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Reading Candlestick Charts

Originally developed in Japan as a means to evaluate the price of rice, candlestick charts have become an indispensable utility in the forex trader's toolbox. While there are several charts used in forex analysis, candlesticks are among the most popular, so it is important to learn them early on.

Like bar charts, candlesticks use lines to designate the open, high, low and close values of a currency. The feature unique to this chart is the candlestick itself, which is called the real body or body. If the real body is white, it signifies that the closing price was higher than in its opening. If the reverse is true, then the candlestick chart is filled with color, usually black.

There are also lines drawn on the top and bottom of the real body, called the high and low shadows respectively. These are used to measure the trading range. Together, shadows and the real body form different candlestick chart patterns which are useful in forex analysis.

Generally speaking, an elongated hollow body means that prices have moved up since the commencement of the forex trading session. This is also indicative of a buyer dominated session. If the real body is stretched but filled, it means sellers are controlling the market and prices will go down.

Shadows also provide information crucial to forex analysis. If upper shadows are lengthy, the trading was spread throughout, while a candlestick with a short lower shadow denotes limited trading, mostly in the vicinity of the opening and closing times.

If the real body has a lengthy upper shadow and a short lower shadow, it signifies that buyer activity forced prices to go up but the selling brought it back down. If the shadow lengths are reversed, then prices will maintain their high level.

Some candlestick chart patterns appear often and have been given names by forex analysts. One of the most frequent candlestick patterns is the Spinning Top, which consists of a small real body, and long shadows, both in the upper and lower areas.

For forex analysts, this is indicative of a lack of market trend, with both buyers and sellers looking for a signal to move in a particular direction. However one should also look at where Spinning Tops appear. Usually they are indicative of a trend change as well.

The Marubozu candlestick chart is noted for the lack of shadows on either side. While there are different ways to interpret Marubozu patterns, in general if it is hollow, it is symbolic of a bullish market, and if it is colored, is a sign of a bearish market.

The distinguishing characteristic of the Doji pattern is its very small and thin body. Of the things to look at in the Doji the most important is the time in which it appears. If the pattern forms after a bullish session, it could connote a change in momentum.

There are several other candlestick chart patterns used by forex analysts, including the Hammer, Shooting Star and Hanged Man. While these patterns may seem confusing at first, it will only be a matter of time before reading candlestick charts becomes second nature to you.