How to Trade Candlesticks on Forex
Foreign currency exchange (Forex) is a demanding financial market that requires extensive experience to trade consistently well. Forex traders speculate on the fluctuations of currency exchange rates. Candlestick charts can assist some Forex traders who develop experience watching prices unfold in this way. A candlestick chart is just one of many charting techniques available in the Forex market to measure price action. Each "candle" visually displays the opening and closing prices of the time period, and also the highest and lowest prices. By comparing adjacent candles, Forex traders make predictions about future price movement.
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Instructions
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Engulfing Candles
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Identify "engulfing" candles. Such a candle is the opposite color of the candle that immediately precedes it. Additionally, the length of the engulfing candle is greater than the length of the previous candle, with the high and low prices extending beyond, or "engulfing," the high and low prices of the previous candle.
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Buy into the Forex market if the engulfing candle is green, with its closing price higher than its opening price. This suggests the market is strongly biased toward further upward movement, since the price action took out the prior candle's trading range while also closing near its highest price.
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Sell into the Forex market if the engulfing candle is red. This is opposite of a green engulfing candle and suggests a strong negative or "bearish" bias. Engulfing candles often appear at major trend reversals, or after a pause in an existing trend.
Pin Bars
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Identify candles where the open and closing prices are near each other, but a long candle wick or shadow extends in one direction from these prices. Such candles resemble "push pins" or "tacks," hence their name. A pin bar visually demonstrates considerable volatility even though price ended nearly unchanged from their start.
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Buy into a Forex market if the candle's shadow extends below the body. Such a pin bar demonstrates that while prices traded down considerably, the market rejected the trading range and was unable to remain at those prices. Such price rejection is likely to continue, leading away from that area.
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Sell into a Forex market if the pin bar's shadow extends above the candle's body. This may occur near the end of a major up trend. The pin bar shows that the market rejected rising prices and closed close to the low of the day. This may signal a continuation to lower Forex prices.
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Tips & Warnings
The body of a candle is the main visible portion between the opening and closing prices. The wick or shadow is the vertical line of the candle not included in the candle's body. Pin bars will always have long shadows, while engulfing candles are characterized by particularly long bodies. A green candle may appear as white in some charting systems, while a red candle appears as black.
There are no foolproof strategies in Forex trading. The risks remain high at all times. Never place a lot of trading capital into a new candlestick strategy until you acquire experience with it.
