Today I decided to dwell in more detail on one of the subspecies of technical analysis, namely on the well-known topic – Forex candle analysis. In my article, as always, I will simply answer the basic questions: What is the candlestick analysis of the forex market? How effective is forex trading? How to read forex candles? What are the forex candlestick patterns? Is it always worth trusting candlestick analysis? To these and many other questions, you will find the most detailed answers in my article.
Candlestick analysis in trading
At the time of the emergence of exchange trading using price charts, there was a need for various types of displays of this price. The most advanced in this matter has advanced in Japan. So, rice trader Munehisa Homma, in fact, became the creator of a certain type of price display and analysis of this chart called analysis of the candlestick chart. He was the first to develop his own trading system, which allowed him to determine points of entry into the market.
Unlike the basic price movement charts, the candlestick chart became simpler and more visual, it did not require special calculations and instantly answered the question of whether the price is falling or rising. This became possible due to the introduction of color filling into the price chart. Moreover, the colors were chosen not just like that, but associatively. So, the price movement denoting a price increase psychologically positively acted on a person and began to be indicated by a positive white color. And the fall in price, on the contrary, had a negative effect, and it began to be denoted in black.
The figure above shows a graph of the price movement, which is presented in the form of Japanese candles. As you can see, when the price rises – the candles are white, when the price falls – candles are black. Otherwise, this is a regular price chart.
Japanese candlesticks in modern technical analysis are a type of interval chart and a technical indicator used mainly to display changes in stock exchange quotes, commodity prices, and other instruments. A chart of the “Japanese candlestick” type is also called a combination of an interval and a linear chart in the sense that each of its elements displays a range of price changes over a certain time.
However, unlike ordinary points on the chart, chart candles provide much more information about the price over time. Candles have a clear link to the time intervals of the chart. The time interval on the chart, otherwise called the chart timeframe, you can read more about this in one of my articles.
The figure above shows what the candle is made of. A candle consists of a black or white body and an upper / lower shadow (sometimes they say a wick). The upper and lower border of the shadow displays the maximum and minimum prices for the corresponding period. The boundaries of the body display the opening and closing prices. If in general prices have risen, then the body is white (not shaded, or just bright), the lower border of the body reflects the opening price, the upper – the closing price. If prices have fallen, then the body is black (painted, or just dark), the upper border of the body reflects the opening price, the lower – the closing price. If prices coincide, the opening and closing of the body may not be. In this case, the candle will look like a cross. Such a candle is one of the main in candle analysis, but more on that later… Modern candles can be of any color, for example, the color scheme of red-green is very popular. However, the classic colors of the candlestick chart are black and white.