The Japanese Candlestick Explained

This has nothing to do with torture or any other form of intimidation. In fact, the funny thing about candlesticks and Forex trading is that they are a useful instrument in creating visuals related to market activity.

They were originally invented by Japanese rice traders back in the 17th century and the popularity of using them as a trading tool has since grown in the West with the Forex markets. The way they are used has changed how traders look at and analyze certain types of data when researching potential trades and picking the time for those trades.

How Candlesticks Differ From Other Trading Data Tools

Bar and line charts that are typical in trading circles basically record just two pieces of data: the open price and the close price during a session. Candlestick charts are said to be far more useful as they “represent the psychology and supply and/or demand” of a market.

Where a candlestick chart excels is in the graphic display that shows the price activity when compared to previous candlestick bars. The body of the candlestick is used to represent the opening and the closing prices and to an experienced trader, just glancing at the candlesticks – their size and shape as well as additional patterns that groups of them can form – can make an informed trading decision.

Candlestick Patterns Tell The Tale

Just like a good bedtime story, candlesticks can give you a lot of comforting information if you know how to use it. The key is behind the patterns created by the candlesticks. A more advanced charting system can utilize patterns that are created by more than a single candlestick. These patterns are generally known as birthday cakes. Actually, that was meant as a joke. Multiple patterns are just called Double Candlestick or Triple Candlestick with descriptive names for each of the actual patterns.

Single Candlestick Patterns Also Exist

A solo candlestick can form what is called a single candlestick pattern. There are two main ‘single’ patterns and they are called the Hanging Man and the Hammer. The Hanging Man candlestick pattern comes off of the top of an upward trend with the Hammer forming at the bottom of a downward trend. You have probably noted that in Forex trading the use of opposites is a huge part of the system. Plus, it is opposites that come into play with trades, trends and just about anything else related to Forex trading.

Are Candlesticks An Effective Trading Tool?

There is no doubt that candlesticks provide a quick visual indicator of market activity. They can identify trends and as a result can become a valuable tool for any trader. The most colorful part about candlesticks actually comes from the names of the patterns which include The Morning Star and Dark Cloud Cover. Whether or not they can make you a great trader depends on how you use them, provided you truly understand the data they reveal in their interesting patterns and shapes.

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1 Comment

  1. Abbas

    It would be much better if you gave an example of each pattern as a sample, so that the readers can distinguish the difference between the candlestick

    Rating: 5.0. From 1 vote.
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