Lesson 3: Essentials of Chart Reading
3.1 Types of Forex Charts
A forex chart (also called a price action chart) visually displays how the price of a currency pair changes during a specific time period—minutes, hours, days, weeks, or even years.
Even if you don’t use technical indicators, learning to read charts is essential for every trader.
Below are the three most common chart types every beginner should know.
Line Chart
A line chart connects closing prices with a single continuous line.
Key Characteristics:
Shows overall price direction
Very simple and clean
Displays only closing prices
Best for:
Understanding the big picture trend, but not detailed price behavior.
Bar Chart (OHLC Chart)
A bar chart provides more information than a line chart. Each bar represents one trading period (for example: 1 hour, 1 day).
Each bar shows:
Open price
High price
Low price
Close price
Because of this, bar charts are also called OHLC charts.
Volatility Insight:
Long bars = high volatility
Short bars = low volatility
Best for:
Spotting trends and understanding market volatility.
Candlestick Chart
Candlestick charts display the same data as bar charts but in a more visual and intuitive format.
Each candlestick consists of:
A body (open to close)
Wicks or shadows (high and low)
The candle shape makes it easier to understand:
Market sentiment
Strength of buyers and sellers
Possible trend changes
Color Meaning:
Green candle: price closed higher than it opened (bullish)
Red candle: price closed lower than it opened (bearish)
Best for:
Identifying trends, momentum, and possible reversals quickly.
3.2 Anatomy of a Candlestick
To read charts confidently, you must understand the structure of a single candlestick.
Real Body
The body represents the distance between the opening and closing prices.
Long body: strong price movement
Short body: weak movement or indecision
Wicks (Shadows)
The wicks show how far price moved beyond the open and close.
Upper wick: highest price reached
Lower wick: lowest price reached
Market Sentiment from Wicks
Long upper wick: sellers pushed price down → bearish signal
Long lower wick: buyers pushed price up → bullish signal
Short wicks: strong momentum in closing direction
Candlestick colors can be customized. What matters is knowing which color represents bullish or bearish movement.
3.3 Candlestick Patterns: Bullish, Bearish & Consolidation
As you move from left to right on a chart, candlesticks begin to form patterns that reflect market psychology.
There are three main market phases:
Bullish: prices move upward
Bearish: prices move downward
Consolidation: prices move sideways
Candlestick patterns help traders spot potential turning points, not guaranteed outcomes.
Common Bullish Candlestick Patterns
Hammer
Small body
Long lower wick
Appears after a downtrend
Signals possible bullish reversal
Inverted Hammer
Small body
Long upper wick
Appears during a downtrend
Suggests buying pressure may increase
Bullish Engulfing
Small red candle followed by a large green candle
Shows strong buyer control
Three White Soldiers
Three consecutive green candles
Each closes higher than the previous
Indicates strong upward momentum
Rising Three
Five-candle pattern
First and last candles are green
Middle three are small red candles within the range
Signals trend continuation upward
Common Bearish Candlestick Patterns
Hanging Man
Small body
Long lower wick
Appears after an uptrend
Signals potential reversal downward
Shooting Star
Small body
Long upper wick
Appears near top of an uptrend
Indicates selling pressure
Bearish Engulfing
Small green candle followed by a large red candle
Signals strong selling momentum
Evening Star
Three-candle pattern
Strong green → indecision → strong red
Signals weakening buyers and trend reversal
Falling Three
Five-candle pattern
First and last candles are red
Middle three are small green candles
Indicates continuation of downtrend
Important Note on Patterns
Candlestick patterns do not predict the future.
They describe price behavior and probability, not certainty.
Always confirm patterns using:
Support & resistance
Trend direction
Risk management
Module Summary
Forex charts visually represent price movement
Line, Bar, and Candlestick charts are the most common
Candlestick charts offer the best balance of detail and readability
Each candle shows open, high, low, and close prices
Candle bodies and wicks reflect market sentiment
Candlestick patterns can signal bullish or bearish tendencies
Patterns indicate probability, not guarantees