the time period.
• The close price: The close price is the last price available for trading during the time period.
• These 4 components can be identified on any candlestick, their positioning on the candle however is subject to change depending on whether the candle is question is a 'Bullish' candle (upward moving) or a 'Bearish' candle (downward moving).

Bullish Candles

A bullish candle is one in which the close price is higher than the open price. The body of the candle will be white or green (depending on the chart's colour scheme) and will point upwards. For the purposes of this page, a Bullish candle will be green. A bullish candle suggests that during the time period in question, buyers were more prevalent than sellers and that prices overall were moving upwards. This might be a sign that it is a good time to 'buy'.

Lets dissect this EURUSD candle below, first we'll look at the wider chart and then zoom into a specific candle:

There's a lot of red and green in this chart, suggesting that this is an extremely active pair with significant price fluctuations. This makes sense if you consider that the most traded forex pair in Global Currency Markets is EURUSD.

From this close up we can see that the candle has both a body and two wicks. Now lets add into the mix our 4 components:

The candlestick in focus here is 01:02 (red arrow)

• Open price: The bottom of the body shows the open price in this case, 1.12831
• Low price: The bottom of the lower wick shows the low price in this case, 1.12830
• High price: The top of the higher wick shows the high price in this case, 1.12843
• Close Price: The top of the body shows the close price in this case, 1.12838

As you can see from the above close up, there is a significant difference between the open and close prices. This means that if you were to 'buy' at this candle's opening price of 1.12831, at the end of the minutes pricing you would be able to close the trade at a price of the Close price (1.12838) + whatever the 'bid/ask' spread is at the time, meaning that you would be in profit.

*The opposite would be true for a sell trade

Bearish Candles

A bearish candle is one in which the close price is lower than the open price. The body of the candle will be black or red (depending on the chart's colour scheme) and will point downwards. For the purposes of this page, Bearish candles will be shown in red. Bearish candles suggest that during the time period in question, sellers were more prevalent than buyers and that prices overall were moving downwards. This might be a sign that it is a good time to 'sell'.

Lets dissect this AUDUSD candle below, first we'll look at the wider chart and then zoom into a specific candle:

This chart depicts hollow bullish candles as well as full red bearish candles. It is apparent from this graph that the price has gone down over time, but it is starting to move in a more upward direction toward the latter end of the time period.

Both a clear body and two wicks may be observed in this candlestick, as was the case with the first example. A clear body and set of wicks help us interpret our four candle components.

The candlestick in focus here is 02:37 (green arrow)

• Open price: The top of the body shows the open price in this case, 0.71488
• Low price: The bottom of the lower wick shows the low price in this case, 0.71478
• High price: The top of the higher wick shows the high price in this case, 0.71497
• Close Price: The bottom of the body shows the close price in this case, 0.71478

As you can see from the above close up, there is a significant difference between the open and close prices. This means that if you were to 'Sell' at this candle's opening price of 0.71488, at the end of the minutes pricing you would be able to close the trade at a price of the Close price (0.71478) + whatever the 'bid/ask' spread is at the time, meaning that you would be in profit.

*The opposite would be true for a Buy trade.

3 Candlestick Trends to look out for

The Hanging Man

A hanging man candle is named for the price pattern that occurs as a result of it. The appearance of a hanging man candle can ring alarm bells for technical analysis traders, as often times this can signify the reversal of an uptrend. This candle is particularly appealing or concerning to traders who enter and exit positions based on momentum.

The hanging man candle occurs in 2 circumstances:

• The chart has been in an uptrend
• There is a small body, a small upper wick and a long lower wick
• Essentially, when a hanging man forms in an uptrend, it indicates that their has been a loss of purchasing momentum, and there is more selling pressure in the market.

Checkout this EURGBP chart to see a hanging man candle in action:

Shooting Star Candle

In contrast to the hanging man formation, a shooting star candle has a extended upper wick, and a small lower wick with a small body. It also appears in an uptrend, and signifies that the price might begin to reverse. The long wick indicates that there is more selling activity than buying activity. A shooting star candle is usually a good indication for opportunistic traders to enter into a Sell trade.

Have a look at this USDCHF chart to see a shooting star in action:

The Inverted Hammer

An inverted hammer is the exact opposite of the hanging man candle, and forms in downtrends. It is named for the resemblance of a hammer when it is "inverted". This candle pattern signals that the downtrend might be reversing, as there is more buying activity than selling activity.

The inverted hammer candle usually precedes a bullish reversal, so it is a good signal for traders to enter into a Buy trade.

Check out this GBPUSD chart to see an inverted hammer in action: