The four important prices for any forex trading chart are: high, low, open, and close. Western charts generally portray these prices through the use of solid bars, with the upper and lower edges representing the high and low, respectively, and the open and close indicated by horizontal “arms” to the left and right. For an example, see the chart below, the EUR/USD hourly chart for 8–13 February 2008:

This chart certainly contains all the information required, including a five-period moving average envelope overlaid across the bar chart and volume indicators below; however, it’s not a particularly graphical representation of what’s happening in the forex trading market for this time period.

This is the purpose of candlestick charts: to provide a picture of the emotions behind the forex trading market’s price action. Below is the same chart for the same time period, with candlesticks instead of Western price bars:

At a glance, the price’s movement is obvious (and in this case, erratic). The chart reader instinctively knows that green candles mean bull or buying pressure, and red candles mean bear or selling pressure. The solid body of the candle represents the open and close, and the “wick” extending above and below display the high and low for each time period. The longer the length of the candlestick’s body, the greater the buying or selling pressure in the market and the more the price advanced or retreated.

A long upper wick indicates buyers (bulls) were in control for most of the trading period but were unable to sustain their high. A long lower wick means the opposite: sellers (bears) were in control for most of the trading period but were unable to sustain the low. Both of these candlesticks symbolise a reversal in market sentiment; in the chart above, note how often the current forex trading market is changing its sentiment.

When the currency pair’s price extends above or below the five-period moving average envelope, the trader can easily see that the buying or selling pressure is very high. This is considered a strong buy or sell signal for market entry.

A green candlestick with a long, solid body but no upper or lower wicks, called a Marubozu, indicates the buying pressure was so high that the open was the low price, and the close was the high. A red Marubozu candlestick indicates strong selling pressure, with the open being the high price, and the close being the low. These are also considered strong buy and sell signals for market entry.

Conversely, candlesticks with small bodies but long upper and lower wicks symbolise indecision in the forex trading market. These candlesticks, called spinning tops if they have small real bodies and doji if they have tiny or no real bodies, show that although prices rose and fell significantly during the time period indicated, there was no lasting movement, and the open and close were the same or nearly so.

When a spinning top or doji forms amongst other short-bodied candlesticks, they are not significant. If one forms after a long-bodied candlestick, it can signal a reversal, as shown within the white circle on the chart above