Any self-respecting Forex trader will regularly use Candle Stick patterns to inform their trading choice. A pattern is observed on a Candle Stick chart by examining the recurring candles in a formation. Usually, only 3-4 recurring candles are observed.
When used in trend trading, these Candle Stick patterns give the trader a clear perspective on the possibility of any trend reversals and or continuations. This then allows the trader to better enter and exit trades while working on trends. Candle Sticks are particularly popular with short term daily traders.
These patterns can be both bullish and bearish depending on the whether they occurred within an existing trend or not. A trader will usually examine the candle formation in conjunction with other technical indicators which point to a trend.
These include important levels such as support and resistance lines as well as momentum and volume. We will examine a number of different candle formations as well as go over some examples when they are used with other indicators.
What is a Candle Stick?
“Japanese” Candle Sticks or simply Candle Sticks are a graphical representation of the open, high, low and close of an asset over a specified time period. It was used as early as the 18th century by Japanese rice traders (hence the name).
Given that they incorporate all of these metrics in one candle, a trader can glean a lot of information about movements in the price. Take a look at the below example of a candle.
Candle Stick Example
As you can see, there is a lot of information embodied in each candle. Similarly, there are two different coloured versions of a Candle Stick.
Taking a look at the first candle, we can see the Open, Close, Low and High points. We can see immediately that in this time period, the asset has closed up. This is because the candle is green.
On the right side, we can see that in this time period, the asset has closed down. In this case, the candle is coloured red. It is no surprise that down candles are red and up candles are green. In older candle charts, these were black and white so these terms can be used interchangeably.
Looking at other parts of the candle, we can observe another part termed the “Real Body”. This is the difference between the open and close of the asset within the time period.
Then, looking above and below the Real Body, we have two thin lines poking out. These display the range between the high and low of the candle and are sometimes termed “wicks”.
As as can be gained from the individual candles, the formation of the preceding candles is where most traders make their important decisions.
Candle Stick Strategies
Of course, Candle Stick strategies and indicators are where the most important information can be gleaned. There are a number of different names for particular candles and candle formations. These indicators are most useful for a trader who is examining a current trend with a range of other tools. They are usually the initial impetus for a trade.
In order to implement any candle stick strategies, the trader must first familiarise simple Candle Stick patterns. These are usually definitions given to individual candles.
Once the trader is fully familiarised with these patterns he / she can analyse more complex Candle Stick patterns that incorporate a procession of individual candles.