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Candle Sticks / Candle Stick Charts

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Chapter 3

Candle Sticks / Candle Stick Charts

 

3.1 Candle Stick Formations

 

 

Japanese candlestick chart is the most widely used chart for forex chart analysis.

Price movement of the forex pair is described using a candlestick formation over a period.

Parts of Candlestick—

 

 

3.2 Candle Stick Types & What it Tells

 

Candles tells us story on market sentiment for the period. The idea to gage the sentiment and use for placing trades. Below explained various candlestick types and stories these tell.

 

The most important and most used candles in decision making for trading are discussed further.

 

 

 

 

 

 

3.3 Bullish Candle Sticks, Bearish Candlesticks & Time Frame

 

As mentioned earlier a candlestick represents price movement in one time period e.g. 1 min, 5 min, 15 min, 1 Hr, 4 Hrs, 1 Day, etc. The time period is of your choice you want to view the candle/candlestick chart for your analysis.

 

Time Frame--So the time period you are talking here is called Time frame. In simple terms, lower time frame are nothing but set of candles as exploded version of candle of the higher time frame, means if you are trying to understand a candle from 1Hr that means you will find 4 candles of 15min time frame or 6 candles of 10 min time frame or 12 candles of 5 min time frame, telling price variation story of that 1 Hr candle.

 

So let's go on with understanding candlestick types and what a specific candlestick is trying to tell us about the market sentiment with its potential price movement. In my experience 80% of the time, the expression given by each candle is true but only in trending markets.

According to all trading gurus for decades, reading these candlesticks and storytelling is considered the same for all kinds of charts analysis in all asset classes e.g. stocks or equities, bonds, precious metal & commodities, futures & financial derivatives/forex, etc. Let’s check:

 

 

Bullish Candlestick—

 

Bullish candlestick is created when price closes above the opening price. Sometimes pair price rises much higher but is pulled back down still closing above the opening price creating upper wick on top of the candle body. Sometimes pair price drops much lower but is pulled back up still closing above the opening price creating lower wick at the bottom of the candle body.

 

 

 

 

Bearish Candlestick—

 

Bearish candlestick is created when price closes below the opening price. Sometimes pair price drops much lower but is pulled back up still closing below the opening price creating lower wick at the bottom of the candle body. Sometimes pair price rises much higher but is pulled back down still closing below the opening price creating upper wick on top of the candle body.

 

Rarely a bullish or bearish candle is what it looks like in the picture above. Bulling and bearish candlesticks formations usually signals bulls or bears respective taking control of the market.

 

 

 

 

 

 

 

 

 

 

 

3.4 Doji

 

A candlestick where opening and closing prices for the pair are very close or virtually equal.

Trading range may be small or big; means the wick may be small or very long.

Though all Doji candles describe indecision between buyers and sellers on price; its potential indication of trend reversal. A Doji formation with bullish or bearish close does not matter, only the formation type matters.

 

 

Neutral or General / Standard Doji

A Neutral Doji is formed when buying and selling sentiments are at equilibrium and prices have fluctuated in a small trading range and closed in the middle of range from where it started. The preceding trend before this type of Doji determines the trend’s future direction.

If its appearing at the end of bullish (or bearish) trend that means the buyer (or sellers) have reached the end of the trend run and market might display consolidation.

 

Long-Legged or Long-Wicked Doji

A Long-Legged Doji is formed when buying and selling sentiments are at equilibrium. Long wicks show that bulls and bears have flexed their muscles for the day and prices have fluctuated in large/wide trading range and closed in the middle of range from where it started. The preceding trend before this type of Doji determines the trend’s future direction.

If its appearing at the end of bullish (or bearish) trend that means the buyer (or sellers) have reached the end of the trend run and market might display consolidation or even reversal.

 

Gravestone Doji

For a Gravestone Doji candle, the bulls push the price up but bears take control of the market and pull the price down & closes at about the opening price giving a very long wick. This candlestick may or may not have extremely small wick on the other side of the candle body.

The preceding trend before this type of Doji determines the trend’s future direction. Gravestone Candle formed during bearish trend describes that bears are still in control and potentially the trend will continue downwards. Gravestone Candle formed during the bullish trend describes that bears have taken the control and potentially the trend will reverse to downwards.

 

 

Dragonfly Doji

 

For a Dragonfly Doji candle, the bears pull the price down but bulls take control of the market and push price up & closes at about opening price giving a very long wick. This candlestick may or may not have extremely small wick on the other side of the candle body.

The preceding trend before this type of Doji determines the trend’s future direction. Dragonfly Candle formed during bullish trend describes that bulls are still in control and potentially the trend will continue upwards. This Dragonfly Candle formed during the bearish trend describes that bulls have taken the control and potentially the trend will reverse to upwards.

 

 

 

 

 

 

 

 

 

 

3.5 Hammer / Hanging Man & Inverted Hammer (Pin Bar in Price Action)

 

 

 

 

Hammer / Hanging Man (Pin Bar in Price Action)

 

Hammer is a small body candle with long wick at the bottom & little or no wick at the top. The wick is max 2-3 times the body of the candle. For a Hanging Man, the wick is much longer than usual Hammer candlestick. The color of the candle does not matter.

It defines a reversal of trend. If this is formed close to the support during downtrend then its considered reversal of bearish trend and shall be verified by next bullish candle. Potentially Trend continuation, if it's formed at the top of the bullish trend. These are also referred to as Pin Bar in Price Action. Always wait for the confirmation with the next candle.

 

 

 

 

 

 

 

 

 

 

 

 

 

Inverted Hammer (Pin Bar in Price Action)

 

A small body candle with long wick at the top & little or no wick at the bottom. The wick is max 2-3 times the body of the candle. The color of the candle does not matter. Potentially Trend reverses if it is formed at the top of the bullish trend. These are also referred to as Pin Bar in Price Action. Always wait for the confirmation with the next candle.

 

 

3.6 Spinning Top

 

A small body candle with long wicks on both sides top & bottom. Mainly call for indecision in the market between buyers and sellers; Its suggestive of a pending reversal if formed at support of resistance. It usually is preceded or succeeded with long wicked candles or engulfing candle patterns as reversal confirmation. We will discuss all these details in Chapter 8 “Strategies”.

 

 

 

 

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