Candlestick charts were invented by a highly successful Japanese rice trader in the late 1700’s. They have been used widely in technical analysis since Charles Dow reintroduced them to stock traders in the early 1900’s.
The idea behind the charts consists of conveying as much information as possible in the available space. Also, each candlestick or grouping of candlesticks can act as an indicator in and of itself.
Figure 1: A daily candlestick chart for the EUR/USD currency pair with white candles representing up moves and black indicating down moves. The vertical axis is the pair’s exchange rate and the horizontal axis is time.
The composition of each candlestick entry on a candlestick chart consists of two parts. These are:
- The Body – the area between the open and closing price that is either filled in black, for a down period, or hollow or white indicating an up period. If black, then the top of the body represents the opening price, while the bottom of the body represents the closing price. If the body is white, then the bottom of the body is the opening price while the top of the body is the closing price.
- The Shadows – the body will often have lines or “wicks” protruding vertically from the top and/or the bottom. These represent the trading range that occurs outside of the opening and closing prices to the period’s high and low.
Candlestick Chart Interpretation
The numerous candlestick patterns and formations which make up the art of interpreting candlestick charts can give clear signals for entering and exiting the market, if you take the time to learn how to recognize them.
Candlestick chart patterns include reversal patterns as well as continuation patterns. A long white candlestick, for example would be a very bullish pattern, while a long black candlestick would be a bearish indicator.
Candles can sometimes appear to be lacking a body. This occurs because the open and closing price were the same, and this chart pattern is called a doji. The doji indicates a market consolidation and may also herald a coming reversal.
Japanese Candlestick Cheat Sheet
There are a lot of Japanese candlestick patterns, and it might be hard for you to remember all of them. That’s why we will give you an overview of all the major and minor candlestick patterns, so you can easily identify them on the chart. The following cheat sheet will help you with this.
Understanding and trading the Japanese candlestick patterns is a rewarding tool for every trader, and should be learned in the early stages of your trading career as these patterns truly represent the fight between bulls and bears in the market. Knowing candlestick patterns gives you an excellent overview of the supply and demand of a currency pair. These patterns are also followed by big players in the forex market, which give additional importance to these patterns and make them a valuable tool to predict future price-action.