Candles

Candles are a visual representation of the price changes over a period of time.  Charts are filled with candles and the candles give you indications of the price direction.  If we look at some sample candles it may help you understand how to read them.  Candles can be of several different styles but they all should convey the same information.   Lets take a look at some examples:

The price is not important and the pair is irrelivant.  All we care about is watching the price change over time.  Look at the chart below.  It is a standard candle chart showing red and green candles.  Red shows a time period when the close price was lower than the open price and thus the price went down during that period.   Green shows a period when the close price was higher than the open price.

How are the candles made? First you have to understand the following terms.   The price OPENS has a HIGH and a LOW and then the price CLOSES.   Lets say over the course of the hour, day, week,....   The price does the following:

For traders the information above is important becuase it shows them what direction the price appears to be headed.  If the price closes above the open price then it can be assumed the price is going up.   All the other prices during the time period that are not marked are body prices.   If the prices are collapsed down they will form a candle

It is easy to see the green box is formed by the open and the closed price.   The tails are formed by the Highest price that period and the Lowest price that period.  All of this information is formed into a candle that fill the charts of a Forex trader.   It is all good information that at the glance of your eye tells you information about what that price did during that time period.  Did the price go up or go down.  Did the price have a high spike up and then come back down?  Could that be an indication that the price will continue up ?

A candle with a small body indicates the price moved around but ended up very close to the open price.   The price went sideways.  Is it turning direction or just "taking a breather" ?

The candles to the left are all green and it would appear the price is going up.  The red arrow is pointing to where the first candle closed and the second candle opened.  Much of the time these two price should be the same but in a lower volume market they may not.  You may get a price jump.

The blue arrow pointing to the high tails.  Notice the high tails are much longer than the low tails.  Another indication that the price has strength to move up. 

Finally notice in this trend how the next candle's body is around the previous candles high.  Prices go in trends but don't continue forever.  What goes up must come down.

Review these prices to the right. Obviously there is one out of place candle. When you see a candle body that is much larger than the normal candle size you should take note.   It is highly likely the price will come back to the middle of that big candle at some point in the near future.   A big jump goes over many traders who wanted to trade at that price..

Finally we can watch the candle colors and quickly know strength of the current direction. Green, Green, Green and you can bet the price is going up.  Red, Red, Red and we are headed down.  Green, Red, Green, Red ?  The price is going sideways and it is best to sit on the sidelines until a trend is established.


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