Forex Candlesticks - How Useful Are They?

By James Woolley

The Japanese invented candlestick charts a few hundred years ago and they have been used extensively by traders ever since. They are basically like bar charts except they provide a lot more information. So how useful are they when used to trade the forex markets?

Well first of all I would say that it's generally not a great idea to make trading decisions based solely on candlestick charts. Ideally you should also use other technical indicators as well in order to find high probability trading set-ups, before looking for additional confirmation from the candlestick charts. Some people do trade and make consistent profits by just trading forex candlesticks but they are definitely in the minority.

Before I discuss how you can interpret candlesticks let me first of all discuss what a candlestick actually is. In simple terms a candlestick is simply a visual display of how the price has moved during a particular time frame. It consists of a body which signifies the open and close price and two wicks which indicate the high and low point during that particular period. If it's a green candle, the closing price was higher than the open price and if it's red then the price moved down with the closing price ending up lower than the opening price.

This may sound fairly basic and you may well wonder how you can trade these candlesticks but there are a number of different patterns you need to learn because they can offer strong buy or sell signals.

For example, if you get several consecutive candles that all have very small bodies followed by a candle with a large body then you know that there is a strong chance of a breakout occurring either up or down depending on the colour of the bar.

Another strong candlestick pattern is the hanging man and hammer patterns. These are both strong indicators that a reversal is due to take place. They both look the same with a small body and a long hanging downside shadow. The only difference is that the hanging man is used to signify a reversal of an upwards trend and a hammer is found at the bottom of a downwards trend and indicates an upwards reversal. Used in conjunction with other indicators these are very strong signals that a reversal is imminent.

These are just a few patterns but there are many other candlestick patterns you should learn because you can gain some invaluable information from them, particularly when combined with other forms of technical analysis.

James Woolley runs a website which provides details about Forex Candlesticks Made Easy and other top selling forex products.