A good interpretation of candlestick lines in forex trading can tremendously help our performance. Using candlestick charts we can see more easier and faster price trends, understand and predict some major market movements. Certainly it is one of the best chart analysis tool.
First of all you will need to learn candlestick patterns and to understand the psychology behind them.
A basic pattern has a real body, a lower and upper shadow. The body represents the difference between the open and close price, known as range. The shadows shows the highest (large shadow) and low (lower shadow) prices of the trading session. If price closes higher than it opens, the session is bullish and the candle's real body is white. If price closes lower than it opens, the session is bearish and the candle's real body is black.
As market changes, candlesticks change and form different patterns:
If the real body of the candle is taller / longer than shadows are, it is a long candle and shows a major price move.
Long white, bullish patterns generally form near the end of an uptrend (meaning there will be a decrease) or after a downtrend, when it is a sign of an uptrend. Long black, bearish patterns may form after an uptrend (sign of bearish reversal, it may start a selloff) or near the end of a downtrend, followed by an increase.
A short candle may have lower shadows or no shadows. In some cases we can see small body and longer shadows, known as spinning top or high-wave candles. Spinning Top represents a loss of momentum. High Wave Candles, with an unusually long shadow shows that, there was a lot of volatility during the session, meaning big profit opportunities.
There are more then 60 candlestick patterns, but only half of them are seen commonly on the charts.
Knowing these patterns help us, choosing the right open and exit points. They perform really well on daily basis. It is mostly a short-term strategy.