Now that you’ve mastered the Line and Bar charts, it’s time we covered another super popular forex chart – (Japanese) Candlestick Chart.
A candlestick chart (also called Japanese Candlestick Chart) is a type of price chart used in technical analysis that displays the high, low, open, and closing prices for a specific period of time.
I know what you’re thinking — how is this any different from a bar chart?
The candlestick chart is pretty much a variation of the bar chart.
Think of it as your cousin that looks a bit like you, but you’re obviously the better looking one.
While candlestick charts show the same price information as bar charts, they are presented in a more appealing format.
And not only do many traders prefer this type of forex chart because it is sexier, but it is also easier to interpret.
But before we dig any deeper, let’s dig back into the history and evolution of the candlestick chart.
Back in the old days when Godzilla was still a cute little lizard, the Japanese created their own version of technical analysis to trade rice.
That’s right, RICE. Traders be hustlin’ back then too.
One beautiful day in 1870, a fella from a country in the far West called Steve Nison came across a secret technique called “Japanese candlesticks” by a Japanese rice merchant.
Steve researched, studied, lived, breathed, ate candlesticks, and began to write about how it could be used in the forex markets.
Slowly, this secret technique was not so much a secret anymore. By the ‘90s, traders all over the world had heard of the candlestick chart.
Long story short, without Steve Nison, candlestick charts would have most likely remained a buried secret.
Thank you, Mr Candlestick Nison.
A candlestick is composed of three parts; the upper shadow, lower shadow and body.
When it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Because the bodies represent the price 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 close was higher than the open.
And since everything is better in colour, traders can alter their candlestick colours in their trading platform too.
A colour telly is much better than a black and white telly, so why not splash some colour on those candlestick charts too, right?
Traders can simply substitute green instead of white, and red instead of black.
This means that if the price closed higher than it opened, the candlestick would be green.
If the price closed lower than it opened, the candlestick would be red.
Not only the bodies can be different colours, but just like humans, candlesticks have different body sizes.
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.
Short bodies imply very little buying or selling activity.
The candlestick shadows (also known as wicks or tails) are depicted as thin lines on the top and bottom of a candlestick.
These upper and lower shadows provide important clues about the trading session.
Upper shadows signify the session high.
Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher. However, sellers came in and drove prices back down to end the session back near its open price.
If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower. However, buyers came in and drove prices back up to end the session back near its open price.
The candlestick chart summarises the executed trades during a specific period of time.
For example a 5-minute candle represents 5 minutes of trading data.
A 4-hour candle represents 4 hours of trading data.
1-week candle represents 1 week of trading data.
And so on. You get the point.
There are many chart time frames to choose from and it is completely up to you to decide which one suits you and your trading style best.
The most common chart time frames are:
The smaller chart time frame you choose, the closer you look into price action.
It is like you are zooming in the chart.