Candlesticks can be used to predict the price of a currency pair. By reading the bars correctly, you can decide if it’s best to buy a currency pair (long) or to sell (short).
How can you read a candlestick?
It’s pretty simple to read a candlestick; the candlestick offers a lot more information than an ordinary price-line.
- Open: the opening price
- High: the highest point within a certain period
- Low: the lowest point within a certain period
- Close: the closing price
A candlestick always relates to a certain period. The period that the bar relates to depends on the timeframe you analyse on the chart. The colour of an OHLC bar indicates if the price has gone up or down. Green bars indicate an increase and red bars indicate a decrease.
The little stem on the candle shows the price range within that period. A positive green bar always starts at the bottom and closes higher, whereas a negative red bar always starts at the top and closes at the bottom.
Candlesticks, compared to an ordinary line on the day chart, give more information.
Why candlesticks instead of a line graph?
Professional investors prefer candlesticks over a line graph. They prefer candlesticks, because you can use them to recognize patterns. By analysing candlesticks, you can determine a good moment to open a trade. Investors naturally want to sell at the bottom and buy at the peak. In this article you can read how you can interpret candlesticks.
What can a candlestick show?
- Continuation: the trend is holding steadily without any problems
- Trend reversal: the trend pivots from increasing to decreasing or vice versa
- Indecisive: the battle between buyers and sellers is still undecided
Candlesticks that indicate the continuation of a trend
Bullish and bearish continuation bars fall under here. We will discuss the bullish continuation bar. With bearish, it’s the same characteristics but the other way around.
A bullish continuation bar is a strong indication that the trend will continue. After a bullish continuation bar, chances are high that the price will continue to move in the same direction. The bar is stronger when the close is closer to the highest point of a bar, and the open closer to the lowest point of a bar. The price didn’t drop that day.
Candlesticks that indicate a reversal
The high/low test
We will discuss the high test. The low test is exactly the same in principle, just the other way around. With a high test, the open and close are in the bottom half of the bar, while the price in that period has gone up quite a bit. The colour doesn’t matter; it’s about the fact that buyers failed to maintain an increasing trend. For a good high test, it’s best that the moment of opening and closing lies in the bottom third of the bar.
The increasing movement has been refused and chances are that more sellers will come into play; the price will continue to fall.
Train Tracks and Twin Towers
The train tracks consist of two bars where an upward trend has been denied. The train track can be compared to a high test, but spread over a larger area. With a train track, it’s important that the bars are more or less symmetrical and that the highs and lows are equal. If you would combine the bars they would form the high test bar, and chances are that the price will drop.
Next to the train track there is also the twin tower. The twin tower is the opposite where the bars form the low test, and chances are that the price will now go up. The names of these bars are a little confusing, but eventually what is important is that you understand they can form a high test or low test.
Bullish/Bearish engulfing bar
A bullish engulfing bar is a good indication of a reversal. You can see the reversal across two bars, with the first one indicating a downward movement. The bar is followed by a candlestick that shows that a downward movement is clearly denied. The high and low of the next bar need to breach the high and low of the first bar, meaning it has to be a bullish bar.
In this case you can clearly see that the buyers that were in the majority at first were defeated by the sellers and that the sellers are now in the majority. With a bearish engulfing bar, it’s the opposite and sellers take over from buyers, causing the price to drop.
Candlesticks that indicate indecisiveness
Inside bars are bars that fit within the high and low of a previous bar. Inside bars show the level of indecisiveness. Nobody knows which direction the price will move. The colour of the bars isn’t important. After an inside bar, a strong upward and downward movement can be expected.
Sometimes there are double inside bars. This is an even stronger indication of indecisiveness. The buyers and sellers can’t get the price further up or down, which gives the price an unclear direction for the time being. A strong outbreak is to be expected.
With a doji bar, the open and close lie almost symmetrically next to each other while the price has gone both up and down. This is an indication of strong indecisiveness where the battle between buyers and sellers is far from over. The colour of a bar isn’t important.
At Plus 500
Click on the button ‘exchange’ between the candlestick/line to use candlesticks at Plus 500.
MetaTrader displays the price movement as a fluent line. A line doesn’t provide a lot of information and that’s why it is best to use candlesticks. You can do this by clicking the button ‘candlesticks’.
Extra: OHLC bars
An alternative way to show price action is by using OHLC bars. OHLC bars give similar information, although the presentation is different. With candlesticks, the inflection left is where the price started within a period, and the inflection right indicates the price at the ending of a period.
Tip: practise recognizing candlesticks
1: low test 2: inside bar 3: doji bar 4: dojo bar 5: high test 6: train tracks
Candlesticks, or price action, are good indications of the next expected movement. A weak low test, almost a doji bar, is a candlestick and is never decisive towards a certain direction. It’s very important to take the market conditions into account before you open a trade. Learn how to recognize a trend, and continue learning in our ‘learn how to trade’ section!