The History and Basics of Candlestick Technical Analysis

The candlestick way of technical analysis traces its roots to Japan from where it originated and now is very popular and used worldwide. Several patterns of candlestick exist on paper as well as on ancient Japanese texts that throw in depth light on the theory and fundamentals of it.

It is said that in the seventeenth century the rice trade carried out by the Japanese was done through such form of technical analysis. In 1900, Charles Dow supposedly used this as the basis to create a modern United States version of candlestick technical analysis. But the real credit of this charting process is bestowed upon Homma, a rice trader hailing from a place called Sakata.

This method is quite useful to get accurate low, high, close, open prices in a given timeframe. While the shadow of the candle, depicts low and high price points, its body the opening and closing prices. Some kind of shading is done to which way the price is going. If the candle is shaded going downwards, it means that the price at which a stock closed, was lower than what it opened up to.

Strong Bullish Reversal Candlestick Patterns

There are many strong bullish reversal candlestick patterns, including the “Abandoned Baby”, the “Morning Doji Star”, the “Three Inside Up”, the “Three Outside Up” and the “Three White Soldiers”. Although there are multiple strong bullish reversal patterns, these are the more important ones to know, understand and recognize.

The Abandoned Baby is a three-day reversal pattern. The first day’s candlestick is dark, which continues a previously established downward trend. A Doji represents the second day of the pattern. This Doji’s shadows (or wicks) trade below the first day’s closing price.

The Morning Doji Star is a three-day reversal pattern. The first candlestick in this pattern represents the first day, which is in a downward trend, thus causing the first candlestick to have a long and dark body. The next day bears a small trading range, opening lower with a Doji. The last day of the pattern closes above the first day’s midpoint.

The Three Inside Up is a three-day reversal pattern. The pattern follows a previously established downward trend. The first candlestick of the pattern, representing the first day, is long and dark. The second day trades up to the first day’s midpoint, with a light candlestick. The third day also comes with a light candlestick, however this candlestick carries the currency pair’s price above the first bearish candlestick.

How to Trade Forex Using Technical Analysis

There are some traders who are simply trading the news and these people are known as fundamental traders. However there are also traders who only trade with indicators and patterns on their charts and these people are known as technical traders. Personally, I am a technical trader and I am going to show you how you can better trade the currency using technical analysis.

Below is some stuff you need to know in order to be able to do proper technical analysis:

1) Candlestick Patterns: This is usually one of the most overlook parts of technical analysis. Most traders do not spend time learning how to interpret candlestick formation and this is why they are unable to trade with success. You do not need to be able to know everything about candlestick but you definitely need to know the various type of reversal patterns or continuation patterns so that you can enter your trade more accurately.

2) Forex Indicators: Once you have familiarized with the candlesticks, you need to spend time to learn the features of different forex indicators so that you know which to choose for your trading plan.

Using Technical Analysis with Fundamental Analysis

Forex trading usually requires three things in order to profit (not including tactics and strategies): a trading philosophy, fundamental analysis and technical analysis. While trading philosophies do not actually make you money, they will help to keep you more disciplined with your account funds. Fundamental analysis deals with the economic, political and world events, surrounding countries and their currencies. Technical analysis involves following trends and patterns from the past to the present, as well as predicting future trends and patterns.

It is ideal to combine your technical analysis with both your trading philosophy and fundamental elements, in order to form a more perfect trading environment.

Learning to read a chart is a basic skill. Each trading platform is different but there are many similarities because of market similarities. Charts all contain these elements:

- The currency pair that is being trading is often displayed in the top left hand corner of most charts

- The time frame you are looking at can usually be determined by looking at the bottom of the chart

- The current price of the pair is usually marked on the far right side of a chart and by the type of indicator on the chart (i.e.: candlestick, line, and dot)

Using Candlesticks and Candlestick Patterns

Many traders and investors in the Forex market use Japanese candlesticks when they conduct technical analysis, as they are unique and allow us to gather information regarding the price actions of particular currency pairs, a lot more effectively.

Candlestick analysis is very popular, mainly due to the fact that there is a lot of information regarding trends of currency pairs, presented on candlestick charts.

Before looking into these trends, you should know the basic layout of a Japanese candlestick. A basic candlestick chart consists of more than one candlestick – each one is spread across a chosen time frame. Each candlestick on the chart represents the price range and movement for the currency pair at each interval within the chosen time frame. The chart, as a whole, represents the chosen time frame. The candlesticks represent periodic intervals within that time frame. Both, of course, represent the price action of a particular currency pair.

Weak Bullish Reversal Candlestick Patterns

There are many weak bullish reversal candlestick patterns, including the “Belt Hold”, the “Gravestone Doji”, the “Inverted Hammer” and the “Tweezers Bottom”. Although there are multiple weak bullish reversal candlestick patterns, these are the more important ones to know, understand and recognize.

The Belt Hold is a simple one-day reversal pattern. The pattern occurs during a downward trend. The pattern consists of a single light candlestick, with an opening price that is very close to the day’s low. Typically, the candlestick has no upper shadow (or wick), though it might have a short one in some cases.

The Gravestone Doji is a simple two-day reversal pattern. The first day’s candlestick is dark and closes near the low of the day, at the lower trading range. The second day comprises of the Gravestone Doji itself. The Doji’s opening and closing prices are identical to each other, however, the Doji’s upper shadow is well into the first candlestick’s body. The Doji tends not to have a lower shadow, though on the odd occasion it might. If the Doji does have a lower shadow, it will typically be very short.

Candlestick Chart Information, History and Patterns

Candlestick charts are very commonly used in Forex technical analysis by many traders and investors. The candlestick charts that are used in the Forex market originate from Japan and were developed more than 500 years ago.

The candlestick charts used in the FX market were developed by a Japanese merchant, who used candlestick charts to visually-represent price movements in a rice market, which apparently led to him to become very rich and wealthy.

Due to the history of candlestick charts, some of the candlestick chart patterns have inherited very unique names, however these names allow traders and investors to more easily remember each one, as there are a few.

First of all, before learning about candlestick chart patterns, you should know about candlestick charts themselves. Candlesticks can represent any chosen time frame – minutes, hours, weeks etc. The body of the candlestick chart is, quite simply, the thicker part. You will notice also, that there are two lines on either side of the candlestick’s body – these are known as the shadows, or wicks. Again, quite, simply, the top line is known as the upper shadow or wick and the bottom line is known as the lower shadow or wick. The upper shadow or wick, is used to represent the currency pair’s price highs, in the chosen time period – and vice versa, the lower shadow or wick, is used to represent the currency pair’s price lows, in the chosen time period. The edges of each candlestick also represent the opening and closing prices of the currency pair in the chosen time period.

Currency Exchange Charts – Why Technical Analysis?

Basically, there are two kinds of traders in this world which first is who use fundamental analysis and second, traders who use technical analysis. To be honest, I really recommend use technical analysis rather than fundamental analysis. With technical analysis, you’ll only need to learn the price action of the market and get advantage both long term trading or short term trading.

The reason why I do not recommend trading using fundamental analysis is because it is only suitable for very long term forecast or trader. Using currency exchange charts analysis or technical analysis, we use different technical studies or learning the market pattern and use it to predict the market and use it as signal for buy and sell. We want to predict price movement with this type of analysis.

Bear in mind, reading the currency exchange charts may be difficult, however, forex market is the easier to predict and use than stock market and you should be lucky with that. Forex is also very stable compared to future and stock. Consider that you’re lucky for being a forex trader, I hope you’re really glad to hear that.

Technical Analysis Of Foreign Exchange Charts Is Only A Guide, Not A Crystal Ball

Technical analysis of forex charts is the using of previous technical data to make decisions on what might happen in the foreign exchange market. It is understanding the various forex signals, such as moving averages, stochastic, and MAC-D indicators. As well, the trends of past flow of the foreign exchange charts are used to predict the future.

The technical analysis is based on numbers, past prices, but you can use indicators that represent the calculations of these numbers, without doing the math yourself.

We are looking at what forex prices were to anticipate what prices will be. Forex charts come in many configurations. You get to determine which forex signals you view at any given time. Whether you use candlesticks or not, it is what you can ‘see’ making patterns that can be anticipated. Generally the forex signals are produced by a formula which can calculate the likelihood of an event.

All technical analysis and forex charts are about history. They relate only to what has happened. Their forecasts of future foreign exchange prices must be taken as a guide only. They serve to explain what has happened in the past, they do not explain the future.

Simplifying Your Technical Indicators

Beginning traders spend a lot of time looking for the holy grail of trading. That one indicator that will give them the edge over every other trader, the one single method that no one has yet brought to light that will make them a millionaire in the Forex market overnight. Well, that indicator has not been found yet and the trading system is not available to make it work. The only man who may have been able to manipulate the markets spends his time trying to tear down the capitalist system these days, but that is a story for another day. Trading is simple: buy low/sell high, sell low/buy high. The difficult part comes when you attempt to make the markets do your bidding instead of learning the ebb and flow and how to profit from it.

All technical analysis is dependent on the development of mathematical models that allow for plotting points on a chart. These historical points provide a basis from which to attempt to predict future movements. However, no model can predict the outside forces that work to move the price of currency at any given time. But regardless of the repeated warnings, new traders keep piling indicators onto their charts in hopes of getting the perfect signal and in response usually wind up with a mixed signal, confusion and bad decisions.