An introduction to candlesticks

For efficient trading in a fast paced Forex market, traders need a chart that provides a wealth of information, that can be processed quickly. Since the late 1800s the Japanese have been using candlestick charts. Whilst traditional data outlets may still use line charts, candlesticks are being used to present more technically in-depth analysis.

The candlestick plotted onto the chart can be separated into two parts a vertical line and a wide bar. The vertical line illustrates the currency’s trading range and the wide bar on top shows the difference between the open and close prices.

The wide bar, called the “real body” represents the range of the open and close prices of the day by the colour it is. If the real body is filled in or black, the close was lower than the open. If the real body is empty, the close was higher than the open. Every chart is different and colours will vary, there representation will not.

Above and below the real body are the wicks of the candle called the “shadows”. These shadows show the highest and lowest prices of the day; upper shadow (highest prices), lower shadow (lowest prices).

To identify the array of shapes and sizes of candlesticks various names have been assigned. Names have also been assigned to patterns of candlesticks to help traders read the chart better to identify trends. Simple patterns can be one candlestick whereas complex patterns will be two or more. A further analysis of candlestick pattern locations around specific pivot zones is an intricate way to quickly assess the market’s trend.

 

Notwithstanding the abundance of information encompassed into an individual candlestick, the chart illustrates the price action trend of a currency. No single indicator will be indicative including candlesticks. Support and resistance levels are synergetic with candlesticks and are used to improve forecasting of trends. Support and resistance levels identify areas where buyers and sellers have set up their defences, analysing how candlesticks react to them will give indications of what prices will do next.

If you want to learn more about candlesticks and how to use them in your trading, Vantage FX an award winning Australian forex broker which has a range of educational articles on their website. Furthermore, they have a comprehensive educational and charting package, to help you with your trading. Vantage FX is regulated by the Australian Securities Investment Commission.

 

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