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Using Candlestick Charts in Forex Trading

27 October 2009 No Comment

candlestick chart

Candlestick charting is a favorite tool among the majority of traders. This type of charting is especially popular among forex traders.
Steve Nison popularized candlestick charting with his book “Beyond Candlesticks” in 1994. It was my introduction to Candlesticks and for some reason it helped me make more sense of the market behavior. I believe that it is one of the key areas supporting learning forex trading.

These were originally developed in Japan during the 18th century by a prominent commodity trader who used them to chart the fluctuations in the price of rice. For this reason they are often known as Japanese candlestick charts, and many of the patterns that they form have Japanese names.

These charts, by their very nature, show more detail of behavior than bar charts. The bar chart showing the opening, high, low and closing prices of a commodity was useful and helped traders to predict future price movements in a more reliable way than line charts, but candlestick charts were even better.

For example, candle charts will pictorially show whether the bulls or the bears are winning the battle of supply and demand in the market. Candle charts also show the force or momentum behind a move in the market whereas the bar charts do not. Probably the most important characteristic is the candle charts are much quicker in showing the signs of an imminent reversal move in the market (two or three sessions) where it takes much longer to confirm with bar charts.

They were introduced to the American stock market and from there to the worldwide financial markets by Charles Dow at the beginning of the 20th century. Dow was the founder of the Wall Street Journal and co-founder of the Dow Jones company.

Candlestick charts are a serious tool for any trader but they can be especially good for the forex trader to confirm and time movement in and out of market positions.

Forming Candlesticks

The chart is made up of a series of rectangular sections or ‘candlesticks’ which typically have vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or longer.

The rectangular part is called the “real body”. It represents the range of the market action between the open and the close. If the real body is “black or red” or “filled in” it means the close of the session was lower than the open. It the real body was “white” or “empty” it means that the close was higher than the open.

The Key to Using Candlestick Charts In Forex Trading

The combination of candlesticks and the patterns that they form give the trader some idea of the market sentiment for that specific period of time. It is really an art to interpret the many patterns into an over riding conclusion. The neat thing about candlesticks is that the interpretation of patterns is not difficult. It can even be somewhat fun to recognize prominent patterns.

Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader to learn currency trading.

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