Jun 03 2020 1
In the 1600s, the Japanese developed a method of technical analysis to analyze rice prices. This technique is called a "candlestick chart". Steve Nison is credited with disseminating this analytical method. At the same time, he is one of the leading experts on forex candlestick patterns.
How to read candlestick patterns in forex
To read forex candlestick patterns, you need to know some of the following concepts:
- Open: This is the price when the market opens, or the price that the first trader buys/sells at. For example, if you go to the market and buy a chicken for $25, and if you are the first customer of the day, $25 is the opening price (open) of that trading day.
- Close: This is the price when the market closes, or the price that the last trader buys/sells at. For example, if you go to the market and buy a chicken for $25, and if you are the last customer of the day, $25 is the closing price (close) of that trading day. This is a very important price for technical analysis.
- Low: This is the lowest price of all the transactions made in the day. For example, there are 1000 people at the market and you are the only one who can deal at the price of $10 for a chicken, then $10 is the lowest price (low) of that trading day.
- High: This is the highest price of all the transactions made in the day. For example, there are 1000 people at the market and you are the only one who deals at the price of $35 for a chicken, then $35 is the highest price (high) of that trading day.
Each Japanese candlestick will demonstrate those 4 figures as follow:
How to trade forex with candlestick patterns
The color of the candlestick depends on what you set on your trading platform, but it is mostly red and green, indicating fall and rise. If the closing price is lower than the opening price, the candlestick is red, indicating that the price falls that day. On the contrary, if the closing price is higher than the opening price, the candlestick is green, indicating that the price rises that day.
The longer the body of the candle, the stronger it shows that the buying / selling power is stronger and vice versa. Green candles indicate buying power. In a down market, if a long green candle is met, it means that the buyers are establishing and controlling the market. Signaling a market is about to turn. The opposite direction when a market goes up to see a long red candle shows that the sellers are dominant. The strong selling force signals a downtrend in the future.
Candlestick charts show a battle for position between the buyer (who expected the price to go up) and the seller (who expected the price to go down) for a specified period of time. In a session if:
- The long green candle proved that the whole buyer session dominated
- Long candles show that sellers dominated the majority of the time
- The body of the candle is short and does not have a shadow (or short shadow), showing that neither side has prevailed and the price has hardly changed compared to the beginning.
- The candlestick with a long lower shadow shows that the selling side dominated in the first time of trading but regained control at the end of the session.
- A candle with a long upper shadow is the opposite of the idea above.
- The candlestick has a long upper and lower shadow and a small real body, showing that both the buying and selling sides have a dominant phase in the session, but at the end of the session, neither side can overwhelm the other.
Many traders prefer to use candlestick charts because of its magic. Besides, there are also people who turn away from this technique because they think it is just a normal graph. No matter how we feel, we should explore the use of this analytical technique. How to use candlestick charts is based mainly on the forex candlestick patterns.