Using Japanese Candlestick Charting in Forex Trading
In its most basic definition, technical analysis and review is the evaluation of the true value of a particular asset in the financial market and predicting future moves by observing historical movements. A legitimate technical analyst is not concerned with what the asset is or the fundamental or economic data behind it.
All that the technical analyst is interested in is the way the asset price is currently behaving, which they then compare to similar movements in the past in a bid to predict future movements. In foreign exchange currency trading, one of the most effective methods of carrying out technical analysis is through the study and interpretation of Japanese candlesticks.
History of the Japanese Candlestick Chart
The candlestick techniques, that are in popular use today, originated from the type of charts that had been in use by the Japanese more than 100 years prior to the introduction of point-and-figure and bar charting systems in the West. During the 1700s, a Japanese trader known as Homma, who was involved in the rice futures market, established that besides the price of rice being influenced by the commodity’s supply and demand, it was also heavily influenced by traders’ emotions. Homma discovered that when emotions are involved in the trade, the result was a big difference between the price of rice and its intrinsic value. The principles that Homma established form the basis for Japanese candlesticks charting and the associated methods of analysis, which seek to measure the market emotion surrounding a currency pair.
Components of a Candlestick
A candlestick features a wide section which is referred to as the “real body.” The real body of a candlestick is a representation of the opening and closing values within a particular trading session. If the real body is filled in, it means that a currency pair closed lower than the session’s opening value. On the other hand, a hollow or open real body means that the asset closed the session higher in value than it opened.
Just above and below the body are lines known as shadows. Technical analysts generally think of these lines as the wick of a candle. The candlestick’s shadows represent the trading session’s highs and lows. The end of the lower wick shows the lowest session price, while the end of the upper wick is the highest price attained during the trading session. For instance, if the upper shadow on a filled in body is short, it means that the opening price of the asset was close to the highest price of the session.
The true value of Japanese candlesticks to the Forex traders is their use as a tool to help identify trend reversals and to spot points where they can enter and exit trades for their benefit.
The length of the real body of the candlestick helps to explain the difference between the session’s opening price and its closing value. Different colours are used to show whether the overall value of a currency pair rose or dropped over the course of the session. Examining the candlestick’s length also provides the Forex trader with essential information regarding the potential direction that the value of the asset is likely to take. If the body of the candle is short, it is a sign that the market is in a period of consolidation, which restricts price movement. Conversely a candle that has a long body shows that there is strong market pressure to buy and sell. Long wicks suggest that the market is highly volatile.
The Japanese candlesticks charting system is one that every Forex trader must know and understand. Just as traders in Japanese rice futures traders discovered centuries ago, the emotions of investors with regard to a traded asset have an impact on the future price movements of the asset.