Candlestick forex charts provide the trader with special visual cues that make it easier to read the price action. Trading based on these forex charts allow the traders to understand market sentiment. It offers more information than bar charts where the lows and highs are emphasised, and place more emphasis on the relationship between the closing and the opening prices.
A very difficult aspect of trading is identifying the price actions that could predict continuation or reversal of a trend. Traders who use candlesticks can often successfully do this. When combined with suitable technical analysis tools, it is possible to successfully select suitable entry and exit points.
Candlestick Forex Charts Design
The candlestick body indicates the opening and closing price. The colour that is used, normally blue if the price is up and red if it is down shows the trader which direction the market closed. The wicks of the candle indicate the extremes of the day, either high or low.
Bar Charts vs. Candlestick Charts
As the body of the candle is generally thicker than the shadow, these charts stress the relationship to the opening price a lot more than bar charts do. Bar charts give highs and lows spikes importance when exploration of data is taking place. These lows and highs are often due to noise in the market which is not significant when undertaking proper analysis. The candlestick is able to eliminate this static in the market and focus on how the market moved the prices during a specific trading period. A candlestick chart on its own cannot provide the trader with sufficient information to determine market sentiment; technical analysis is required to do this. You can however look for patterns within a candlestick chart to attempt a prediction for future movements in price.
Patterns of Reversal
Technical analysis targets identification of price directional changes. Since candlesticks allow insight into the thinking pattern of the market, it is possible for the chart to suggest amendments to the market sentiment. This is called a pattern of reversal.
There are other reversal patterns used in trading, such as Double Tops and Head and Shoulders. These charts generally do not provide insight into the thinking pattern in the market; they merely show the common patterns that are present in the price actions prior to a reversal.
An important factor to note with candlestick forex charts is that a reversal pattern is not suggestive of a complete trend reversal, but rather a pause or a change in the direction of the trend. This could be indicative of a trend slowdown, trading going sideways after a trend had been established, or a complete turnaround after a candle pattern reversal.
Using Candlestick Charts
Candlestick charts can be valuable for traders who want an insight into the market. Most analysts who chart candlesticks will recommend that you do not use it as your sole analysis tool. The patterns often become obsolete when there are events relevant to analysis that fall outside of the formations the candles are indicating. These charts should be used along with other methods of technical and fundamental analysis. This will give you the best basis for prediction of forex rates.
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