In 1755, Candle chart was first invented by a Japanese rice merchant named Homma Munehisa who discovered that the psychological and emotional aspect of traders has critical influence on rice prices. Now widely used for technical analysis of a market, candlestick chart shows the high, low, open and closing prices of a market for a set period. X-axis of the chart is for time by hours or days, and Y-axis is for currency exchange rate price. The candles tell if the closing price was higher or lower than the opening price. Depending on the time frame of the strategy, the x-axis can be set up by 1 or 5 minutes for scalping, or can stretch into hourly or daily x-axis for intraday, and weekly and monthly for swing and position trading.
Candlestick chart is used in technical analysis of Forex price patterns.
It is a powerful visual aid for decision making when reading psychological trend.
It is a cornerstone of strategical case study of Forex market and a trader must get used to reading the chart before getting into deeper complex mechanism of the technical analysis.
You can take help from the book ‘The Candlestick Course’ by Steve Nison. I read it in my starting years and I remember, it was quite helpful. Also, you can refer to the articles on candlesticks, given here on the babypips website as well, they are also very easy to understand.
Two factors I have learned from writers who don’t concentrate on candlestick formation and patterns. I’m not saying you need to forget about engulfing patterns and hikkakes and haramis and all the rest, just that you need to always be aware of the wider perspective.
Firstly, according to Al Brooks, there are only two types of candlestick, trending and non-trending. Nothing else about the individual candlestick is as important as this. Which kind of suggests that searching for hammers and shooting stars isn’t going to be profitable.
Secondly, although each candlestick give more information than each HL bar, a higher high and higher low that follow a higher high and higher low are telling you something the candle does not print up very well.
Bars and candlesticks are different. Bars have no differentiated body between the open and close. A HL bar doesn’t show the open and close, and can be coloured according to the differences from the H and L of the prior HL bar.
The best way to start the interpretation of candles, is to choose a market and always evaluate a defined schedule to visualize what are the patterns of behavior. It should be borne in mind that when dealing with investments, they will be affected by political, economic and even significant natural events, so it will be necessary to always keep in mind all the incident aspects in the periods of behavior analysis
