The Currency Market: Forex Trading with Japanese Candlesticks

The Currency Market: Forex Trading and Chart Types

There are essentially three types of Forex charts, namely line, bar and candlestick charts. Line charts consist of a single line that passes through the closing price of a unit of time, depending on the timeframe of the chart. Bar charts include more information, such as the open and close prices as well as the highs and the lows. A single vertical bar represents a unit of time with the top being the high and the bottom the low. Each bar also has horizontal dashes where the dash on the right is the open price and the dash on the left is the closing price.

Candlestick charts, on the other hand, while offering the same information as bar charts, structure it a fashion that is much more pleasing to the eye, making it much easier to identify patterns. This is because the individual candlesticks, which represent a unit of time, consist of bodies which can be either hollow – often displayed as white – if the closing price is above the open, or are filled if the close is below the open – usually featured as black. This allows a trader to easily spot upward or downward momentum in a market.

Candlesticks also show the highs and the lows with wicks or shadows that extend from the body. The wick extending from the top of the body represents the high while the one extending from the bottom represents the low.

The Currency Market: Forex Trading, Bodies and Wicks

Understanding what different size candlestick bodies and wicks signify to currency market Forex trading is critical to becoming proficient at chart analysis. This is because it can be a good indication of the trading volume in one direction or the other, in other words it can tell you if buyers are stronger or sellers.

Depending on buying and selling pressure, candles can have different size bodies and different size wicks. So, a long black candlestick implies that the sellers are stronger than the buyers and are exerting more pressure, forcing the market down, while the opposite is true for long white candles. If the bodies are short then this implies very little activity, whether buying or selling respectively.

The length of a candlestick’s wicks is also quite significant. For example, if there is a long wick extending upwards, which shows the high, this implies that buyers gained momentum at one point but, for some reason, they could not maintain it and sellers pushed the market back down. The same is true for a long lower wick but in reverse.

The Currency Market: Forex Trading and Candlestick Patterns

Candlestick patterns can be an excellent indicator of a possible reversal of a trend or even the continuation of said trend. There are three basic candlestick patterns that you need to know. These are the spinning top, the Marubozu and the Doji.

The spinning top is a candlestick that has long upper and lower wicks and a short body making it look much like a spinning top, hence the name. This type of candle is an indicator that there is a balance in the market with neither sellers nor buyers being able to push the market in their direction. Spinning tops often indicate the possibility of a reversal in trend.

The Marubozu is a candlestick that has no wicks, meaning that it looks like a block. There are white Marubozu candles, which have white bodies and no wicks and black Marubozu candles. The former indicate that buyers had the upper hand throughout the session and the latter that the sellers won the session. These types of candles are usually a confirmation of the continuation of an upward or downward trend respectively.

The Doji candlestick cannot tell you much about a market unless it is analyzed in conjunction with preceding candlesticks. Doji’s have very short bodies with the open price being almost equal to the closing price. Doji’s usually indicate the reversal of a trend, however, do not enter a trade without receiving confirmation by waiting for the candle after the Doji to close in the opposite direction.

Related posts:

1. Forex Market Trading: An Introduction to Charting
2. Futures Trading: Common Candlestick Patterns
3. Forex Trading: News and Its Impact on the Currency Market
4. The Forex Market Trade: The Pitfalls of Indicators