Forex Technical Analysis – Japanese Candlesticks
Japanese candlestick charts were originally used by Japanese rice traders. Eventually, westerners “discovered” these little charts, and trading has not been the same since. The Japanese candlestick clearly and visually identifies more trade information than available by standard charting methods.
What is a Japanese candlestick?
Candlestick charts show the following, the open, close, high, and low, for a trading period. If the period closes higher than the open, then the candlestick is hollow and usually drawn in white. If the period closes lower than the open, then the candlestick is filled, and usually drawn in black. The body of the candlestick is the portion that is hollow or filled, the gap between open and close. Thin lines above and below the body are the high and low for the period. These lines are typically called shadows. The top of the line is the high for the period, the bottom of the line the low. Should the period close on the high or low, the body will extend to high or low, and there will be no corresponding shadow.
The shape and size of the candlestick are critical for proper forex technical analysis. A large gap between open and close, with a resulting long body, show strong buying or selling pressures. Small gaps, with short a short body, show weak buying or selling pressure. Long hollow candlesticks show the close well above the open, buyers wanted this currency, and pushed the price significantly up. Long filled candlesticks show the opposite, sellers outnumbered the buyers, and the price declined significantly. Long shadows show significant volatility for the period. If the top shadow is long, buyers pushed the price up, but there was not enough momentum to maintain the price increase. The reverse is true for a short shadow; selling pressure pushed the price down, but was not strong enough to maintain the price decrease.
Knowing how to read a candlestick chart helps a forex trader understand what happened during the charted period. Using candlesticks make it much easier to detect trends and determine the strength of a movement. Mastering candlesticks makes for a profitable forex trader.