The Japanese Candlestick

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Price Action is one of the most useful tools when using technical analysis to speculate price movement in the Forex market. With the invention of Japanese candlesticks, traders were able to visualize price fluctuations better than bar charts and line study. Candlesticks gives technical traders the opportunity to derive open, close, high and low prices easily which is used in deriving or calculating pivots (resistance and support) in general.  Moreover, they also act as technical indicators on their own, from my own experience and perspective, i think price actions and patterns that emanates from the Japanese candlesticks are the most accurate means of predicting price movement in the market.

 

Candlestick charts are thought to have been developed in the 18th century by Munehisa Homma, Japanese rice trader of financial instrument. They were introduced to the Western world by Steve Nison in his book. He is credited with popularizing candlestick charting and has become recognized as the leading expert on their interpretation. Candlesticks are graphical representations of price movements for a given period of time. They are commonly formed by the opening, high, low, and closing prices of a financial instrument (stocks, bonds, currencies, binary options, commodities etc.).

 

Candlesticks are usually composed of the body (black or white depending on the color selected for buying and selling representation), and an upper and a lower shadow (wick): the region between the open and the close is called the main body, price excursions above and below the main body are called shadows.

 

The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The body illustrates the opening and closing trades. If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top, this simply represents a buying scenario. If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom, this represents a selling scenario.Candlestick charts serve as a cornerstone of technical analysis. They aid in detecting chat patterns and price actions that helps predicting future price movement. There are several chat patterns and price actions used in technical analysis.

 

There are really only 5 major Candlestick patterns that need to be committed to memory. The Japanese Candlestick trading signals consist of approximately 40 reversal and continuation patterns. All have credible probabilities of indicating correct future direction of a price move. These are namely the doji, pinbar, engulf, hammer and Inside bar candlestick patterns.
Utilizing just the major Japanese Candlesticks trading signals will provide more than enough trade situations for most investors. They are the signals that investors should contribute most of their time and effort. However, this does not mean that the remaining patterns should not be considered. Those signals are extremely effective for producing profits. Reality demonstrates that some of them occur very rarely. Other formations, although they reveal high potential reversals, may not be considered as strong a signal as the major signals.

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