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As one of the most widely-used charting systems when it comes to analyzing the market, reading candlestick charts has become a daily pastime for many forex traders. This important innovation was initially developed by Homma Munehisa in the 18th century. A legendary rice trader from Japan who traded Ojima rice in Sakata, Munehisa is considered one of the most successful traders in history. He generated the current dollar equivalent of over $100 billion in trading profits in his forex trading career, sometimes making $10 billion in a single year.
Around the year 1900, Charles Dow, an American technical analyst and the trader that put the “Dow” in Dow-Jones, adopted Munehisa’s charting technique, and it has been used extensively ever since.
Candlestick Charts: How they Work
A normal bar chart gives the open, high, low and close of the market for each time period charted. In addition to that information, a candlestick chart also visually indicates whether the financial instrument or commodity closed up or down by using different color bars drawn between the high and low. Often these bars are colored red and green or sometimes black and white.
- An upper “shadow” or line – this vertical line ends at the market’s high which is at the top of the upper range for the period in question.
- A body – consists of a box which has the opening price at the bottom of the box and the closing price at the top of the box. If the box is not filled in, this indicates an up period. If the box is filled in, the box indicates a down period. The opening price sits at the top of the box and the bottom of the box is the closing price level.
- A lower shadow – this vertical line denotes the low for the period that was the maximum downward extent of the currency’s range.
Candlestick Types:
Candlesticks vary considerable in shape depending on the action in the market. For example, a long white candle with small upper and lower shadows indicates strong buying pressure in the market. While a black candle with the same attributes means the opposite, strong selling pressure.
Certain candlesticks have special names such as:
- Doji– a formation that shows the same opening and closing price and appears like a cross with the upper and lower shadows showing the range, indicates a market reversal. Doji formations can be “long legged” meaning the trading range was large, or “Dragonfly”, meaning the open and close were the same but the currency traded substantially lower. Also the “Tombstone” Doji, where the trading was substantially higher and closed where it opened, on the low.
- Marubozu– a formation without upper or lower shadows with either a white or black body showing great buying or selling pressure.
- Spinning Tops– a candlestick with a long upper and lower shadow and a short body, which indicates indecision in the market.
Other named candlesticks formations exist, and when particular combinations occur, technical analysts commonly interpret them to have certain implications for the market’s future. Nevertheless, going into further depth on the subject falls beyond the scope of this article. Many resources on reading Candlestick Charts can be found online and a number of excellent books have been written on the subject to further your research with.
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