Candlestick forex charts have quickly become the most popular type of chart used by currency traders because of the range of information it provides. A candlestick chart is essentially a bar chart, except with ‘wicks’ on either end that shows the highest and lowest prices, allowing a trader to see this information quickly. The candle body also emphasizes the difference between the opening and closing prices by being filled in with different colors depending on whether the currency closed lower or higher than the opening price. When the price closes near its lowest point, it is considered a bullish signal, while it is bearish when the opposite happens.
Here are some common candlestick forex charts formations:
- Hammers/Hanging Man: These price formations are distinguishable because the candle body is small with longer wicks. When a Hammer is formed, it indicates a bullish reversal after a price decline. On the other hand, a Hanging Man is a bearish reversal that forms after a price increase. Although both formations can signal trades, a confirmation is needed first before action can be taken.
- Pricing line: This formation combines two candles, with the first one long and bearish and the second short and bullish and indicates that the price trend is bullish.
- Dark Cloud Cover: This bearish forex charts formation consists of a strong colored candle on the first period followed by an uncolored candle on top of first one, but with the closing price near or at the lowest level of the trading session. The opposite of this formation is the Piercing Pattern, which is bullish with the first candle having a colored real body followed by a long uncolored one.
- Stars: These forex charts formations are made up of a candle with a small real body, with the star itself gapping away from it. The Morning Star is a bullish bottom reversal formation made of three candles – a real body, a second small real body and a third real body that moves into the first candle’s body, while the Evening Star is a bearish top reversal formation which acts as a counter to the Morning Star, with a long, uncolored first candle, a second one with a small real body that forms the star and a third one that has a colored real body moving into the shadow of the first candlestick; Doji Stars are candlestick formations that gap on top of a real body when the market is rising and on the bottom of a real body when the market is falling. The two popular types of Doji Stars are the Evening Doji, which consists of two candles, a short uncolored real body and a long, colored real body, and indicates an upturn in the price; and the Morning Doji, which consists of a dark candle followed by a long, uncolored real body. Finally, there are Shooting Stars, which actually serve as warnings rather than trading signals; these consist of a candle with a short body but a longer upper wick.