Japanese Candlesticks Patterns Explained - Japanese Candlesticks Technical Analysis
Understanding Candlesticks in Forex Trading - How to Read Candlesticks in Forex
Brief History
Candlesticks were developed in the 18th century by the legendary rice trader called Homma Munehisa to give an overview of opening, high, low and closing market price over a given period of time.
They were used by the legendary rice trader to predict future market prices. After dominating the rice market, Munehisa then eventually moved to the Tokyo exchanges where he then gained a huge fortune using this trading analysis. It is said that He made over 100 consecutive winning trades.
Types of Forex Trading charts
There are 3 types of charts used in Forex: Line, bar and candlesticks.
Line - plots a continuous line connecting closing prices of a currency pair.
Bars- displayed as sequence of OHCL bars. O H C L represents OPEN HIGH LOW & CLOSE. The Opening price is displayed as a horizontal dash on the left and closing price as a horizontal dash on the right.
The main disadvantage of a bars is that it is not visually appealing, therefore most forex traders don't use them.
Candlesticks - these use the same price data as bar charts (open, high, low, and close). However, they in a much more visually identifiable way which resembles a candle with wicks on both ends.
How to Analyze
The rectangle part is called the body.
The high and low are described as shadows and plotted as poking lines.
The color is either blue or red
- (Blue or Green Color) - Prices moved up
- (Red Color) - Prices moved down
Most trading platforms like the MetaTrader 4, use colors to mark the direction. colors used are blue or green; when price moves up, red; when price moves down.
Candles Vs. Bar Chart
When candlesticks are used it is very easy to see if the price moved up or down as opposed to when a bars are used.
The Japanese techniques also have very many formations that are used to trade the FX market. These patterns have different technical analysis interpretation and the most common are:
| Reversal Patterns |
The above patterns is what makes the Japanese candlesticks popular among technical traders and it is why this type of analysis are the most widely used when it comes to analyzing the currency exchange market. The analysis for these pattern formations in Forex trading is the same as that one used in stocks trading.
Drawing These Charts on MetaTrader 4
To draw these on the MetaTrader 4, select the charts drawing tools within the "MetaTrader 4 Toolbar" - shown below.
To view this toolbar on MetaTrader 4 go to "View" Next to file at the top left corner of the MetaTrader 4 Platform, Click "View", Then Click "Toolbars", Then check the "Charts" Button. The above toolbar will appear.
Once the above toolbar, appears you can then select the type you want to convert to, If you want to view using the bar format, click the bar tool button as shown above, for line format click the line tool button, for Japanese candlesticks format click the "candlesticks tool button".
