Candlestick Chart Patterns to Trade Currencies
Jun 30, 2009 Forex Trading
In Forex trading there are two ways of predicting the price movement. One is fundamental analysis and second is technical analysis. The most popular tool in technical analysis is candlestick chart patterns. They come in existence some time in 18th century in Japan. Many commodity traders there were using such candlestick charts to identify the price movement. That’s the reason why we call it candlestick charts.
In the beginning a simple line connecting the price values over time was used for quite a long time. However traders needed to be able to plot more on a two dimensional chart than just a line. That’s why bar charts were invented. A price bar shows open, close, high and low prices for chosen period of time. However candlesticks that appeared later would give even better visualization.
First American who used candlesticks and introduced it to other stock market traders was Charles Dow. Everyone knows him as a founder of the Wall Street Journal.
Candlestick Patterns
Candlestick chart consists of rectangular shaped candles with vertical lines that are called upper and lower shadows. Those candlesticks have two different color depending of the difference between open and close prices over the period of the candlestick. Usually bullish candlestick (open price is lower than close price) have a brighter color than a bearish candlestick.
The wick represents the highest or lowest price point during the time period that candlestick was formed. The horizontal lines represent the opening price and closing price for that time period. Let say we have a bearish candlestick. It can be identified by the color of the candlestick. Then the open price will be higher than the close price for such a candlestick.
The Ways to Use Candlestick Patterns for Trading
Candlesticks are the best way to visually identify the trend. For example if you have a candlestick chart of 5 minute time frame over several hours and the majority of the candles are green (or whatever color on your chart means bullish movement) then you can tell that the uptrend is developing.
That’s the beauty of candlestick charts they give visual information immediately. It shows if the trend up down or if the price in a sideways movement. In an environment when you need to make decision quickly such tool can be invaluable for a Forex trader.
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