Candlesticks can be used to predict the price of a currency pair. By reading bars carefully, you can ultimately decide whether it is wise to buy (long) or sell (short) a currency pair. In this article, we'll discuss how to use candlesticks. We also show the most used & most popular candlestick patterns.
How do you read a candlestick?
It is quite easy to read a candlestick. A candlestick contains a lot more information than a normal price line.
- Open: the opening price
- High: the highest point within the relevant period
- Low: the lowest point within the relevant period
- Close: the closing price
You can see from the colour of a candlestick whether the price has gone up or down. Green bars indicate that the price has risen and red bars that the price has dropped.
A candlestick refers to the price development in a certain period. The period to which the bar relates depends on the period in which you are analysing the graph. For example, one candlestick can relate to an hour or a day.
The shadow of the candle indicates the price range within that period: this is also called the shadow of the candle. The body is the thick part of the candlestick and indicates the opening price and closing price of the period.
A positive green bar always opens in the lower part of the body and closes in the higher part of the body. A negative red bar always opens in the higher part of the body and closes in the lower part of the body.
Candlesticks compared to a regular line on the daily chart, candlesticks provide more information.
The information from candlesticks
Candlesticks display a lot of information. A large body shows a strong price movement, while a small body shows that there was hardly any movement. A short shadow shows that most of the activity took place around the opening and closing price. A long shadow, on the other hand, shows that prices have gone far beyond the opening and closing prices.
How can you use candlesticks?
Candlesticks are also called price action. With price action, you can see how the battle between buyers and sellers in the market develops. At all times, there is a balance between the number of buyers and sellers on the market. The price is constantly adjusted to ensure that this balance is maintained.
When the number of buyers increases at a given price, the price rises to ensure that there is still enough supply. Candlesticks display these developments beautifully. When you understand how you can read candlesticks, you can analyse the battle between buyers and sellers.
When the buyers have the upper hand, it makes sense to buy. If the sellers have the upper hand, it is wise to sell. However, it is advisable to always base your decisions on multiple sources of information. For example, see if the price action takes place on an important horizontal level. In this way, you increase the chance that you will achieve a good result with your investments!
Why should you use candlesticks instead of a line?
Professional investors prefer candlesticks over a line chart because it is easy to spot patterns with candlesticks. When you can analyse candlesticks properly, you can find the turning point in the graph. Investors want to sell at the lowest point and buy at the highest point. In the rest of this article, you can read how you can interpret candlesticks.
What can candlesticks indicate?
- Continuation: The trend continues without problems
- Trend reversal: the trend reverses from rising to falling or vice versa
- Indecision: The battle between buyers and sellers is undecided
Candlesticks that indicate a continuation of the trend
Bullish and bearish continuation bars indicate a continuation of the trend. We discuss the bullish continuation bar, with the bearish continuation bar the same characteristics apply but reversed.
A bullish continuation bar is a strong indication that the trend will continue. After a bullish continuation bar, chances are that the price will move further in the same direction.
The bar is stronger when the open is near the lowest point of the bar and the close is near the highest point. The upward movement is then very strong and has hardly received any resistance from sellers. In the image, you see both an example of a bullish continuation bar and a bearish continuation bar.
Falling & rising three methods
The falling & rising three methods show a progression of the bullish or bearish trend.
The bullish pattern you see on the left is called the rising three methods candlestick pattern. It consists of three short red candlesticks sandwiched between two long green candlesticks. The pattern shows that despite some pressure from the sellers, buyers are clearly in control.
The bearish pattern on the right is called the falling three methods pattern. Here you can just see three small green bodies between two large red candlesticks. Here you see that despite some pressure from the buyers, the sellers maintained control. Both patterns are continuation patterns.
Candlesticks that indicate an upward trend
These candlesticks indicate a rising or bullish trend. In this situation, it can be attractive to buy. Here we discuss the following bullish candlesticks: hammer, bullish engulfing bar, bullish train tracks, piercing line, morning star and three white soldiers.
In a low test or hammer, the open and close are in the top half of the bar, while the price has moved down considerably during that period.
The color does not matter with this candlestick: the point is that despite strong downward pressure, the sellers have failed to keep up with the downward trend. For a good low test or hammer, the moment of opening and closing must be in the top 1/3 of the bar.
The downward movement has stopped and there is now a good chance that more buyers will come into play: the price will then continue to rise.
The Bullish Engulfing bar indicates a clear trend movement. You can see how the initial downward movement is held back and how buyers gain momentum.
This change can be seen over two bars with the first bar indicating a downward movement. However, the bar is followed by a candlestick where the downward movement is rejected. The second bar must engulf the entire bar. The bar must also close against the top part. The movement is stronger when the candlestick is large.
In that case, you can clearly see that the sellers who were once in the majority are beaten by the buyers who are now dominant.
In some cases, a bullish engulfing bar can also follow after multiple, smaller candlestick bars.
Train tracks consist of 2 bars. You may encounter both a bullish and a bearish train track candlestick. In the picture, you see a bullish train track where the upward movement is declined.
Bullish train track can be compared with the low test. With a bullish train tracks, this pattern is however spread over two candlesticks. With a train track, it is important that the bars are approximately symmetrical to each other and that the high and lows are approximately equal to each other. When you merge the bars, they form a low-test bar. With this pattern, there is a good chance that the price will subsequently rise further.
This candlestick pattern consists of two bars. You can see how one long red candlestick is followed by a long green candlestick.
In most cases, you can see a big difference between the closing price of the first candlestick and the opening price of the second candlestick. The closing moment of the second bar must be higher than half of the body of the first bar.
This combination shows strong pressure from buyers. The price has been pushed up above the previous day's middle price.
Not all candlestick patterns consist of two candlesticks. The morning star pattern is a candlestick pattern that consists of three candlesticks.
The first candlestick is a long red candlestick. This is followed by a candle with a short body. The third candle is a long, green candlestick.
We call the middle candle the star. The body of this candle does not overlap with that of the first and last. This is a clear pattern that indicates that the buyers are taking over from the sellers.
The last bullish candlestick pattern we will discuss, is the three white soldiers pattern. This pattern consists of three candlesticks instead of two.
With this pattern, you see three green candlesticks with a small shadow. The three candlesticks open higher every time compared to the previous one.
This candlestick combination is a strong buy signal and shows that buyers are winning the battle.
Candlesticks that indicate a downward trend
These candlesticks indicate a downward or bearish trend. In this situation, it can be attractive to sell. Here we discuss the following bearish candlesticks: the high test, bearish engulfing bar, bearish train tracks, evening star, three black crows, and the dark cloud cover.
The inverse hammer or high test is the opposite form of the low test or hammer. This candle is also called the hanging man. In a high test, the open and close are in the bottom half of the bar, while the price has moved up considerably during that period.
The colour does not matter: the point is that despite strong upward pressure, buyers have not managed to keep up with the upward trend. For a good high test, the moment of opening and closing must be in the bottom 1/3 of the bar.
The upward movement has stopped and there is now a good chance that more sellers will come into play: the price will then fall further.
With a Bearish Engulfing bar you can see that sellers take over from the buyers. After this, the price is likely to fall. You will then see a smaller rising bar, followed by a large falling bar.
The first candle has a small green body followed by a longer red candlestick. The strength of the bearish engulfing bar increases, when the second candlestick reaches a lower value. The bearish engulfing bar may be a clear indication of a reversal of the general market movement.
The bearish engulfing bar is the counterpart of the bullish engulfing bar.
In the image you see a bearish train track where the upward movement is rejected.
The bearish train track is comparable to the high test but spread over two candles. With a train track, it is important that the bars are fairly symmetrical to each other and that the high and lows are approximately equal to each other.
When you merge the bars, they form a high test bar. With this pattern, there is a good chance that the price will continue to fall further.
The evening star is comparable to the bullish morning star. This candlestick pattern also consists of three candles.
In this case, the middle candlestick is between a large green candlestick and a large red candlestick.
This pattern shows a clear reversal in which the sellers are taking over from the buyers. If the situation permits, you can place a sell order here.
This pattern is the opposite version of the three white soldiers. This candlestick pattern also consists of three candles.
With this pattern, you see three consecutive red candlesticks with a short or absent shadow. Each new candle opens at a price comparable to the previous one. However, the power of the sellers pushes the price further down.
This pattern can be a clear indication of the start of a downward trend. It can then be interesting to place short sell orders.
The dark cloud cover candlestick pattern is the counterpart of the bullish piercing line. The title is appropriately chosen: the red candlestick conveys a dark cloud over the optimism of the previous day.
This candlestick pattern consists of two candlesticks. First, you have a large, green candlestick that shows a sharp rise. This is then followed by a red candlestick that originally opens higher than the green candlestick, but closes below the centre of the green candlestick.
This pattern clearly shows that the increase in price cannot be sustained. The sellers win over the buyers and the price shows a clear decrease. This can be a good time to place a sell order.
Candlesticks that indicate indecision
Sometimes there is no clear trend. The candlesticks in this section can indicate indecision in the market. When there is indecision, it is likely that the market will continue to move in the same direction. In some cases, the price can also suddenly break out sharply in the opposite direction.
Inside bars are bars that fit within the high and low of the previous bar. Inside bars often indicate a degree of indecision: nobody knows in which direction the price will develop. The colour of the bars is not relevant in this case. After an inside bar, a strong move up or down can be expected.
Sometimes there are also double inside bars. In this case there is an even greater degree of indecisiveness on the market. The buyers and sellers could not bring the price further down or up, so the price has no clear direction at the moment. A strong outbreak can then be expected. On the left, you see an example of double inside bars.
For the Doji bar the open and close are almost symmetrical to each other, while the price has gone both up and down. This is an indication of a high degree of indecision in which the battle between buyers and sellers has not yet been fought. The colour doesn't matter with this bar.
A Doji bar alone is not a good reason to take a position. Therefore, wait for new candles before deciding.
The spinning top is also a candlestick that indicates indecision. With this pattern, you see a small body with a large shadow. There is no clear price movement.
You can see that within the period the buyers and sellers have both made the price rise and fall considerably. Yet there is still no clear winner: there is a period of rest.
How can you use candlesticks?
It is possible to use candlesticks at almost every broker. In this part of the article, we'll explain how you can add candlesticks to your chart.
Using candlesticks with Plus500
Plus500 is a user-friendly broker where you can trade currency pairs and stocks with CFDs. Do you want to know more about this broker? Then read this article!
Click on the button to switch between candlestick/line to use candlesticks at Plus500.
Candlesticks within MetaTrader
By default, MetaTrader displays the price as a smooth line. However, a line provides little information and it is therefore wise to change this to candlesticks. You can do this easily by pressing the candlesticks button.
Tip: practice recognizing candlesticks
Below you can see a chart of candlesticks. Try to identify the different bars, name them, and think about what they mean imply. By practising you learn to recognize the candlesticks faster and faster and you can predict the price more accurately.
1: low test 2: inside bar 3: Doji bar 4: dojo bar 5: high test 6: train tracks
Candlesticks or price action are a good indication of the expected next price move. As can be seen in for example 1 (weak low test, almost a Doji bar) a candlestick is never decisive in a certain direction. It is essential to consider market conditions before opening an investment. Read directly how to recognize a trend or continue learning in our technical analysis course!
Do you want to practice using candlesticks yourself? This can be done without risk! Download a free investment demo package and practice recognizing these patterns:
How can you use candlesticks to take a position?
When you have found a good moment to open an investment, you can use candlesticks to plan your trading position. A position always consists of two important elements: an entry point and a stop loss. The entry point is the moment when you open an investment and the stop loss is the moment where you take a loss if the position nevertheless moves in the other direction.
In this example, we open a position based on a hammer candlestick. The price of a currency pair has fallen for a while and is now touching a strong horizontal level. This is where this pattern is forming which may indicate that the price is now going to rise.
You can then choose to place the entry point just above the candlestick. If the price unexpectedly moves in the other direction, you prevent opening a loss-making position.
At the same time, you can place the stop loss just below the candlestick. If your position opens and the price moves in the other direction anyway, you prevent your losses from increasing further.
You can therefore use candlesticks to plan your investments. That way you minimize potential losses and maximize potential winnings!
Where do candlesticks come from?
Candlesticks have a rich history. Its origins can be found in the 17th century. The Japanese wanted to increase profits from rice sales. Candlesticks help analyse price patterns. Charles Down expanded this concept in 1900 and brought the instrument to the level we know today.
Candlesticks focus entirely on ‘what'. Candlesticks show what is happening, but don't try to explain it. You can therefore only use candlesticks for technical analysis. To perform such an analysis, we assume the following list of characteristics to be true:
- All information is displayed in the current market price.
- Expectations and emotions drive the markets.
- The markets are constantly changing.
- The current price does not have to be the actual or intrinsic value.
Extra: OHLC bars
An alternative way of displaying price action is the so-called OHLC bars. OHLC bars provide information comparable to candlesticks; the presentation is just a bit different. With an OHLC bar, the bend on the left is the price at which the period opened and the bend on the right is the price at which the period closed.