In any credible Forex Trading course, the Forex education syllabus should start with a focus on the basic elements of a candlestick. Candlesticks are widely used across the world as clues into what the Forex market is doing and make up trading formations such as engulfing pattern and dark could covers. In this Forex education article, we are going to simply concentrate on the basics rather than how these candles are used. Further information on how to use the candles in your trading strategies will be supplied in forthcoming articles.
In every trading session, currency pairs, company stocks, commodity stocks and other stocks start with an open. The open price is effected by various factors which we will not cover in this article but can be viewed via a candlestick. At the end of the session the market also has close which is mirrored in the candlestick. Throughout the session the market price will go up and down, so in-between the open and the close, the market will also have a low and high of the day. Please copy and paste this URL into another tab in your browser to enable an understanding of the below explanation of the candlestick (http://en.wikipedia.org/wiki/File:Candle_definition_en.svg).
The rectangular section of the candle is called the ‘Real Body’. In simple terms, the real body represents the start and the end of the session i.e. the session’s open and close. If the body of the candle is black (or red in many cases), the market has closed below the open of that session. In reverse, if the candle is white (or green in many cases), the market has closed higher than the open in the trading session. So, if you are looking at a black candle the open is at the top and if you are looking at a white candle the open is at the bottom. The height of the real bodies will vary throughout the chart as different volumes of trades are executed.
Most of the time, real bodies will have straight lines poking out of the top and bottom. These lines are called ‘Shadows’. Logically, they are defined as ‘upper shadows’ and ‘lower shadows’ depending on where they are. Shadows basically represent the highs and the lows of the session i.e. the highest and the lowest price that the stock has reached within that session. Similarly to real bodies, shadows will also vary in height as the number of trades will differ throughout various trading sessions.
The height of the real body will give us an indication of the strength the bulls (buyers) and the bears (sellers) possess. If the candle is white it is clear that the bulls are in control. If the candle is black, the opposite is true i.e. the bears are selling and are in control. Similarly, the length and position of the shadows will give us an indication of buying/selling pressure that has been applied throughout the session. Throughout your Forex education you will see many variances of such candles/shadows. Some will have no real bodies and some will have no shadows. Whatever the format of the candle however, it will provide us with a much needed insight into the sate of the market.
