The Candlestick Chart

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These articles will teach you about how to improve your forex trading success using a specific chart formation or pattern. This chart formation or pattern helps you understand better and faster the mechanics and movements of forex in a trading session. 

The candlestick formation is often considered the best forex indicator whose reliability and accuracy in helping predict forex trading outcomes has been tested for centuries. It has become a powerful tool for every forex trader, beginner and professional alike, to better streamline their trading activities and to achieve better and more lucrative profits from such activities while avoiding potential losses.

What is Candlestick Trading Indicator?
The candlestick trading indicator refers to the visual appearance of the indicator on the chart, which resembles a candle with its wick normally sticking out from its top and its tail from its bottom. All parts of the candlestick chart pattern represent the core elements of forex trading movements and mechanics, with no element being purely decorative and wasteful. 

More about the elements of the candlestick indicator, what they represent, how to read them, and what you can achieve from being able to read them will be discussed later in this article. There will also be specific discussions about why the candlestick chart pattern is considered the most powerful forex trading chart pattern and what the main strength and weakness of this indicator are.

Introduction to Candlestick Trading Indicator
The majority of people in the forex business may recognize this indicator more by its appearance than by its name. Although it is a forex trading tool that is so pervasive that it has become an indistinct part of every forex trading chart, not all people know its name and its origin, let alone the correct way to read it and to benefit from it, and to exploit it fully in identifying the market trends, to reveal the key levels in the market, and to identify a price action signal.

Candlestick Trading Indicator is an indicator that has been around since the very dawn of the trading history. It was invented by the 17th-century Japanese rice trader Munehisa Homma. He once attempted to discover the most reliable chart pattern to monitor the trends of the prices of rice and to make the best decisions concerning the right time to buy and sell rice. The candlestick trading pattern was the final result and the magnum opus that he discovered after years of tinkering with different chart systems and developing his own unique method and indicator. His achievement in discovering the best trading chart granted him wealth amounting to tens of billions in today’s dollar and an honorary title of a Samurai.

For centuries, the candlestick chart pattern was somewhat buried within the rather obscure world of forex trading due to the relative exclusivity of this business. Only people who had devoted their life in forex trading recognized the pattern and exploited it in their business. Only after sometime around the eighties when forex trading had become highly computerized that this chart became a staple in the forex business, which became increasingly more popular due to the business’s computerization and—later—its widespread availability due to the internet.

This article about the candlestick trading indicator attempts to be concise yet comprehensive in covering the information about this indicator. You may encounter some funny terms associated with specific candlestick patterns. Whether you want to focus on those terms or to ignore them and to mind only the concepts they represent, I can guarantee that those terms will be much more helpful for you than confusing.

The Candlestick Anatomy
Before you try to understand everything that the candlestick represents, you need to understand the anatomy of the candlestick first. A candlestick has a number of body parts, each of which has a specific meaning that you need to understand. A candlestick also has a specific color and body size which give you a quick clue about the concept it represents. The length of the candlestick’s shadow is comparable with the candlestick’s body size in terms of the information that both parts represent. Generally speaking, the anatomy of a candlestick can be described as follows.

The entire form of the candlestick represents the complete price action that occurs within a particular timeframe. The price action represented includes the opening price within a session, the closing price, the lowest, and the highest (open, close, low, high). Each of those price action elements is represented by the following two parts.
1.  Body
The candle’s body or real body represents the relationship between the opening and the closing prices. Its colors determine whether the price goes up (open < close; normally represented by hollow, white, or green) or goes down (open > close; normally represented by filled, black or red).
2.  Shadow
The shadow, represented by the candle’s wick and tail, is the thin vertical line that goes through the body from the lowest point, which represents the lowest price in a session (low) to the highest (high). A shadow is always monochromatic (black or white). The shadow may disappear completely when the opening and closing prices are at the same positions with those of the lowest and highest prices—a condition called Marubozu or a bald candle.

Why Candlestick?
I deliberately put this section here instead of in the introduction because you need to understand first the anatomy of the candlestick before you try to understand why is the candlestick indicator better than other charts.

Traditional charts, such as bar and line charts, can indeed show the similar price action within a certain timeframe. It shows whether the price goes up or goes down and provides you with a clue to make decisions.

However, the candlestick chart is considered a lot more reliable than the traditional charts because it shows more numeric data and because it also shows the emotions. If you are a seasoned forex trader, you should already be aware that the actual price movements don’t always reflect the actual flow of the market and that emotions and expectations do affect the way buyers and sellers move the markets.

When dealing with rapidly fluctuating forex markets, understanding those extra data and being able to interpret them quickly and accurately is considered much more important that reading the numeric data provided by the traditional charts.

Nevertheless, this doesn’t mean that in the forex business, traditional charts are abandoned. It is widely used in most—if not all—forex applications and is normally underlaid behind the candlestick chart.

Bulls versus Bears
The main concept being put forward by the candlestick trading indicator is the fight between bulls and bears. Bulls represent sellers and bears buyers. The colorful look of the candlestick bodies across the chart board is a clear representation of the stringent battle that occurs between bulls and bears. 

As the main actors represented by the candlestick, the bulls and the bears, are represented by the only colors that the candlestick has. In other words, the colors of the candle’s body determine whether the price movement is bullish or bearish. The candle’s body that is hollow/white/green indicates buying pressure whereby the close is greater than the open. Conversely, a filled/black/red body indicates selling pressure, which causes the close to be lower than the open. The former is typically called the bullish candlestick because the buyers dominate the market, which causes the price to go up, whereas the latter is the bearish candlestick.

The Candlestick’s Size
Depending on the size of the candlestick’s body, the length of its shadow, and the visual relationship between the body and the shadow, you can easily find out what is happening in a trading session in regard to the price action and you can find that out quickly. 

Later, you will have to learn about the candlestick patterns, which are basically the relationship between a candle with its neighbors. Learning the candlestick patterns is necessary because relying solely on a single candle to make decisions is a fatal mistake. More importantly, to predict the market trends and to determine the right time to buy and to sell, you need to know exactly what certain patterns mean. The reading of the candlestick patterns all goes back to your understanding of how to identify a candle based on the visual dimension of its parts.

1. The Body’s Size
The body of the candle can be either tall/long/fat or short/thin. As a matter of fact, it can even be completely flat in some scenarios. The factor that determines the size of the candle’s body is the interval between the open and the close. When there is a large interval between the open and the close, the candle’s body will be fat. Conversely, a thin body indicates a small distance between the open and the close.

Now what does this interval mean? A long candlestick indicates control and dominance in the market whereas a short candlestick signifies the relative absence thereof. The color of the body further determines which party dominates the market. A long white candlestick is a clear sign that the bulls dominate the market, whereas a long black candlestick indicates that the bears control the trading. A short candlestick indicates that neither the bulls nor the bears have a strong control of the trading, though the price still moves in favor of either party depending on its color.

A flat candlestick’s body, which appears as a flat horizontal line, signifies the absence of control in the trading activity. The flat body indicates that the open is the same with the close and that neither party is equally indecisive. The candlestick pattern in which the body appears to be completely flat is called the Doji pattern, which is considered one of the most important candlestick patterns. We will discuss more about this pattern later in the candlestick patterns section.

2. The Shadow’s Length and Its Relationship with The Body
As already explained, the shadow or the candle’s wick and tail, the real battle between the bulls and the bears is represented by the length of the shadow. A long shadow signifies a stringent competition that occurs in a trading session to reach the low and the high before being concluded by the body, which shows the close of the session.

In most cases, the upper shadow (the wick) is either shorter or longer than the lower shadow (the tail). The length of either shadow signifies the activity of a party versus the resilience of their competitor. The color of the body doesn’t really matter in this case. Whether the body is bullish or bearish, the length of either shadow determines which party—amidst the harsh competition—can finally make an impressive hit by the end of the day.

A longer upper shadow is a sign of the bulls’ dominance for the most part of the trading session, but at the end of the session, they have to surrender to the impressive resilience of the bears, who successfully keep the close low enough after getting while for a while.

In the opposite scenario, a longer lower shadow indicates the bears’ control for the most part of the trading session before having to surrender to the bulls’ resilience at the end of the day. The extra length of either shadow is the base on which the candlestick patterns Hammer and Shooting Star materialize. Like Doji, both patterns are also considered among the most important.

The length of the upper shadow may also be comparably similar to the length of the lower shadow. An upper shadow that is as long as the lower shadow is an indicator that both parties are fighting “violently” in most part of the trading session, but neither can assert their dominance over the other and at the end of the day, each has to return to their base with only a very slight change between the open and the close, despite the aggresive measures to reach the high and the low. This scenario results in a standoff and the pattern is generally called a spinning top.

Like the candlestick’s body which can be completely flat, the shadow can also disappear completely, leaving the candlestick having the body alone with neither wick nor tail. In this scenario, the candlestick is called bald like a monk. The Japanese term for it is Marubozu. More about Marubozu will be explained in the candlestick patterns section below.

The Market Structure and Trends
The understanding of candlestick patterns is necessary to understand the market structure and trends and you can only make accurate predictions and decisions if you understand how to read the patterns to fully recognize the market structure and trends. The relationship between a candle and its neighbors is a clear visual clue to reach such understanding.

The market structure determines what the crowds are actually doing, who in control of the market within a wider timeframe is, and whether the market is in the bullish or bearish trend.

Your ultimate goal of reading the patterns is thus to determine the current market trends. The market trend occurs when a repeating pattern takes place across different trading sessions. If the repeating patterns tend to be bullish, which are characterized by higher highs (HH) and higher lows (HL), the chart is showing an up-trending market. Conversely, if the repeating patterns are characterized by lower highs (LH) and lower lows (LL), you are seeing a downtrend market. Take a look at the two images below to better understand about the market trends.

Uptrend Market

  
Downtrend Market

There are two important things to understand about the market trends. Firstly, in an uptrend market, the candlesticks tend to be bullish, but the chart itself is necessarily a mixture of bullish and bearish candlesticks. Similarly, a down-trending market also shows a chart that mixes bullish and bearish candlesticks. The focus of predicting the market trends is thus not on whether the candlesticks are bullish or bearish, but on the lows and the highs. An uptrend market shows a series of higher highs and higher lows and a downtrend market shows a series of lower highs and lower lows. 

Secondly, you need to understand what can be called a trend. Remember that market trends don’t necessarily occur in a highly fluctuating forex market, though they do occur quite often. The statistics shows that market trends occur approximately 30% of the time. When you can detect their occurrence, you can benefit from them when executing your trading.

How can you detect a market trend? Obviously, you need to read the candlesticks across a wider timeframe to find out whether a market trend is occurring. The wider the timeframe you observe, the more accurate your prediction of a trend is. However, if you wait too long, the trend may cease or go into a reversal before you can benefit from it. 

One rule to follow to predict a market trend is that you should never use a small timeframe to read the market structure. One or two hours of up-trending or down-trending market means nothing and assuming a trend from such small timeframe can be an ugly mistake. Use instead 4-hourly, daily, or weekly timeframe to determine whether a trend is occurring.

How can you predict if—after a certain period of observation—a trend will continue as it is or if it will go to a reversal? Your understanding of different candlestick patterns will help you make rather accurate predictions about that. The candlestick indicator is often regarded as the best forex indicator because its patterns—after centuries of trials and tests—are proven to help traders predict the price movements and market trends rather accurately.

The Candlestick Patterns
In the forex trading, price action ultimately becomes the most reliable clue to predict the price movements in the broader forex timeframe and to make important decisions, usually based on trends. No chart is more reliable in visually representing price action and market trends than the candlestick chart. After you understand the candlestick’s anatomy, it’s time for you to recognize the candlestick patterns, what they mean, and how to read them to make accurate predictions and decisions.

A Precaution
For every pattern explained below, you will also read about what a specific pattern indicates. For instance, a doji indicates a stop or reversal and a marubozu indicates a continuation or reversal. This indication, however, is an estimate based on the general observation of those patterns. As explained above, you should observe the wider timeframe to determine the trend and not rely on one single pattern only, so you also need to look at the preceding patterns across different trading session and a wider timeframe to determine the movement of the market structure.

1. Marubozu 
The Marubozu shows the complete and unchallenged domination of either the bulls or the bears from the very start of a trading session to its close. Marubozu can be either bullish or bearish and it signifies a complete victory of the respective party after a full market control for the entire trading session. The color of the body determines who is in control in the whole affair.

In the Bullish Marubozu scenario, the bulls push the price upward right after the open and continue to do so until they reach the high, which is exactly where the close is concluded. In the Bearish Marubozu scenario, the bears become aggressive right after the open and successfully cause the price to collapse until it reaches its lowest point by the time the close is concluded.

What does a Marubozu indicate?
The Marubozu pattern generally indicates a continuation of the existing trend or a reversal from the opposite trend. A bullish marubozu signifies the continuation of up-trending market or a reversal from a down-trending market to an up-trending one. The opposite can be said about a bearish marubozu. Take a look at the image below for better understanding of how a marubozu pattern affects the market trend.

2. Spinning Top
The spinning top occurs when a short body (either bullish or bearish) has equally long upper and lower shadow. This clearly reads a short gap between the open and the close with a rather aggressive activity occurring to reach the high and the low.
What does a Spinning Top indicate?
In the real market, a spinning top signifies indecision. The bulls and the bears are similarly active during the session and try their best to reach the highest possible high and the lowest possible low, but in the end, the battle has to conclude in a standoff with neither party can launch a decisive blow to their opponent. As a result, despite the market’s activity, there is only a small gap between the open and the close.

A spinning top may indicate a potential stop of a trend. This stop may be followed by the continuation of the trend or its reversal to the opposite trend. If you take a look at the image of the marubozu pattern’s effect on the market trend above, the stop or reversal of a trend is always indicated by a candlestick with a rather short body.

3. Doji
A doji is the extreme version of a spinning top. The distance between the open and the low can be so small that it virtually become absent. A doji occurs when the open and the close within a trading session occur at the same point. A doji is thus represented by a thin horizontal line that represents the very short candlestick’s body. The shadow can be of any length to signify the activity of the market, but in the end, the battle still concludes in a standoff. Like a spinning top, a doji also signifies indecisiveness and a potential stop of reversal of the currently running trend.

Although a doji ideally has a completely flat candlestick’s body, this is not always the case. A spinning top that is so short that the distance between the open and the close is ignorable can be regarded as a doji. Nonetheless, this is just a play of term and it should not confuse you very much, especially because both a spinning top and a doji indicate a rather similar movement of the price.

What does a Doji indicate?
A doji and a spinning top play a very much identical role: they indicate indecision, neutrality, and the equality between buying and selling pressures. The main difference between a doji and a spinning top is that the latter signifies greater indecision that is indicated by generally long shadows and thicker body. A spinning top is also slightly different from a doji because it signifies trend weakness but not necessarily signifies a reversal.

One important notice is that although a spinning top generally has longer shadows, a doji’s shadows aren’t necessarily short. Long-legged dojis occasionally appear on the chart and, like their spinning top counterparts, they also reflect a great amount of indecision in the market.
   
4. Hammer and Hanging Man
A hammer and a Hanging Man share the identical look of a short-bodied candlestick with a long lower shadow and a short or no upper shadow; however, they play a contrasting role in a candlestick chart. A hammer is a bullish pattern that is normally located at the bottom whereas a hanging man is bearish pattern that sits at the top of the chart. In order to qualify as a hammer or a hanging man, the lower shadow should be at least twice the length of the body; the longer the better.

What do a Doji and a Hanging Man indicate?
A hammer is usually located in a downtrend movement and often indicates a bullish reversal. The long lower shadow is a clear sign that initially after the open, bulls storm the market, causing the price to go down; however, in the end, the buyers’ population suddenly spike and push the price upward, triggering a close that is significantly higher than the low. A hammer is often considered a clear indication of strong buying by bulls after the waning of the sell-off period. In order to confirm whether the hammer does trigger a reversal which will signify that the buyers are in control, you should wait for the next patterns to appear.

A hanging man, on the other hand, is generally found in an uptrend movement and signals a weak selling pressure that is indicated by the long wick that ends in a high low. When a hanging man appears on the top, it often indicates a change of the sentiment in the market that usually triggers a reversal to a downward movement.

How about the color of the hammer and hanging man? Which color provides the strongest indicator? Although there is no general rule concerning this and you should always see the pattern in a wider picture, a white hammer and a black hanging man generally serve as the stronger indicators than their opposites. 

5. Dragonfly Doji
An ideal dragonfly doji is a doji with long lower shadow and a virtually absent upper body. It can be located at the bottom or the top of the chart and the patterns that follow it will confirm the role that it plays in the price movement. Generally speaking, its long lower shadow gives it a role that can be that of a hammer or that of a hanging man, depending on where it is located and what follows it.
What does a Dragonfly Doji indicate?
As explained above, a dragonfly doji generally plays the same role with that of a hammer or a hanging man. It is a bullish pattern because during the session, the sellers dominate the market, but in the end, the buyers is coming in to push the price upward until the close reaches the same position with that of the open. Just like a hammer and hanging man, a dragonfly doji also requires the preceding and upcoming patterns to confirm its exact role.

6. Shooting Star and Inverted Hammer
A shooting star and an inverted hammer share the same look and different role that is indicated by their location on the chart. Both have a short body and a significantly long upper shadow, which must be at least twice the length of the body.

A shooting star is located in an uptrend movement. It is called that way because it is a star that is located at the top of the chart and—with a long upper shadow—resembles a falling star in the sky. An inverted hammer, on the other hand, is generally located in a downtrend movement.

What do a Shooting Star and Inverted Hammer indicate?
Both patterns show an initial buying pressure that occurs in the market and causes the price to spike after the open; however, as the sellers storm the market, the price goes down with the close by the end of the day relatively low, nearing the open. A shooting star generally indicates the end of an uptrend and the beginning of a downtrend. Like a shooting star, an inverted hammer, which is located after a downtrend movement, could also signify a trend reversal.

7. Gravestone Doji
A gravestone doji is the doji’s counterpart of a shooting star. It is a doji with a relatively absent lower shadow and a long upper shadow. It is a bearish pattern due to the domination of the buyers after the open in a session, which is marked by the rising price; however, as the sellers come in, the price starts to drop until the close is in the same position with that of the open.
What does a Gravestone Doji indicate?
The long upper shadow indicates a buying pressure during the session, but this buyers’ rally ends in failure after the sellers push the price downward. The similar position of the open, low, and close is a clear sign of this total failure.

A gravestone doji could indicate a reversal. If it occurs after an uptrend, it signifies that the buyers’ domination which has been occurring so far will cease soon as the sellers gain power to counteract the raising of the price. If it occurs after a downtrend, it signifies that the sellers’ hitherto domination starts to encounter significant resistance from the buyers. They could not push the price much lower and an upward reversal is expected to occur soon. A confirmation by the upcoming patterns, however, is always needed.


8. Engulfing Bar
So far, we have been discussing about patterns that generally consist only of one candlestick, though their role needs confirmations from both the neighboring candlesticks. Starting from here, you will see patterns that consist of more than one candlestick.

An engulfing bar is a pattern that consists of two candlesticks, with the preceding shorter candlestick is engulfed by the following longer candlestick—hence the term. The body of the first candlestick is engulfed by the second’s longer body, though the first’s shadows are not necessarily engulfed by those of the second.

What Does an Engulfing Bar Indicate?
An engulfing bar can be either bullish if the engulfed candlestick is white and the engulfing candlestick is black or bearish if the situation is inverted. A bullish engulfing bar signifies that the buyers control the market whereas a bearish engulfing bar signifies sellers’ control of the market. 
What an engulfing bar indicates depends on where it is located. If a bearish engulfing bar occurs after an uptrend movement, in which white candlesticks dominate the chart, it could signify a reversal due to the successful rally conducted by the sellers. If it occurs after a downtrend movement, it may signify the continuation of the trend because the sellers still control the market.

The opposite scenario is valid for a bullish engulfing bar. It may signify the continuation of an uptrend movement due to the buyers’ persisting control of the market or may also indicate the reversal of a downtrend movement. 
  



9. Harami
Harami means pregnant in Japanese and on the chart, a harami pattern is the opposite of the engulfing bar pattern. The first longer candlestick in the harami pattern acts as a mother who bears a shorter candlestick that follows her. The child’s shadows are not necessarily within the mother’s body, though they preferably are.

What Does a Harami Indicate?
A harami can be either bullish if the mother is black and the child is white or bearish if the formation is inverted. A bullish harami indicates the arrival of the sellers to dominate the market whereas a bearish harami marks the end of the sellers’ domination with the arrival of the controlling buyers at the market.

The Harami’s influence on the chart is rather interesting. If it occurs in the middle of an uptrend or downtrend movement, it signifies the trend continuation and can be a good signal for you to join the trend. If it occurs at the top of an uptrend movement or the bottom of a downtrend movement near a support level, it may signify that a trend reversal is a possibility.
10. Morning Star
The morning star pattern consists of three candlesticks and often occurs at the bottom of a downtrend movement. The first candlestick is a long bearish candlestick followed by the second shorter candlestick that can be either bearish or bullish. The third candlestick is a bullish candle that signifies the rising control of the buyers.


What does a morning star indicate?
A morning star at the bottom of a downtrend near a support level indicates a strong reversal in which the buyers take control of the market from the sellers.


11. Evening Star
The evening star pattern is the opposite of the morning star. It consists of a fat bullish candlestick, followed by a small candlestick of any color, and then finalized by a fat bearish candlestick.
What does an evening star pattern indicates?
An evening star generally occurs at the top of an uptrend movement and it can be a clear signal of reversal. The sellers will likely take control of the market from the buyers after the occurrence of this pattern.


Conclusion
Those are the most essential candlestick patterns that you will encounter frequently on a candlestick chart. What makes this chart the best forex indicator is all the signals that these patterns show. Obviously, there are many other candlestick patterns that you will encounter when studying the candlestick chart, but learning all patterns listed above will give you enough understanding of how the candlestick chart works and enough learning assets to help you explore the candlestick system further.

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