By Tom OReilly
Among the many types of technical analysis available to currency traders, the most popular and the single most useful are undoubtedly candlestick charts. During the 18th. century, they were originally developed in
Traders were in need of something more than the simple line graphs plotting the price of a commodity at regular intervals in time, that had been used for centuries. They wanted something that could plot more variables within a two dimensional graph. Candlestick charts were even better than the bar chart showing the opening, high, low and closing prices of a commodity that were used to help traders predict future price movements and were reliable but not as good as the candlestick charts.
Charles Dow, founder of the Wall Street Journal and co-founder of the Dow Jones company, introduced them to the American Stock Market at the beginning of the 20th. century. From there they were adapted by the worldwide financial markets.
Candlestick Formation
The chart is made up of a series of 'candlesticks' which typically have a chunky body with vertical lines stretching up from the top (the upper shadow or wick) and bottom (the lower shadow or wick). The different points measure the differential in prices over a certain period of time, which might be 5 minutes, 15 minutes or longer.
The highest point reached during the time period is the top of the wick and the lowest point of the lower wick is the low. The opening and closing prices are the top and bottom of the body. The bottom of the body marks the opening price and its top marks the close. If price rose during the period the body will be white (or green or blue if colored). If the price fell during the period the prices are the other way around and to show this at a glance the body will be black (or red if colored).
How To Use Candlestick Charts In FX Trading
A chart showing 5 or 15 minute candles over a period of several hours can provide the forex trader with many patterns on which he can base a system for determining when a trend is developing. For example, when the candle body is black or red and lower than the preceding candles, it indicates that buyers are very bearish. When the candle body is white or green and higher than the preceding candles, it indicates that buyers are very bullish.
Being able to see these implications at a glance is vital in the fast moving forex markets where trading decisions often need to be made in a split second. So candlestick charts are one of the most useful visual aids for any forex trader. - 23309
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