How to read candlestick charts
Candlesticks can be used to predict the price of a currency pair. The ultimate decision to buy (go long) or sell (go short) a currency pair can be strengthened by closely examining bars in the graph.
Understanding candlestick charts
- Open: the opening price
- High: the highest point within the specified period
- Low: the lowest point within the specified period
- Close: the closing price
A candlestick always refers to a specific period. The period the bar represents depends on the analyzed time frame. The colour of an OHLC bar indicates whether the price has risen or fallen within that period. Green bars indicate the price has increased, red bars indicate the price has decreased.
The extended line of the candle represents the price range within that period. In the example of the green bar above the price has thus reached higher than the price at which the bar closed. A positive green bar always starts at the bottom and closes higher, while a negative red bar always starts at the top and closes lower. This is obvious as the bars reflect increases and decreases.
Candlesticks compared to a regular line on the intraday chart, candlesticks clearly provide much more details.
What could candlestick bars indicate?
- Continuation: the trend continues without troubles
- Trend Reversal: the trend shifts from upward to downward or vice versa
- Indecisiveness: the struggle between buyers and sellers remains undecided
Candlesticks that indicate a trend continuation
This includes the bullish and bearish continuation bars. We will briefly discuss the bullish continuation bar, for the bearish continuation bar the same characteristics apply but in opposite direction.
A bullish continuation bar is a strong indication the trend will maintain its heading. The bar is stronger if the close is close to the top of the bar and the open is close to the lowest point of the bar, in that case the price continuously rose throughout the day, without having a fallback.
Candlesticks that indicate a reversal
The high / low test
We will discuss the high test, the same goes for the low test but in opposite direction. At a high test the open and close are located in the lower half of the bar while the high of the bar is considerably higher than both the open and close. The colour is not important: what matters is that despite strong upward pressure the price could not maintain its ascending trend. A good high test requires the open and close to be in the lower 1/3 part of the bar.
The upward movement is halted and it is likely more sellers will open positions: the price will now drop further.
Train Tracks and Twin Towers
Train Tracks consist of two bars whereat the upward movement is halted. Actually train tracks can be compared to the high test, only it is spread out over a larger area. For a train track it is important that the bars are approximately symmetrical to each other, and that the high and lows of both bars are equal to each other. If you would merge the bars they would form a high-test. After train tracks the price will probably decrease further.
Besides train tracks there are also the Twin Towers. The Twin Tower is a reverse Train Track, they also consist of two bars however they form a low test. After a twin tower the price will likely go up. The names of these bars may be a little confusing, the important part is that you realize and understand that they both form a high test or a low test.
Bullish / Bearish engulfing bar
The Bullish Engulfing bar is a good indication of a reversal. The reversal can be seen across two bars from which the first indicates a descending movement. The second candlestick however, is an ascending bar indicating a trend reversal. The high and low of the successive bar should engulf (open lower, close higher) the previous bar and should be bullish.
Here it is clearly visible that the buyers, who were in the majority at first, were overpowered by the sellers. A Bearish Engulfing bar is the exact opposite of a bulling engulfing bar: the sellers are overpowered by the buyers after which the price declines.
Candlesticks indicating indecisiveness
Inside bars are bars that fit within the high and low of the previous bar. Inside bars often indicate a certain degree of indecision: no one knows in which direction the price is moving. The colour of the bars is of no importance. After an inside bar a strong movement either upward or downwards might be expected.
Sometimes double inside bars appear, in that case there is an even greater degree of indecision. The buyers and sellers were unable to further increase or decrease the price, leaving the price without a clear direction. A strong outbreak could be expected. To the left you see an example of double inside bars.
A doji bar is characterised by an almost symmetrical open and close while the price has both gone up and down within that period. This indicates a high degree of indecisiveness where the struggle between buyers and sellers remains undecided. The colour is of no importance for this bar.
Getting started with candlesticks
Click on the button to switch between candlestick / line to use candlesticks within the Plus500 software.
An alternative way to represent price action are OHLC bars. OHLC bars give similar information as candlesticks; the presentation however is slightly different. For an OHLC bar the part on the left indicates the opening price, the part on the right represents the closing price, and the bottom and top of the bar obviously represent the high and low.