Forex trading is a skill. As with most skills and professions, it has its rules and tools. Understanding candlesticks is like learning to use one such tool. This article is targeted at beginners. So in this and subsequent articles, we will explain key topics in very simple terms.
Let’s dive in.
Candlesticks also called Japanese candlesticks or candles are graphical elements used in the financial market to indicate price movement of any commodity or currency. These movements are indicated in graphic form with the shape of a candle… a candle with a wick.
But what if we represent it with the shape of a…
…matchstick, for example
…or a Hot dog,
Like… “this is the Japanese Hotdog, you buy when it’s Hot, and sell when its cold”
Alright, we’ll leave that for another day.
So, back to candlesticks…
To understand why a trading indicator is called a candlestick, we’ll have to go back in time.
HISTORY OF CANDLESTICKS
In the 1700s, a Japanese man named Munehisa Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Note the key expressions:
- Supply and demand
- Traders’ emotion
USING CANDLES TO TRADE THE FINANCIAL MARKET
Candlestick charts are used by traders to determine possible price movement based on past patterns. It is a type of price chart used in technical analysis that displays the high, low, open, and closing prices of a security for a specific period.
These are the key elements of the market at any given time, let’s say, for example, during the last 1 hour
The High – The highest price that a commodity or currency is priced during the last 1 hour.
The Low – The lowest price it was priced.
The Open — The first bid price at the start of the 1-hour period.
The Close – The last bid price at the end of that 1-hour period.
The wide part of the candlestick is called the “real body” and tells investors whether the closing price was higher or lower than the opening price.
When the opening price is consistently higher than the closing price over a specific period, (let’s retain our 1-hour period analogy), it means that buyers are winning the market tug-of-war,
This is time to join the winning team
… you buy.
Sounds simple, right?
And when the opening price is consistently lower than the closing price over the same given period of time, what do you do?
Yeah, you’re right. You sell!
FOREX TRADING AND YOUR EMOTIONS
One of the biggest secrets to successful forex trading is; “EMOTION”
Understanding and harnessing your emotions is key to forex trading because:
- forex is greatly influenced by human emotions, and
- candlesticks show what the market emotion is over a given time,
You can use it to establish market patterns and exploit this pattern by moving along with the crowd.
So, when candlestick says “everyone is buying”. You buy!
When it says “everyone is selling”. You sell!
But when the buyers and sellers are… indecisive…
Now is time to wait.
Wait and watch until the market takes a particular direction. In this “indecisive stage” the market is said to be in a range (a stage of equal buyers and sellers). It is possible, though, to trade a ranging market, but for simplicity, lets stay out of it for now.
Buyers’ candlesticks, also known as bullish candles, are usually green. When you have consecutive green candle, and each is higher than the other, it shows that there are more buyers than sellers. This is a potential buy signal.
Sellers’ candlesticks, also known as bearish candles, are usually red. When you have consecutive red candles, and each new candle is lower than the previous one, it shows that there are more sellers than buyers. This is a sell signal.
The height of a candlestick can tell how volatile the market it at any given time. A short candle shows that there was little price movement. this happens when after registering an open point, the market barely moved a short distance either up or down. this shows that either, there were little buyers and sellers or the was similar number of both. We’ll discuss more of this in subsequent articles.
Because of the high volatility in the forex market, there are many bullish or and bearish movements over the course of each trading period, and that means more buying and selling opportunities.
Forex volatility is a two edged sword. On the one hand it has sent many new investors down the financial abyss.
Successful traders, on the other hand are skillfully exploiting these volatilities to gain thousands or even millions in wealth to buy enough candles should the light go off even in America.
This is an introductory article to the “forex trading for beginners” series.