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.
Long time before candlestick charts were invented traders would use line connecting the prices over time. Bar charts substituted the line charts because a bar gives much more visual information about the price movement. Looking at the bar of certain time frame you could tell at what price it opened, closed, what was the high and low of the price for that particular period period. However a candlestick could make visualization even better.
Early in 20th century American stock market traders started to use candlestick charts. The one who introduced them to candlesticks was Charles Dow. We know him as a co-founder of the Dow Jones company.
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.
Each line gives certain information in candlestick. For example the higher wick or shadow shows what was the highest price during the time period of the candlestick. The lower wick or shadow shows the minimum of the price during that time frame. The horizontal lines indicate the open price and close price. The direction of the price movement is identified by the color of the candlestick.
The Ways to Use Candlestick Patterns for Trading
Candlestick chart is a very good way to visualize the trend development. On a chart time frame like 15 minutes over long time where multiple candlesticks fit you can see if majority of the candlesticks have the same color. Tat means you see the trend development.
Very often a trader needs to make a decision very quickly. Candlestick patters allow to get information about the price movement in a glance. The color and size of the candles show what the trend is and how strong it is. That’s why candles are very useful tools for Forex trading.