Developed by Japanese rice traders in the 17th century, candlesticks are used today by securities traders. On a price chart, candlesticks provide an instant picture of a security’s price behavior over different time periods. Forex traders can read a candlestick chart to help determine the best trading strategy. Unlocking the information is the first step to incorporating Japanese candlesticks into your Forex trading.
Recognize the different parts of a candlestick. The candle body, also known as the real body, is the long rectangular box. The bottom of the body tells you the opening price and the top of the body tells you the closing price. You may see a thin line extending from the top or bottom of the body. The line extending from the top of the body is the shadow. The shadow indicates the highest trading price for the period. The line extending from the bottom of the body is the tail. The tail indicates the lowest trading price for the period.Step 2
Select the time frame you want to use. Candles reflect currency pair price movements for a variety of time frames from one minute to several months. Look at the different color and length for each candle. The candle body is colored white or green when the currency pair price moves upward. The candle body is colored red or black when the currency pair price moves downward. The body length indicates the strength of the price move.Step 3
Understand that the EUR/USD (Euro dollar/US dollar) with a long white or green candle body is a bullish signal. A long red or black candle body is a bearish signal. When prices move in a narrow range, the candle body is short.Step 4
Look at the chart to see if there is a trend. A row of upwardly-moving long white or green candles indicates a currency pair such as the EUR/USD is in a strong, bullish trend. A group of small squat green or white candles with long tails at the top can indicate the bull trend is weakening and may reverse. A row of downwardly-moving long red or black candles indicates the EUR/USD is in a strong bearish trend. A group of small black or red candles with long shadows at the bottom can indicate the bear trend is weakening and may reverse.Step 5
Read the candlestick chart to help determine your trading strategy. For example, the EUR/USD thirty-minute chart shows three long white or green candles in an uptrend. A new long candle is forming. You could buy the currency pair as long as the candles reflect the uptrend.
- Online Forex brokers usually offer candlestick charting with their trading software.
- Do not trade using candlesticks alone. Pair them with other technical indicators such as the Relative Strength Index of the Moving Average Convergence-Divergence to confirm the candlesticks.
Based in St. Petersburg, Fla., Karen Rogers covers the financial markets for several online publications. She received a bachelor's degree in business administration from the University of South Florida.