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How to Read Candlesticks in Forex Trading
Do you know how to read candlesticks in forex trading?
If not, don’t worry.
Reading candlestick charts is straightforward.
By learning some common patterns (discussed below), you’ll be able to start making profitable trades in no time!
Let’s start by explaining how to read candlesticks in forex trading…
How to read candlesticks in forex trading
If you didn’t know, forex candlesticks provide a wealth of helpful information about currency price movements. That’s why learning how to read candlesticks in forex trading will allow you to enter trades with confidence.
Candlesticks are really simple…
They show four pieces of information: the open, the close, the high price, and the low price.
Green candlesticks show the close price is higher than the opening price.
Red candlesticks show the close price is below the opening price.
Check out the image below:
The open price marks the first traded price of a new candle.
The high price marks the peak of the candlestick.
The low price marks the bottom of the candlestick.
The close price marks the last traded price of a new candle.
It sounds pretty straightforward, right?
Yes and no.
Look at the above picture again…
The open and close prices always mark the body of the candlestick. That’s why the body part of the candle stick is thicker, representing the section between the opening price and the closing price.
That said, look at those two vertical lines at the top and bottom of the candlestick body. Those two lines are called ‘wicks’, which some forex traders call ‘shadows’.
But some candlesticks might have no wicks or just one wick. That might happen when there’s no trades within the candle timeframe, or the open price is the low of the candle, or the close is the high of the candle.
The forex chart will look different depending on the time frame you’re analysing…
When trading the one-hour chart, each candle represents one hour.
Looking at the daily chart, each candle represents one day.
And when trading the weekly chart, each candle will represent one week.
You get the point…
Digging deeper: How to read candlesticks in forex trading?
But why do forex traders use candlestick charts?
The answer’s simple!
They are more visual.
Candlestick charts allow forex traders to read the market quickly.
When you look at the colour and length of the candlestick, you can gauge whether the market is strengthening or weakening.
That puts you in a prime position to trade forex…
Candlestick charts show more information than line charts. Line charts typically only show the closing price for each time interval on the graph.
How to trade forex using candlestick charts
If you want to start trading candlesticks in forex, you’ll need to learn about pattern recognition. Being able to recognise patterns will allow you to read the market, allowing you to enter trades with confidence.
Let’s look at some of the best candlestick patterns…
How to read candlesticks in forex trading: Common patterns
The hanging man
The hanging man pattern is a bearish indicator and usually appears at the peak of an uptrend.
A bearish indicator suggests an increase in selling pressure…
If you want to make money trading this pattern in forex, you should trade the ‘short side’. This means you’re betting the price will go lower.
Looking at the image below, the price started to fall after the formation of the hanging man. So, if you opened a short position, you would have made a nice profit on this trade.
The hanging man has a long lower wick, a short upper wick, a small body, and a close that is lower than the open.
The shooting star
The shooting star candle formation is another bearish indicator.
Forex traders often use the shooting star pattern as an indicator to open a short position.
Looking at the image below, the price decreased after the shooting star indicator. So, if you opened a short position, you would have made a nice profit on this trade.
The shooting star consists of a wick that’s – at least – half of the candle’s body length. The long wick shows the selling volume outweighs the buying volume. This indicates the price is likely to fall in the future.
The hammer candle pattern is bullish.
This means you should go long (i.e. buy)…
Looking at the image below, if you went long after seeing the hammer formation, you would have made a nice profit.
The hammer’s characterised by its long wick and small body.
Learning candlestick patterns is just the start…
The next step is to learn how to make profits on a consistent basis. The key is to incorporate a positive risk-reward ratio into your trading strategy.
Risk-reward ratio and win rate
Most people don’t know that you can lose more than 50% of the time and still become consistently profitable in forex trading…
It sounds surprising.
But you can!
In fact, many successful traders have a win rate of under 50%. That’s because they incorporate a positive risk-reward ratio into their trading strategy.
That’s the key to being a successful forex trader.
Let’s say that you want to make a $100 trade. Your risk is $100. If you set a ‘take profit’ of $300 from your trade, your risk-reward ratio will be 1:3. With a risk-reward ratio of 1:3, you only need to win 25% of your trades to break even…anything more is profit.
It doesn’t sound real, but we’ll explain…
You first need to calculate the breakeven rate, which is simple:
Breakeven rate = ((risk/reward) (+1)) x 100
Let’s use our above example:
- Risk: 1
- Reward: 3
Breakeven rate = ((1/3) (+1)) x 100 = 25%
See the following table for more examples:
What do you think that table shows you?
You can lose more forex trades than you think…
If you’re aiming for a risk-reward of – at least – 1:2, you’re on the right track. This means you can lose more than 50% of your trades and still make money. Because you’re using a risk-reward ratio of 1:2, it means that every winning trade makes up for two losing trades. As you increase the reward value, the number of trades you need to win to be successful decreases.
Your ‘Start With Forex’ Takeaway: How to read candlesticks in forex trading
We have covered a lot of ground today…
The first step in learning how to read candlesticks in forex trading is to learn some basic patterns.
Pattern recognition is a fundamental skill, which every forex trader should know. Learning how to recognise patterns will allow you to enter trades with confidence in the forex markets.
That said, alongside pattern recognition, having a positive risk-reward ratio is essential to making consistent profits.
There’s no magic number here…
But we recommend starting with a 1:2 risk-reward ratio. That means you can lose over 50% of your trades and still make consistent money. Keep in mind that every forex trader is different, so feel free to experiment until you find something that suits your trading style.
Remember, consistency is key
It’s okay if you don’t win every trade!
By the way, if you want to learn how to trade forex like a professional, start by reading our FREE forex course. Remember, there’s a million ways to make a million bucks in the forex markets. So if you want a head start in forex trading, alongside our free course, check out our approved products page for forex trading signals and systems to help kick start your trading.
To your trading success,
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