Understanding candlesticks in forex

 

Various factors affect the movement of currency rates and forex market analysis. More often than not, one such factor is the use of candlesticks in technical analysis.

Candlestick charts (also known as Japanese candlesticks) consist of a rectangle of a body and an upper and lower shadow.

The rectangle’s colour represents whether or not the closing price for that particular time was higher or lower than the opening price.

It gives traders important information about what happened during the trading session within the set time frame.

The length of each part of the rectangle – body, upper shadow, and lower shadow determines how much the closing price differs from the opening price, respectively.

This difference between opening price/closing price is also called ‘range’.

A white body represents an opening price equal to the closing price, whereas a black candlestick represents an opening price lower than the closing price on that day.

Any rectangle with nobody indicates that both opening and closing prices were the same on that particular time interval.

Candlestick charts

Every high or low is represented by a ‘real body’, either hollow (white) or filled (black).

If there are upper shadows, they are always lighter in colour than the natural bodies below them; if there are lower shadows, they are always darker than their corresponding natural bodies below them.

The longer an upper shadow appears compared to its natural body signifies there may have been resistance during the session when prices moved up.

If the lower shadow is darker than its natural body, it means that there may have been support during the session when prices moved down.

A candlestick can be red or black, depending on whether it finished the period in the upper half of its range or the lower half.

For example, if a one-hour candle for EUR/USD closed at 1.0800 and opened at 1.1000, this would indicate that EUR/USD had fallen to a low of 1.0750 before rallying again to close 0.2500 higher at 1.0800 for a net loss of 0.3000 points or 300 pips for that day’s trading session.

Opens & closes are significant because opens represent how the currency started that trading day, while closes represent how currency ended.

A gap in the rectangle’s colour represents where prices ‘opened’ during the session. It is always represented by a gap up, white. If there is no gap in between two candlesticks, it means there were no trades done for that time interval.

A gap down is only present if the closing price for one candle is lower than the opening price of the next candle.

Any gap in candlestick chart without a corresponding gap in price indicates the same closing and opening prices, respectively.

There are also two types of gaps – the ‘intra-day’ gap, which occurs when there are multiple trades for that specific time interval, whereas the ‘end-of-day’ gap occurs when there is no trade recorded for that specific time interval.

End-of-day gaps

End-of-day gaps are usually the most common of the two types of gaps because most currency dealers do not open new positions until 15 minutes before market close.

White or ‘intraday’ gaps can be either up or down gaps depending on whether the price moves higher than the previous candle’s low (up) or if the price moves lower than the previous candle high (down).

Intraday

Intraday gaps are generally short, which means they only occur over short time intervals compared to end of day gaps.

It also means that volume during this intraday period was huge (many trades) and did not necessarily mean an important event caused these large price swings.

A large intraday gap is generally considered more significant since it signifies more extensive market participation.

The shadows show the entire range (both ‘high’ to ‘low’ and ‘open’ to ‘close’) for which prices moved during those time intervals; this is evident because prices opened at one level, closed at another.

There was enough activity in between to push it far enough away from open/close levels to create the height of the shadow.

If you could zoom in on any candlestick chart, you would see that other levels exist beyond both high/low and opening/closing prices, but they are not shown simply due to space limitations on most charts.

Even if these secondary highs or lows were included, it would still not show the entire price range for time intervals as shown by shadows.

 

Comments are closed.