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The Art Of Candle Sticks In Forex Trading

Using Candlesticks As A Tool In Trading

The history of the use of ‘candlesticks’ in trading is quite fascinating. First of all, the reason it’s called that, is because the movement of price illustrated this way, (a one day period, for example) resembles a candlestick. It’s good to have a clear understanding of this historical method of ‘tracking data’, since using and knowing how to interpret Forex candlestick patterns can assist your trading success. Getting right down to it, what is a candlestick, in the world of trading?

In a few words, a ‘candlestick’ is a visual representation of price movement, in a given time frame. It shows the opening price, the closing price, and the high & low of price movement within that period, whether it be 5 minutes or 1 week. These 4 pieces of information are key in helping to determine what may be coming next, in terms of price action. Market sentiment is constantly fluctuating, and the candle ‘captures’ all of that movement enabling the trader to ‘read’ it at a glance.

It is similar to a note on a sheet of music, where one note alone communicates something. A note can be sharp or flat, it can be a half, or an eighth note. It has a particular tone. But it’s only when you put a string of notes together that an actual piece of music ’emerges’.

Much like a jigsaw puzzle, the individual pieces offer clues and information, but, complete the puzzle, and you get a ‘whole picture’. In trading, when you become familiar with the patterns that many candlesticks in succession form, a picture also emerges as to what price is likely to do in the future. It’s a thing of beauty, really, due to what the market is revealing, and it very much involves history repeating itself. It’s predictive in nature.

Like something called ‘pin bar reversals’. A pin bar candle has a long wick and small body. You will frequently see this formation, which, not always, but frequently indicates that a price reversal is afoot.

The candles in the diagram at the right, have bottom wicks, or shadows, as they’re also called, as a result of price dropping down several times, pulling back, and closing higher. The ‘bears’ could not hold on to their momentum at this juncture. As you can see, price did indeed reverse to the upside, following the 2 pin bar candles.

Who Invented Candlestick Trading?

Candlestick trading was first conceived of in Japan, 100’s of years ago, where rice traders developed this charting method to track the buying and selling movements of rice, the number one commodity back then. It’s a complicated history as to how candlestick charting evolved, but bottom line, savvy rice vendors drew ‘candlesticks’ on scrolls, to indicate the raw data of price movement, in order to keep records, and ‘predict’ future outcomes based on past circumstances and actions.

Rice merchants realized that human emotion played a large role within trading, and that emotional reactions were predictable, and cyclical. Hence the need to reflect market outcomes within candle stick renderings, based on ‘sentiments’. Traders don’t always act, based upon facts, but rather on fear or greed.

And sure enough, the market patterns we see today, hundreds of years later, still reflects this same emotional factor that drives futures, derivatives and commodities trading, to this very minute. In the chart comparison below, you can see that the upper chart price movement is more erratic, with large ‘gaps’ in price, and a dramatic long red candle where price dropped suddenly. When I see this on a chart, I move on. The whole recent pattern shows indecision, and confusion as to where price is going.

Little has changed since the 1700’s! I know in my own experience, you can clearly see emotions getting played out on a candlestick chart, in live trading. It is often triggered by various news announcements that impact currency, or the stock market. And you can also see when price is moving cleanly, in an ‘orderly’ fashion, such as in the second chart above. And when things are relatively calm, (both you and the market!), that is usually the best time to make trading decisions.

Once Wall Street caught on to candlestick charting, made famous by Steve Nison, back in the mid 80’s, it wasn’t long before its use was integrated into trading platforms everywhere.

It simply made ‘reading’ price action much easier. I would say it’s the difference between looking at an abstract painting of a flower, or, looking at the flower itself.

When I first began my trading education, I often saw what is called a ‘bar chart’, with just lines. Some traders prefer this. I didn’t like the bar chart, I found it ‘hard’ to interpret.

In comparison, candlesticks were infinitely more visually appealing, and made it easier to quickly identify the opening & closing price, and the high and low. Most traders use candlestick charts.

(Below: bars on the left, candlesticks on the right)

Mapping The Movement Of Price To See Where It’s Going Next

Price action can do only 3 things. It either moves up, down, or sideways. Candlesticks map that movement, but allowing you to not only see the pattern of movement, but also what each candle individually, and in formations, is telling you about what’s coming next. The candlesticks within the wedge or flag pattern below, show how price is moving back and forth sideways, with a lot of  ‘indecision’ as to direction.

However, something which happens repeatedly in candle formations is, you will see, after a period of consolidation such as above, that you can draw a trend line across the upper candles where there are 2 or more touching points, and the lower trend line…..the same.

These flag shaped patterns are very common, and once price breaks out above or below the trend lines, price either continues an upward trend such as above, or, in this case, breaks the pattern, to the down side. When price breaks out, you will usually have full, longer candles, which confirms price breakout. In the chart above, red candles are bearish, and green candles are bullish. The longer red candles moving below the lower trend line, are showing strength of movement in a new direction.

There are numerous candlestick patterns that you will see over and over again. That’s why it’s good to become familiar with these formations, so you’ll know where price may be going next. Unless you have a photographic memory, it’s helpful to have a reference guide.

The Best Way To Start Getting Ahead, Fast

I would recommend The Candlestick Trading Bible, a comprehensive book on candlestick analysis, which also teaches you about trends, and support/resistance, 2 other vital elements that go hand in hand with candlestick patterns, in determining trades to take.

I like the simplicity of this book, anyone can follow it, and if you are new to trading, you will be able to practice what you learn, on a demo account.

If you really want to ‘speed up your results’, or you just don’t have a lot of time to learn, you might consider getting trend trading software (HERE) that generates multiple weekly trade signals. (You should also learn about risk management).

Learning to trade can be difficult at first, but when you have the right information at your finger tips, like The Candlestick Bible, which teaches you all the basics you need, and if you also get software that provides signals straight to your inbox, you can start making money right away!

Why not learn and earn at the same time? If you have any questions, please tell me what’s on your mind!

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9 Comments

  1. stefan

    Hi, this is quite interesting to know when wanting to start trading stocks or anything in fact.

    I’m quite new to this and have not read a lot about the candlestick trading analysis. I’ll guess I rather go through the Candlestick trading Bible first and get some more detailed knowledge about this technique.

    • Olivia

      Thanks for commenting. The Bible really does explain it in detail, and gives so many examples. Candlestick patterns alone are not really enough to trade off of, that’s why the Bible also teaches you about trends, and how to find them, as well as support and resistance levels. Download a free demo account from any fx broker, and play around with the platform, and you’ll begin to get an idea of how it all works together.

  2. Jamiro Hazel

    Wow, before reading your post i had no idea what candlestick trading was, i am happy i was able to read your article and gain some more information. This is definitely an area where i need to do some more investigation because it looks like some valuable information that i can use in the future. I’ve always been interested in trading but didn’t know where to start. Thanks so much for sharing. 

    • Olivia

      The Bible is excellent for beginners, and gives you the basics to start trading. If you’ve never done it, you can go to any Forex broker that has demo accounts, and you can download that, and start practice trading. You’ll have to learn about the tools on the trading platform and the broker has all that info, so it will take a while just to learn the platform, and set up charting. You can go to babypips.com which also offers a complete forex education for free.

  3. DorcasW

    Hi Olivia; Great article on trading. I enjoy reading about the term: ‘Candlestick’ If I ever decide to get involved in trading I will have to find you for some personal training as you seem to know much about trading. I looked at all of the images and tried to understand them but I might have been too hasty, to learn at first sight. I am sure that many people who read your post who are inclined to do forex or some other kind of trading will understand the meaning of the images, at first sight.

    DorcasW.

  4. Paul

    Wow, that is a lot to take in – such a great post.  I have always been interested in the world of trading on the stock market but never really known where to start.  Is this book a good place or is there something else you would recommend to get me moving in this exciting world?

    Paul

    • Olivia

      I tried to simplify the information as much as possible but when something is new to you, it’s all greek, no matter how simply put lol. the candle bible is an excellent place to start because it helps you to understand what you’ll be seeing on a trading platform, where you’ll be placing trades. You download a demo platform from the broker of your choice, then you can start placing practice trades, following the information given in the book. It takes time to get used to the ‘playing field’ but after a while, you become intuitive with it. 

  5. Jonno

    This looks like a good book, candle stick bible…..thanks for writing, it is interesting and i am a new trader still working on a demo account. I think i need to understand the candle paterns better, i see how that can make the difference for taking trade decisions.

    • Olivia

      I think it will help you a lot, to see where price may be going next. When you see a candlestick pattern you come to recognize, you can then check with your other indicators to help confirm either the beginning of a new trend, a reversal, or the continuation of a trend, after a correction in the market.

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