Candlestick charting at its heart has two main traits that make it so popular. For one, the versatility of candlestick charting is amazing. Visually, charts jump out at you. Chart patterns that were always there on a regular bar chart stick out like beacons with this technique. There are so many applications for every type of trader. We will cover a few in this forex candlestick lesson 1.
Secondly, Japanese Candlestick charting can be used in conjunction with other forex market analysis techniques. This is unique to candlesticks. Are you a swing trader that uses pattern based entries for currency trading? Well, try something different then just a regular old bar chart. Guaranteed to visually have more impact, and it is not just because of the different colors. But rather the way the strength of bull/bear momentum hits the eye with so much more intensity. I attribute this to the changing of the candlestick, which in turn triggers an extra mental note. Things are bullish, or things are bearish. (Reminds the little voice in ones head) May sound foolish to some, but every edge is valuable when trading a moving market.
Now before we get into what forex candlestick lesson 1 is all about, lets get something clear. If you gain anything from forex candlestick lesson 1...let it be this. Japanese Candlesticks are not the Holy Grail, not better then bar charts, and not for everyone. Like most technical analysis, this form of charting is subjective, and up for interpretation. Therefore, it is best to look at it for what it is...a tool. And that is all that it is. Personally I find them extremely helpful, and have been using them in my market analysis since the early 1990's. So, yes I have some experience with them. To say the least.
Remember that technical analysis does not gauge anything more then psychology. It is just that simple. The market is a reflection of how the world feels at any given moment about a certain thing. It is this idea that forms the basis of Japanese Candlestick charting. The roots start in the 1500's, but it was in the 1700's that things were written down and made applicable.
Typically the hollow candle is the bull candle, and when the body is colored it is a bear bar. Every user adjusts charts to their liking, but they are just variations. If the open and close are the same price for a bar then it is called a Doji, and a variation of that is the spinning top. This is when the body is very small in relation to the body of the candlestick. Usually the body for this type of bar is only a few price levels wide.
Now back to the psychology. A pattern such as a bearish engulfing line does not imply a positive market action. In fact that is the point. Just as it is visual, and you get that little voice chirping, it sets a tone for what direction you should be leaning towards on your trade. Or at least of what direction to be careful of trading. Remember this method is subjective. So lets give an example to make things clear.
Lets suppose that you are a swing trader. Then lets also conclude that you use an indicator such as the RSI. And then lets also include the fact that you are big into moving average crossovers. Now what does candlestick charting have to offer you? Here is how it can be all put together...
Fifteen minute chart.
The RSI indicator is in the overbought zone. (Bulls may run out of gas? Sell?)
The Moving Averages just crossed to indicating a turn to the downside. (Sell?)
The current Japanese Candlestick bar just took out the last swing low with a bearish engulfing line. While also breaking below a support trend line that had held for over a day. (Big Sell signal!)
What to do? Well this would be a great sell signal.
#1. The market has broken a long existing support line.
#2. The RSI is in overbought territory.
#3. A swing low has been taken out.
#4. The Bearish Engulfing line (bigger range then one or more of the last few bars, and is trading lower).
Now this is an example of a potentially great sell signal, and the look of the candle will jump out at anyone using the chart. As far as working the trade for entry, target, stop, etc. That is an entirely different topic and lesson. Many candlestick patterns are found at tops and bottoms in the market. Knowing this information can be invaluable to the swing trader.
Time frames are important. Things happen very fast on the 1 and 5 minute charts. Usually the ranges are to tight for trading, and setup to many false signals. However, from the 15 minute chart on up, it is a completely different story. Do you see a head and shoulders pattern setting up? The previous example can be applied to the right shoulder. Sell signal confirmed! The same can be used as a bullish signal, only a bullish engulfing line would be the buy signal.
There are enough Japanese Candlestick patterns to fill a very large book. It is through examples that I think they are best learned. And they should be used in tandem with other techniques. This insures the best results with the highest probability of success. Forex candlestick lesson 1 is just the beginning. There are many free resources to learn the nitty gritty guts of candlestick methods. Just remember that they are all subjective. Do not just think that they work like clockwork. In our example, we supported the candlestick engulfing pattern with Three other sell signals. But the candle bar was a great confirmation! And that gets back to how useful candles can be.
Dojis and engulfing lines are probably the most important two candlesticks to use. You will do fine if all you do is learn to use these. Keep it simple. Over the years I have seen many traders and analysts get hung up on the Orthodoxy, if you will, in market analysis. Do not fall into this trap. Remember that whatever you use for trading should be a tool. And that is all that it is.
In our next article we will have more examples of how to incorporate Forex Candlestick systems into your trading. And with practice, hopefully improve the results that you have had so far. Good luck in all of your currency trading endeavors. Please feel free to leave a comment on this article if there are any special situations that you may wish me to highlight in another article. Every market has its own traits. The Euro currency trades much differently then the Canadian dollar, or the British Pound. There is so much opportunity in trading currencies these days. Take your time. Patience, practice, and a plan will take you far.
Thank you for your interest in Forex Candlestick Lesson 1.
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Forex Candlestick Lesson 1 is just a start. Check out some articles that we have produced... Euro Under the Gun Against the US Dollar