What could possibly be more important to a technical forex trader than their price charts? Your perception of price will ultimately help shape your opinions of trends, determine entries, and more. With this in mind it becomes absolutely critical to understand what you are seeing on your trading monitor. More often than not forex charts are defaulted with candlestick charts which differ greatly from the more traditional bar charts that you may come across in your trading career. Surprisingly after learning to analyze candlesticks, traders often find they are able to quickly identify different types of price action.
These charts have found great popularity with currency traders. Candlestick charting is usually credited to the Japanese rice trader Munehisa Homma in the early eighteenth century, though many references indicate that this method of technical analysis probably existed as early as the 1600s. Steven Nison of Merrill Lynch is credited with popularizing candlestick charting in Western markets and has become recognized as the leading expert on their interpretation.
The candlestick is a thin vertical line showing the period's trading range. A wide bar on the vertical line illustrates the difference between the open and close. The daily candlestick line contains the currency's value at open, high, low and close of a specific day. The candlestick has a wide part, which is called the "real body". This real body represents the range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open.
Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day's trading. When the upper shadow (the top wick) on a down day is short, the open that day was closer to the high of the day. And a short upper shadow on an up day dictates that the close was near the high. The relationship between the day's open, high, low and close determine the look of the daily candlestick.
Candlesticks are easy to read with a little bit of practice. Once you understand the basics, they have the ability to open up an array of trading opportunities. While a trader may not employ candlestick analysis alone in their strategies, forex professionals do use them to gauge market sentiment and market direction. At just a glance, you can see where a currency's opening and closing rates, its high and low, and also whether it closed higher than it opened. When you see a series of candlesticks, you are able to see another important concept of charting: the trend.