Making Use of Candlesticks in Forex Trading

In our primer on candlestick charts we showed you how to see long-term candlestick charts for what they are. However, to use candlestick analysis techniques in the currency markets, you need to know how to hone in on parts of a candlestick that are easily ignored.

Candlestick Bodies

The candlestick has two major dimensions. First, a candlestick is made up of a body, which can be positive or negative in its movement. This diagram should help explain the body of a candlestick:

We can describe a candlestick as being either long or short. A long candlestick is one in which the body is longer than most other candlesticks within the immediate view. You’ll know it when you see a long candlestick, as it will stick out like a sore thumb on a forex chart.

Short candlesticks appear frequently on forex charts as well. Short candlesticks have a small real body, which shows us the size of the price movement during the time period that the candlestick represents. When small candlesticks appear, you know that the forex pair was either inactive, or it appeared at a price at which bullish and bearish traders are equally interested in the market. When there is a lot of buying and selling pressure at a certain time and price, the real body of a candlestick is smaller.

You can think of this as bulls and bears “squeezing” the price into a small candlestick. The pressure is equalized.

Candlestick Wicks

You should also begin to focus on the “wicks” of a candlestick. The wick shows us how high or how low the price moved during the time-period the candlestick represents. This is made more clear with the following diagram:

As you can see, the candlestick circled on the chart has very long wicks. In reading this chart, we know that the price moved down and up before closing up.

The wicks are also known as “shadows.” The word shadow means that the price moved up or down, but did not hold. Think of it like a ghost. The price was there, but now it isn’t. Even still, we can see where the price moved.

Wicks or shadows can be short or long. In terms of being short or long, the size is relative to the real body of the candlestick, and also to other candlesticks. Look at the candlestick diagram below:

From this diagram, we see that the real body of the first candlestick is small and the wicks are large, since the wicks are larger than the real body. The second candlestick, however, is made up of a large body relative to the wicks, and thus the body is large and the wicks are small.

Got it? Great! Let’s move on to candlestick patterns made up of a single candlestick.