Of the various concepts technical analysis presents, candlesticks are the most misunderstood. Occurring at hinges like breakouts and trend transitions, candlesticks predominantly lead to misconceptions and assumptions that drive traders off-track! It is a price chart that conveys the highs, lows and opening prices of a commodity within a certain timeframe. No market can exist without the high-low movements, which eventually birth a trend for traders to study and capitalize on.
Candlesticks In Detail:
Candlestick shadows denote a day's high peaks and low drops caused by a price, and how they are linked with the opening and closing points of a trade. Based on the said four factors, a candlestick's shape can vary tremendously. What started as a method to track the price of rice in Japan, has today, after nearly 200-300 years, made it an essential part of Forex trading strategies in the currency markets! Candlesticks aren't limited to Forex; they can be used in stocks, futures, and any market that is liquid enough.
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Markets are either bullish, or bearish, and both these trends can be mapped efficiently with candlesticks. White-green candlesticks hint at increasing buying pressure, leading to a bullish trend. Whereas black-red candlesticks indicate an increase in the selling pressure and this births a bearish trend.
Two predominant patterns can be seen in these charts:
1) Hammer: This is a bullish reversal pattern. After opening, some prices tend to move lower, and then gradually see ascension.
2) Hanging Man: A hammer's bearish counterpart is called the hanging man. They play a substantial role in helping traders pick a top or bottom in the market.
Markets see two common types of candlestick trading patterns:
1) Two-Day Patterns: Known as the engulfing pattern, this suggests a trend reversal. Housing two candlesticks, the first one is overshadowed and engulfed by the second. When it makes an appearance at a downtrend, it is called as a bullish engulfing pattern; when it does the same by an uptrend; it is called as a bearish engulfing pattern.
2) Three-Day Patterns: Here, the first candlestick follows an uptrend, the second one has a narrow body, and the third one closes midway. This is called an evening star. A morning star, on the other hand, is a bullish reversal pattern, where the first candlestick sees selling pressure (black-red) and has the following candlestick that gaps lower.
These are great indicators in Forex, and do a tremendous job of equipping traders with market and price movement information. With the right trading account, you can use a plethora of tools to capture the best trends and capitalize on them! Call WesternFX today and get one! From Forex trading strategies to platforms, we will provide you with the best of tools and ensure you emerge victoriously.
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