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The chart is called "Candlestick Chart" because it shapes like a candle. The chart is taken from Netdania (www.netdania.com), provider of real-time chart for forex. In addition to Netdania, there are many other chart providers that can be freely accessed. Each provider has a chart and it looks different from one another. That’s not really a problem because if we can use one chart platform, then to start using another platform we should only require a few adjustments.
The chart is created in the 17th century by the Japanese which was initially used to monitor the price movements on commodity products. Steven Nison is known as the first one to popularize this chart model. It is a very representative chart, because it consists of the high, low, open and closing price. That make candlestick as the most popular chart used by the forex analyst. If you are familiar with securities products, you’ll found that this graph is never used to monitor the price. Why? Because the price of securities just need closing price, not like forex trading.
In fact there are more types of graphs such as bar chart, dot chart, line chart, and more. However Candlestick is commonly used by the trader because it’s representative or looks easy to read.
Picture above is the chart for the exchange rate AUD / JPY. The broken blue line at the top is the last price of AUD / JPY is at 79.34. This means one AUD valued JPY 2.0052 (remember how to read a quote once be on the previous module). In the top left of screen there is note written "weekly". That means one candle (one bar) represents the price movement for one week.
Candlestick interpretation is based on existing "pattern". Green candle means the price increased or closing price is higher than the opening price. Conversely, a red candle means prices go down or closing price is lower than the opening price. Then, what are the vertical lines above and below the candle? That is the highest price and lowest price during the given period. In above example, the lowest and highest price for each period is based on weekly time-frame.
If we used the term Bullish and Bearish, then the green candle is Bullish pattern and the red candle is a Bearish pattern. For more details, see the image below:
Do not be confused when you see a different color for both patterns, for example with the blue-red. That’s not a problem; because it’s all depend on each chart provider to give color.
Well, now look at the picture below:
This is a candlestick chart for the GBP / USD on 24 April 2007 by using the chart period 1 hour (meaning 1 candlestick represents movement for 1 hour). Axis "X" particularly the section that I marked with red box is movement that we’ll discuss. It shows period of time between 09.00 and 10:00 WIB. That represents the price movement between 09.00 and 10:00. Here's how to read them: At 09.00 the price opened at 1.9987 and then closed 10:00 at price 1.9987. From the red chart, it shows that the highest price is the same as the opening price, presented by the absence of a vertical line above the candlestick. The lowest price is about 1.9955. From 10:00 to 11:00, the price opened at 1.9971 and closed at 1.9974. The highest and lowest prices are 1.9980 and 1.9960. And so do with another candlestick.
Now it’ll lead us to a question, is it that the opening price must be equal to the closing price on the previous candle? No. It should not be, and indeed it often happens that the opening price different from closing price from previous day. This often happens on the holidays (Saturday and Sunday), or if there are special events. This difference is known as "gap." Gap is often used by technical analysts to predict prices.
The discussion about the gap will be separated from this article because it’s becoming part of technical analysis that we’ll be discussed later. Now, it’s sufficient for us to be able to read Candlestick before getting into technical analysis. Do not forget to read the other articles on this site to extend your analysis capabilities.
Well, now you already know the key of reading forex charts or at least to read the price movement from the chart. You may be thinking: "Gotcha! Finally I can open a real account!
Wait a minute. Being able to read the chart doesn’t mean that you’ll able to get some profit. Please, finish your forex lesson before you decide to open a real account.
Next, we will begin to learn technical analysis! Be prepared then!
