In the fast-paced world of the foreign exchange (forex or fx) market, you need all the help you can get to keep on top of trends and price changes. You can choose from a host of oscillators and momentum indicators to keep your finger on the pulse of the market. But the information they give you tends to lag behind. What you need is a way to gauge what the market is doing now at a glance. Fortunately help is at hand in the form of Japanese candlestick charts. So what are they and what makes them so special?
Candlestick charting was developed by Japanese trader Homma Munehisa who used them to corner the Osaka rice market in the 18th century. As Japan was in isolation for centuries, candlestick techniques remained hidden from the rest of the world. Charles Dow in the United States developed his own bar chart system which has much in common with candlesticks.
Japanese candlestick charting was to remain hidden from most of the world until 1990 when trader Steve Nison discovered themes. After examining old Japanese documents, Nison unlocked the simple beauty of the candlestick trading method and went on to popularize it in a series of books.
So what exactly are they and why are they so great?
A candlestick comprises a body (by default black for uptrending and white for downtrending) and an upper and a lower shadow sometimes called a wick. The upper and lower shadows represents the highest and lowest prices and the body corresponds to the opening and closing prices. By looking at the color and length of a candlestick or the configuration of groups of candlesticks, and also the absence or length of shadows, traders can gain profound insights into the state of the forex market.
Nison identifies a host of candlestick formations including the dark-cloud over, hanging man, morning and evening stars, three black crows and the famous doji, with its various incarnations as dragonfly doji, long-legged doji and gravestone doji.
Studying the world of Japanese candlesticks could take a lifetime but a working trader needs a small group of candlestick patterns he can apply with confidence and clarity on a day to day basis.
In fact, a select handful of candlestick patterns can tell you everything you need to know about what's happening in the forex market right now. The problem is knowing which patterns to focus on and then how to interpret them correctly. Once you get that right, the foreign exchange market will yield its secrets and its profits.
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