Now that you’ve mastered the Line and Bar charts, it’s time we covered another super popular Forex chart – the Japanese Candlestick Chart. Candlestick charting is the most popular and commonly used method of analyzing price movement on a chart.
So, let’s explore these types of candlestick graphs, show you what a candlestick represents, and discuss the history and origins of candlestick patterns.
A candlestick chart (also called the Japanese Candlestick Chart) is a type of price chart used in technical analysis that displays the high, low, open, and closing prices for a specific time period. When you look at the candlestick on a chart, you will eventually be able to get the high and low prices of a specific time frame.
I know what you’re thinking — how is this any different from a bar chart?
The truth be told, it’s not THAT different. The candlestick chart is pretty much a variation of the bar chart.
Think of it as your cousin that looks a bit like you, but you’re obviously the better-looking one. While candlestick charts show the same price data as bar charts, they are presented in a more appealing format and enable you to analyze the markets using common candlestick patterns.
And not only do many traders prefer this type of Forex chart because it is sexier, but it is also easier to interpret in terms of the asset’s price movement.
But before we dig any deeper, let’s dig back into the history and evolution of the candlestick patterns.
Back in the old days when Godzilla was still a cute little lizard, the Japanese created their own version of technical analysis to trade rice. That’s right, RICE. Traders were hustlin’ back then too.
One beautiful day in 1870, a fella from a country in the far West called Steve Nison came across a secret technique called “Japanese candlesticks” by a Japanese rice merchant that helps to analyze the price movements of rice. Munehisa Homma. Steve researched, studied, lived, breathed, ate candlestick chart patterns, and began to write about how it could be used in the Foreign currency market, and in the stock market.
Slowly, this secret technique was not so much a secret anymore. By the ‘90s, traders all over the world had heard of the candlestick chart and started using Japanese candlestick charting techniques as part of their trading strategy.
Long story short, without Steve Nison, candlestick charts would have most likely remained a buried secret.
A candlestick pattern is composed of three parts; the upper shadow, lower shadow and body of the candle.
A candlestick pattern can be identified by analyzing just one candlestick bar, or a sequence of candlesticks that create candlestick patterns like the bullish engulfing pattern, the bearish engulfing pattern, the hammer candlestick pattern, the morning star pattern, and many more. This is the beauty of this method – it creates a great visualization for human eyes to analyze the past performance of a financial instrument and to predict the future price movements of the asset.
When it comes to Forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Because the bodies represent the price range between the opening price and closing price of that day’s trading. When the real body is filled in white or black or green and red, it means the close price was lower than the open.
If the real body of the candle is empty, then it means the close was higher than the open.
And since everything is better in colour, traders can alter their candlestick colours in their trading platform too. A colour telly is much better than a black and white telly, so why not splash some colour on those candlestick charts too, right? Traders can simply substitute green instead of white, and use a green candle instead of black and a red candle instead of white.
This means that if the closing price was higher than the opening price, the candlestick would be a green candle. Otherwise, if the price closed lower than it opened, the candlestick would be red.
Not only the bodies can be in different colours, but just like humans, candlesticks have different body sizes and thus different candle patterns. Long bodies indicate strong selling or buying pressure. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.
Short bodies imply very little buying or selling activity, and it usually indicates indecision (much like a star candlestick pattern). The most widely used short body is the Doji candlestick pattern.
The candlestick shadows (also known as wicks or tails) are depicted as thin lines on the top and bottom of the body of a candlestick. These upper and lower shadows provide important clues about the trading session. An Upper shadow signifies the session high, while a lower shadow signifies the session low.
Upper shadows signify the session high. Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close. On the other hand, candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a Japanese candlestick has a long upper shadow (upper wick) and short lower shadow, this means that buyers flexed their muscles and bid prices higher. However, sellers came in and drove prices back down to end the session back near its open price, which ultimately indicates a bearish reversal pattern.
On the other hand, if a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower. However, buyers came in and drove prices back up to end the session back near its open price, which signals strong buying pressure and the beginning of a bullish trend.
In a nutshell, if you learn how to read candlestick charts correctly, you basically get all the information about the executed trades during a specific period of time.
For example, a 5-minute candle represents 5 minutes of trading data. A 4-hour candle represents 4 hours of trading data. A 1-week candle represents 1 week of trading data.
And so on. You get the point.
There are many chart time frames to choose from and it is completely up to you to decide which time frame suits you and your trading style best.
The most common chart time frames are:
Clearly, the smaller the chart time frame you choose, the closer you look into price action. It is like you are zooming on the chart.
So, to sum up, if you have intentions to become a professional trader, you need to know how to read and use a candlestick chart. In fact, some traders completely rely on technical analysis charts without reading the news and take the market sentiment as a factor. They believe you get everything you need from a simple candlestick chart.