Candlestick Charts For Currency Traders — Basic Knowledge About The Most Significant Technical Analysis Device In Currency Trading

Among the numerous kinds of technical analysis accessible to currency traders, the single most important and popular are probably candlestick charts. These were originally developed in Japan during the 18th century by a renowned commodity trader who applied them to chart the alternations in the price of rice. Because of this reason they are frequently called as Japanese candlestick charts, and many of the patterns that they form have Japanese names.

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Simple line graphs plotting the price of a commodity at standard periods in time had been used for ages, but traders required something that could draw more variables within a two dimensional chart. 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 accurate way than line charts, but candlestick charts were even more sophisticated.

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They were introduced to the American equities 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 Formation

The graph is made up of a sequence of ‘candlesticks’ which usually have a chunky body with 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 specific time range, which might be 5 minutes, 15 minutes or longer, up to one month.

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The top of the wick is the highest point reached during the time interval and the lowest point of the lower tail is the low. The top and bottom of the body are the opening and closing prices. If price rose during the tradin session the body will be white (or green or blue if colored). The bottom of the body shows the opening price and its top marks the close. If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).

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How To Use Candlestick Charts In Forex Trading

A chart showing 5 or 15 minute candles over an interval of several hours can provide the currency trader with several formations on which he can base a method for finding out when a trend is developing. For example, when the candle body is white or green and higher than the preceding candles, it indicates that market participants are very bullish. When it is black or red and lower than the former candles, it signals that market participants are very bearish.

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Being able to see these implications at a quick sight is absolutely necessary in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick graphs are one of the most practical visual devices for any foreign exchange trader.

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