When these types of candlesticks appear on a chart, they can signal potential market reversals.

Here are the four basic single Japanese candlestick patterns:

Hammer and Hanging Man

The Hammer and Hanging Man look exactly alike but have totally different meanings depending on past price action.

Both have cute little bodies (black or white), long lower shadows, and short or absent upper shadows.

Single Candlestick Pattern: Hammer and Hanging Man

Hammer at the end of a downtrend and Hanging Man at the end of an uptrend

The Hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.

 

When the price is falling, hammers signal that the bottom is near and the price will start rising again.

 

The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.

Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger.

A typical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the Hammer.

Recognition Criteria for a Hammer:

  • The long shadow is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the upper end of the trading range.
  • The color of the real body is not important.

The Hanging Man is a bearish reversal pattern that can also mark a top or strong resistance level.

When the price is rising, the formation of a Hanging Man indicates that sellers are beginning to outnumber buyers.

 

The long lower shadow shows that sellers pushed prices lower during the session.

 

Buyers were able to push the price back up some but only near the open.

This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price.

Recognition Criteria for a Hanging Man:

  • A long lower shadow which is about two or three times of the real body.
  • Little or no upper shadow.
  • The real body is at the upper end of the trading range.
  • The color of the body is not important, though a black body is more bearish than a white body.

Inverted Hammer and Shooting Star

The Inverted Hammer and Shooting Star also look identical. The only difference between them is whether you’re in a downtrend or uptrend.

An Inverted Hammer is a bullish reversal candlestick.

A Shooting Star is a bearish reversal candlestick.

Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and small or absent lower shadows.

Single Candlestick Pattern: Inverted Hammer and Shooting Star

Single Candlestick Pattern: Inverted Hammer at the end of a downtrend and Shooting Star at the end of an uptrend

Inverted Hammer

The Inverted Hammer occurs when the price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.

However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted to push the price back down.

Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open.

 

Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold.

And if there are no more sellers, who are left? Buyers.

Shooting Star

The Shooting Star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when the price has been rising.

Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom.

This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left because they’ve all been overpowered.

الگو ی انبرک

Spinning Tops

Japanese candlesticks with a long upper shadow, long lower shadow, and small real bodies are called spinning tops. The color of the real body is not very important.

The Spinning Top pattern indicates the indecision between the buyers and sellers.

Forex Candlestick Pattern: Spinning Tops

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.

 

Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.

 

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

  • If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
  • If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Marubozu

Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!”

Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies.

The word “marubozu ” translates to “bald head” or “shaved head” in Japanese.

So a Marubozu candlestick is a bald candle or shaved candle means it has no shadow or wick.

Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.

Check out the two types of Marubozus in the picture below.

Forex Candlestick Pattern: Marubozu

White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.

 

This means that the candle opened at its lowest price and closed at its highest price.

 

This is a very bullish candle as it shows that buyers were in control of the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.

This means that the candle opened at its highest price and closed at its lowest price.

This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.

Depending on where a marubozu is located and what color it is, here are few guidelines:

White Marubozu

  • If a White Marubozu forms at the end of an uptrend, a continuation is likely.
  • If a White Marubozu forms at the end of a downtrend, a reversal is likely.

Black Marubozu

  • If a Black Marubozu forms at the end of a downtrend, a continuation is likely.
  • If a Black Marubozu forms at the end of an uptrend, a reversal is likely.

Doji

Doji candlesticks have the same open and close price or at least their bodies are extremely short. A Doji should have a very small body that appears as a thin line.

Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers.

 

Prices move above and below the open price during the session, but close at or very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross, or plus sign.

The word “Doji” refers to both the singular and plural form.

Forex Candlestick Pattern: Doji

When a Doji forms on your chart, pay special attention to the preceding candlesticks.

If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.

In order for the price to continue rising, more buyers are needed but there aren’t any more! Sellers are licking their chops and are looking to come in and drive the price back down.

Forex Candlestick Pattern: Long White Candle and Doji

If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weakening.

In order for the price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

Forex Candlestick Pattern: Long Black Candle and DojiWhile the decline is sputtering due to a lack of new sellers, further buying strength is required to confirm any reversal.

Look for a white candlestick to close above the long black candlestick’s open.

 

In the next following lessons, we will take a look at specific Japanese candlestick patterns and what they are telling us.

Hopefully, by the end of this lesson on Japanese candlesticks, you will know how to recognize different types of candlestick patterns and make sound trading decisions based on them.

الگو ی انبرک

Let’s break down the different parts of a Japanese candlestick.

Sexy Bodies

Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!

Japanese Candlestick Anatomy

Long bodies indicate strong buying or selling.

The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.

 

Short bodies imply very little buying or selling activity. In trading lingo, bulls mean buyers and bears mean sellers.

 

Long vs. Short Japanese CandlesticksLong white Japanese candlesticks show strong buying pressure.

The longer the white candlestick, the further the close is above the open.

This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls were kicking the bears’ butts big time!

 

Long black (filled) candlesticks show strong selling pressure.

 

The longer the black Japanese candlestick, the further the close is below the open.

This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.

Mysterious Shadows

No, we’re not talking about wearing dark smokey eye shadow.

The upper and lower shadows on Japanese candlesticks provide important clues about the trading session.

Upper shadows signify the session high.

Lower shadows signify the session low.

Candlesticks with long shadows show that trading action occurred well past the open and close.

Japanese candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

Japanese candlesticks with long shadows

If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher.

 

But for one reason or another, sellers came in and drove prices back DOWN to end the session back near its open price.

If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower.

الگو ی انبرک

Japanese Candlestick Trading

Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That’s right, rice.

Traders be hustin’ back then also. To rock ice, you traded rice. 💎

 

A Westerner by the name of Steve Nison “discovered” this secret technique called “Japanese candlesticks,” learning it from a fellow Japanese broker.

 

Steve Nison

Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it.

 

Slowly, this secret technique grew in popularity in the ’90s.

 

To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret.

Steve Nison is Mr. Candlestick.

What are Japanese candlesticks?

The best way to explain is by using a picture:

Japanese Candlestick Anatomy

Japanese candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes ….whatever you want!

 

They are used to describe the price action during the given time frame.

Japanese candlesticks are formed using the open, high, low, and close of the chosen time period.

  • If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
  • If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
  • The hollow or filled section of the candlestick is called the “real body” or body.
  • The thin lines poking above and below the body display the high/low range and are called shadows.
  • The top of the upper shadow is the “high“.
  • The bottom of the lower shadow is the “low“.

Now that you know the basics of how to trade support and resistance, it’s time to apply these basic but extremely useful technical tools in your trading.

Because here at BabyPips.com we want to make things easy to understand, we have divided how to trade support and resistance levels into two simple ideas: the Bounce and the Break.

The Bounce

Price Bounce

As the name suggests, one method of trading support and resistance levels is right after the bounce.

Many retail forex traders make the error of setting their orders directly on support and resistance levels and then just waiting for their trade to materialize.

Sure, this may work at times but this kind of trading method assumes that a support or resistance level will hold without price actually getting there yet.

 

You might be thinking, “Why don’t I just set an entry order right on the line? That way, I am assured the best possible price.”

 

When playing the bounce, we want to tilt the odds in our favor and find some sort of confirmation that the support or resistance will hold.

For example, instead of simply buying right off the bat, we want to wait for it to bounce off support before entering.

Bounce off Support Level

 

If you’ve been looking to go short, you want to wait for it to bounce off resistance before entering.

Bounce of trend line | How to trade support and resistance in forex

By doing this, you avoid those moments where price moves fast and break through support and resistance levels. From experience, catching a falling knife when trading can get really bloody!

The Break

In a perfect world, support and resistance levels would hold forever, politicians would never lie, McDonald’s would be healthy, and we’d all have jetpacks.

 

In a perfect forex trading world, we could just jump in and out whenever price hits those major support and resistance levels and earn loads of money.

 

The fact of the matter is that these levels break… often.

So, it’s not enough to just play bounces. You should also know what to do whenever support and resistance levels give way!

There are two ways to play breaks in trading: the aggressive way or the conservative way.

The Aggressive Way

The simplest way to play breakouts is to buy or sell whenever price passes convincingly through a support or resistance zone.

The keyword here is convincing because we only want to enter when the price passes through a significant support or resistance level with ease.

We want the support or resistance area to act as if it just received a Chuck Norris karate chop: We want it to wilt over in pain as price breaks right through it.

Aggressive way of trading a break of support or resistance

The Conservative Way

Conservative Trade

Imagine this hypothetical situation: you decided to go long EUR/USD hoping it would rise after bouncing from a support level.

 

Soon after, support breaks and you are now holding on to a losing position, with your account balance slowly falling.

 

Do you…

A. Accept defeat, get the heck out, and liquidate your position?

or

B. Hold on to your trade and hope the price rises up again?

If your choice is the second one, then you will easily understand this type of trading method.

Remember, whenever you close out a position, you take the opposite side of the trade.

Closing your EUR/USD long trade at or near breakeven means you will have to short the EUR/USD by the same amount.

Now, if enough selling and liquidation of losing positions happen at the broken support level, the price will reverse and start falling again.

This phenomenon is the main reason why a broken support level becomes a resistance level whenever it breaks.

As you would’ve guessed, taking advantage of this phenomenon is all about being patient.

Instead of entering right on the break, wait for the price to make a “pullback” to the broken support or resistance level, and enter after the price bounces.

These channels aren’t television channels, they’re trend channels, sometimes also called price channels.

 

Still, this doesn’t mean that you should walk away like it’s a commercial break. Channels can be just as exciting to watch as Tiger King or Keeping Up with the Kardashians!

 

Trend channels are just another tool in technical analysis that can be used to determine good places to buy or sell.

The upper trend line marks resistance and the lower trend line marks support. So both the tops and bottoms of channels represent potential areas of support or resistance.

Trend channels with a negative slope (down) are considered bearish and those with a positive slope (up) are considered bullish.

Trend Channels

To create an up (ascending) channel, simply draw a parallel line at the same angle as an uptrend line and then move that line to a position where it touches the most recent peak. This should be done at the same time you create the trend line.

 

To create a down (descending) channel, simply draw a parallel line at the same angle as the downtrend line and then move that line to a position where it touches the most recent valley. This should be done at the same time you create the trend line.

 

When prices hit the LOWER trend line, this may be used as a buying area.

When prices hit the UPPER trend line, this may be used as a selling area.

Types of Trend Channels

There are three types of channels:

  1. Ascending channel (higher highs and higher lows)
  2. Descending channel (lower highs and lower lows)
  3. Horizontal channel (ranging)

Some traders prefer to use the terms “rising channel” for an ascending channel and “falling channel” for a descending channel. Most likely, Millenials.

Important things to remember about drawing trend channels:

When constructing a trend channel, both trend lines must be parallel to each other.

 

Generally, the bottom of the trend channel is considered a “buy zone” while the top of the trend channel is considered a “sell zone”.

 

Like in drawing trend lines, DO NOT EVER force the price to the channels that you draw!

A channel boundary that is sloping at one angle while the corresponding channel boundary is sloping at a different angle is not correct and could lead to bad trades.

When this happens, this chart pattern is no longer a trend channel but a triangle. (which you will learn about more later).

That said, trend channels don’t have to be completely parallel. Nor does 100% of price action have to fit within the channel.

A common mistake many traders make is that they only look for textbook price patterns.

They miss important information about price action and close their eyes to other important clues.

Notice the channel drawings below…

Trend Channels

They are probably one of the most underutilized ones as well.

If drawn correctly, they can be as accurate as any other method.

 

Unfortunately, most forex traders don’t draw them correctly or try to make the line fit the market instead of the other way around.

 

Trend Lines Example

In their most basic form, an uptrend line is drawn along the bottom of easily identifiable support areas (valleys).

This is known as an ascending trend line.

In a downtrend, the trend line is drawn along the top of easily identifiable resistance areas (peaks).

This is known as a descending trend line.

How do you draw trend lines?

To draw forex trend lines properly, all you have to do is locate two major tops or bottoms and connect them.

What’s next?

Nothing.

Uhh, is that it?

Yep, it’s that simple.

Here are trend lines in action! Look at those waves!

Forex trend line examples: uptrends, downtrends, and sideways trends

Types of Trends

There are three types of trends:

  1. Uptrend (higher lows)
  2. Downtrend (lower highs)
  3. Sideways trend (ranging)

Here are some important things to remember using trend lines in forex trading:

 

It takes at least two tops or bottoms to draw a valid trend line but it takes THREE to confirm a trend line.

 

The STEEPER the trend line you draw, the less reliable it is going to be and the more likely it will break.

Like horizontal support and resistance levels, trend lines become stronger the more times they are tested.

Strangely enough, everyone seems to have their own idea of how you should measure support and resistance.

Let’s take a look at the basics first.

Forex Support and Resistance Explained

Look at the diagram above. As you can see, this zigzag pattern is making its way up (a “bull market”).

 

When the price moves up and then pulls back, the highest point reached before it pulled back is now resistance.

 

Resistance levels indicate where there will be a surplus of sellers.

When the price continues up again, the lowest point reached before it started back is now support.

Support levels indicate where there will be a surplus of buyers.

In this way, resistance and support are continually formed as the price moves up and down over time.

The reverse is true during a downtrend.

In the most basic way, this is how support and resistance are normally traded:

Trade the “Bounce”

  • Buy when the price falls towards support.
  • Sell when the price rises towards resistance.

Trade the “Break”

  • Buy when the price breaks up through resistance.
  • Sell when the price breaks down through support.

A “bounce” and “break”? Say what? If you’re a little bit confused, no need to worry as we will cover these concepts in more detail later.

Plotting Support and Resistance Levels

One thing to remember is that support and resistance levels are not exact numbers.

 

Often times you will see a support or resistance level that appears broken, but soon after find out that the market was just testing it.

 

With candlestick charts, these “tests” of support and resistance are usually represented by the candlestick shadows.

Forex Support and Resistance | Support holding at 1.4700

Notice how the shadows of the candles tested the 1.4700 support level.

At those times it seemed like the price was “breaking” support.

In hindsight, we can see that the price was merely testing that level.

So how do we truly know if support and resistance were broken?

There is no definite answer to this question. Some argue that a support or resistance level is broken if the price can actually close past that level. However, you will find that this is not always the case.

Let’s take our same example from above and see what happened when the price actually closed past the 1.4700 support level.

Forex Support and Resistance | Support holds at 1.4700

In this case, the price had closed below the 1.4700 support level but ended up rising back up above it.

If you had believed that this was a real breakout and sold this pair, you would’ve been seriously hurtin’!

Looking at the chart now, you can visually see and come to the conclusion that the support was not actually broken; it is still very much intact and now even stronger.

Support was “breached” but only temporarily.

To help you filter out these false breakouts, you should think of support and resistance more as “zones” rather than concrete numbers.

One way to help you find these zones is to plot support and resistance on a line chart rather than a candlestick chart.

 

The reason is that line charts only show you the closing price while candlesticks add the extreme highs and lows to the picture.

These highs and lows can be misleading because oftentimes they are just the “knee-jerk” reactions of the market.

It’s like when someone is doing something really strange, but when asked about it, he or she simply replies, “Sorry, it’s just a reflex.”

When plotting support and resistance, you don’t want the reflexes of the market. You only want to plot its intentional movements.

Looking at the line chart, you want to plot your support and resistance lines around areas where you can see the price forming several peaks or valleys.

Line chart showing forex support and resistance zones

Other interesting tidbits about support and resistance:

  • When the price passes through resistance, that resistance could potentially become support.
  • The more often price tests a level of resistance or support without breaking it, the stronger the area of resistance or support is.
  • When a support or resistance level breaks, the strength of the follow-through move depends on how strongly the broken support or resistance had been holding.

Examples of forex support and resistance

With a little practice, you’ll be able to spot potential forex support and resistance areas easily.

انواع همبستگی جفت ارزها

n order to study how the price of a currency pair moves, you need some sort of way to look at its historical and current price behavior.

chart, or more specifically, a price chart, happens to be the first tool that every trader using technical analysis needs to learn.

chart is simply a visual representation of a currency pair’s price over a set period of time.

It visualizes the trading activity that takes place during a single trading period (whether it’s 10 minutes, 4 hours, one day, or one week).

Any financial asset with price data over a period of time can be used to form a chart for analysis.

Price changes are a series of mostly random events, so our job as traders is to manage risk and assess probability and that’s where charting can help.

Charts are user-friendly since it’s pretty easy to understand how price movements are presented over time since it’s sooooo visual.

With a chart, it is easy to identify and analyze a currency pair’s movementspatterns, and tendencies.

On the chart, the y-axis (vertical axis) represents the price scale and the x-axis (horizontal axis) represents the time scale.

Prices are plotted from left to right across the x-axis.

The most recent price is plotted furthest to the right.

Back in the day, charts were drawn by HAND!

Fortunately for us, Bill Gates and Steve Jobs were born and made computers accessible to the masses, so charts are now magically drawn by software.

What does a price chart represent?

A price chart depicts changes in supply and demand.

A chart aggregates every buy and sell transaction of that financial instrument (in our case, currency pairs) at any given moment.

A chart incorporates all known news, as well as traders’ current expectations of future news.

When the future arrives and the reality is different from these expectations, prices shift again.

The “future news’ is now “known news”, and with this new information, traders adjust their expectations on future news. And the cycle repeats.

Charts blend all activity from the millions of market participants, whether they’re humans or algos.

Whether the transaction occurred by the actions of an exporter, a currency intervention from a central bank, trades made by an AI from a hedge fund, or discretionary trades from retail traders, a chart blends ALL this information together in a visual format technical traders can study and analyze.

Types of Price Charts

Let’s take a look at the three most popular types of price charts:

  1. Line chart
  2. Bar chart
  3. Candlestick chart

Now, we’ll explain each of the forex charts, and let you know what you should know about each of them.

 

Line Chart

A simple line chart draws a line from one closing price to the next closing price.

When strung together with a line, we can see the general price movement of a currency pair over a period of time.

Line Chart Example

It’s simple to follow, but the line chart may not provide the trader with much detail about price behavior within the period.

All you know is that price closed at X at the end of the period. You have no clue what else happened.

But it does help the trader see trends more easily and visually compare the closing price from one period to the next.

This type of chart is usually used to get a “big picture” view of price movements.

The line chart also shows trends the best, which is simply the slope of the line.

Some traders consider the closing level to be more important than the open, high, or low. By paying attention to only the close, price fluctuations within a trading session are ignored.

Here is an example of a line chart for EUR/USD:

Line Chart - Type of Forex Chart

Bar Chart

Unfortunately, this is not a chart at a bar.

A bar chart is a little more complex. It shows the opening and closing prices, as well as the highs and lows.

Bar charts help a trader see the price range of each period.

OLHC Price Bar - Forex Chart

Bars may increase or decrease in size from one bar to the next, or over a range of bars.

 

The bottom of the vertical bar indicates the lowest traded price for that time period, while the top of the bar indicates the highest price paid.

 

The vertical bar itself indicates the currency pair’s trading range as a whole.

As the price fluctuations become increasingly volatile, the bars become larger. As the price fluctuations become quieter, the bars become smaller.

The fluctuation in bar size is because of the way each bar is constructed. The vertical height of the bar reflects the range between the high and the low price of the bar period.

The price bar also records the period’s opening and closing prices with attached horizontal lines.

The horizontal hash on the left side of the bar is the opening price, and the horizontal hash on the right side is the closing price.

Here is an example of a bar chart for EUR/USD:

OLHC Chart - Type of Forex Chart

Take note, throughout our lessons, you will see the word “bar” in reference to a single piece of data on a chart.

A bar is simply one segment of time, whether it is one day, one week, or one hour.

When you see the word ‘bar’ going forward, be sure to understand what time frame it is referencing.

Bar charts are also called “OHLC” charts because they indicate the Open, the High, the Low, and the Close for that particular currency pair.

A big difference between a line chart and an OHLC (open, high, low, and close) chart is that the OHLC chart can show volatility.

Here’s an example of a price bar again:

OLHC Price Bar - Forex ChartOpen: The little horizontal line on the left is the opening price

High: The top of the vertical line defines the highest price of the time period

Low: The bottom of the vertical line defines the lowest price of the time period

Close: The little horizontal line on the right is the closing price

Candlesticks Charts

The candlestick chart is a variation of the bar chart.

Candlestick charts show the same price information as a bar chart but in a prettier, graphic format.

Many traders like this chart because not only is it prettier, but it’s easier to read.

Candlestick

Candlestick bars still indicate the high-to-low range with a vertical line.

However, in candlestick charting, the larger block (or body) in the middle indicates the range between the opening and closing prices.

Candlesticks help visualize bullish or bearish sentiment by displaying “bodies” using different colors.

Traditionally, if the block in the middle is filled or colored in, then the currency pair closed LOWER than it opened.

In the following example, the ‘filled color’ is black. For our ‘filled’ blocks, the top of the block is the opening price, and the bottom of the block is the closing price.

If the closing price is higher than the opening price, then the block in the middle will be “white” or hollow or unfilled.

Candlestick Price Bar - Forex Chart

Here at BabyPips.com, we don’t like to use traditional black and white candlesticks. They just look so unappealing.

And since we spend so much time looking at charts, we feel it’s easier to look at a chart that’s colored.

Color television is much better than a black and white television, so why not splash some color on those candlestick charts?

 

We simply substituted green instead of white, and red instead of black. This means that if the price closed higher than it opened, the candlestick would be green.

 

If the price closed lower than it opened, the candlestick would be red.

In our later lessons, you will see how using green and red candles will allow you to “see” things on the charts much faster, such as uptrend/downtrends and possible reversal points.

For now, just remember that on forex charts, we use red and green candlesticks instead of black and white and we will be using these colors from now on.

Check out these candlesticks…BabyPips.com style! Awww yeeaaah! You know you like that!

Colored Candlestick Price Bar - Forex Chart

Here is an example of a candlestick chart for EUR/USD. Isn’t it pretty?

Candlestick Chart - Type of Forex Chart

The purpose of candlestick charting is strictly to serve as a visual aid since the exact same information appears on an OHLC bar chart.

The advantages of candlestick charting are:

  • Candlesticks are easy to interpret and are a good place for beginners to start figuring out chart analysis.
  • Candlesticks are easy to use! Your eyes adapt almost immediately to the information in the bar notation. Plus, research shows that visuals help with studying, so it might help with trading as well!
  • Candlesticks and candlestick patterns have cool names such as the “shooting star,” which helps you to remember what the pattern means.
  • Candlesticks are good at identifying market turning points – trend reversals from an uptrend to a downtrend or a downtrend to an uptrend. You will learn more about this later.

There are many different types of charts available, and one is not necessarily better than the other.

The data may be the same to create the chart but the way that data is presented and interpreted will vary.

Each chart will have its own advantages and disadvantages. You can choose any type or use multiple types of charts for technical analysis. It all depends on your personal preference.

Now that you know why candlesticks are so cool, it’s time to let you know that we will be using candlestick forex charts for most, if not all of forex chart examples on this site.

The theory is that a person can look at historical price movements and determine the current trading conditions and potential price movement.

Someone who uses technical analysis is called a technical analyst. Traders who use technical analysis are known as technical traders.

 

The main evidence for using technical analysis is that, theoretically, all current market information is reflected in the price.

 

Technical traders generally ascribe to the belief that “It’s all in the charts!

This simply means that all known fundamental information is priced into the current market price.

If price reflects all the information that is out there, then price action is all one would really need to make a trade.

Technical analysis looks at the rhythm, flow, and trends in price action.

Now, have you ever heard the old adage, “History tends to repeat itself“?

Well, that’s basically what technical analysis is all about!

If a certain price held as a major support or resistance level in the past, forex traders will keep an eye out for it and base their trades around that historical price level.

Technical analysts look for similar patterns that have formed in the past and will form trade ideas believing that price could possibly act the same way that it did before.

Technical analysis is NOT so much about prediction as it is about PROBABILITY. 

Technical analysis is the study of historical price action in order to identify patterns and determine probabilities of the future direction of price.

Technical analysis: Price unable to break support and resistance levels

So how the heck does one “study historical price action“?

In the world of trading, when someone says “technical analysis”, the first thing that comes to mind is a chart.

 

Technical analysts use charts because they are the easiest way to visualize historical data!

 

Technical analysts live, eat, and breathe charts which is why they are often called chartists.

You can look at past data to help you spot trends and patterns which could help you find some great trading opportunities.

What’s more is that with all the traders who rely on technical analysis out there, these price patterns and indicator signals tend to become self-fulfilling.

As more and more forex traders look for certain price levels and chart patterns, the more likely it that these patterns will manifest themselves in the markets.

You should know though that technical analysis is VERY subjective.

Just because Michelangelo, Donatello, Leonardo, and Raphael are looking at the exact same chart setup or indicators doesn’t mean that they will come up with the same idea of where price may be headed.

 

The important thing is that you understand the concepts under technical analysis so you won’t get nosebleeds whenever somebody starts talking about Fibonacci, Bollinger Bands, or pivot points.

Now we know you’re thinking to yourself, “Geez, these guys are smart. They use crazy words like ‘Fibonacci’ and ‘Bollinger’. I can never learn this stuff!”