What is the meaning of candles in Forex?

To understand the meaning of candles in Forex, we must know about the Market price analysis. Market prices are always on the move and the easiest way we can visualize this movement is with a simple line chart. This chart shows the movement of price over time and in any time interval. We will find the market trading in a range of price levels. 

Imagine that we focus only on the price movement for a single hour. At the top of that hour, there is a start price, also known as the open price. At the end of the hour, the price we see is the close price. Within this time interval, we can also identify both the highest and lowest price level the market closed at.

A candle is a visual representation of these four price levels. They can act as a powerful predictive raw material, helping you to know what is likely to happen next. There is more to the meaning of candles in Forex.

You can use color to identify the direction of the market price. The candle turns green when the close price is higher than the open price, but if the price were to fall, the candle will turn red. 

The central area of the candle is the body, while the lines that extend from the body above and below are the wicks or shadows. A combination of these candle forms a candlestick chart. With it, we can see the overall trend of the market price of an asset. 

As you learn more about candlesticks, you discover that individual candlestick may have particular names. 

It might interest you to know that Candlesticks are Japanese in origin. Hundreds of years ago, the Japanese rice traders who used candlestick charting noticed that some types of candlesticks, which could be identified by their real body and weak patterns has some predictive power. 

The old Japanese analysts put a name to every type of candle you could imagine. Meanwhile, this article will not only help you to know the meaning of candles in Forex, but also the five most important types of candlesticks that every trader needs to recognize. 

The Pin Bar 

Know as a Hammer, the pin bar has a tiny real body close to either its high or low and a long shadow that sticks out on one side. It forms whenever the price opens, moves away in one direction and returns quickly to the first level. 

The pin bar signifies an immediate move in the direction opposite to the way the shadow was pointing, especially where the shadow pokes out beyond the highs or lows of preceding candles. 

This is because the long shadow shows a sharp projection of the price from support and resistance, which should continue for a while.

The inside Bar

This is a bar within the range of the candle just before it. This means its high is lower than the previous candle’s high, and its low is higher than the previous candle’s low. The inside bar signifies a period of market indecision. An example is a consolidation, which is the breakout that can be bought or sold for profit. This belief is because the price could not move beyond the confines of the previous candles high and low, so when it makes its move, it should be strong. 

The Outside Bar

The outside is a bar that exceeds both the high and low of the range of the candle just before it. This means its high is higher than the previous candle’s high and its low is lower than the previous candle’s low. Its significance depends on where the bar closes. If the bar closes near its high, it is a bullish trend, it closes near its low, it is a bearish trend. 

If it closes near the middle of its range, then it signifies a combination of increasing volatility and indecision. Traders who spot this will probably stay out of the market.  

The engulfing bar

This is a candle whose real body engulfs i.e swallows up and reverses the real body of the candle just before it. This means that a bullish engulfing bar may only form after a bearish bar, that is a candle that closes lower than it opens and that a bearish engulfing bar may only form after a bullish bar, that is a candle that closes higher than it opens. 

A bullish engulfing bar’s close must not only be higher than its open but also higher than the previous candle’s open. A bearish engulfing bar’s close must not only be lower than its own open but also lower than the previous candle’s open. 

As the name suggests, bullish engulfing bars shows a bullish trend and bearish engulfing bar shows a bearish trend. 

The Doji

This is a candle whose real body is non-existent or tiny. It’s open and close point are close to together, sometimes at the same price. A pure Doji is one where the upper and lower wicks are the same size. When one wick is much longer, the candle becomes more of a pin bar. Such candles are sometimes called a dragonfly or gravestone Doji. 

A Doji signifies indecision as it shows that the price went up and down, but goes nowhere. This signifies a quiet directionless market or that a move up or down may have run out steam and it’s getting ready to reverse. 

Consecutive Doji at the end of a trend can signify a trend reversal, providing a potential low-risk high reward entry point. 

Now that you know the meaning of candles in Forex and can identify the five important types of candles, you can begin your analysis.