Tuesday, 14 May 2013

Forex Tutorials Part 6 - Japanese Candlesticks

This tutorial will touch on candlesticks. I personally adore candlesticks trading. Below is a sample on how Japanese candlesticks look like:

In your trading software, a candlestick can stand for various time frames, from minutes to days and even weeks and months. Candlesticks are formed by using the open, high, low, and close of the chosen time period. The shadow is the movement of the market during the entire time period. The colour is by default white and black but I have chosen to use green and red as that is how I view my chart. A white (green in the figure) candlestick usually means that the closing price of the time period is higher than the opening of the time period. So if you have a buy order at the opening price you see many white (green) candlesticks later, you will be making profits.

A black (red in the figure) candlestick usually means that the closing price of the time period is lower than the opening price of the time period. This candlestick is what you want to see when you have a sell order as you can buy back the currency pair at a much lower price.

The high is the highest price reached during that specific time period and the low is the lowest price reached. Anything that is not in the real body (fat rectangles shown by the green and red body) is known as shadows and depict the movements of the market.

Candlesticks have short and long body. The longer the body is, the higher the buying or selling pressure. Compare the 2 candlesticks at the figure below:

As you might observe, the long body on the right shows higher buying pressure whereas the shorter body on the left shows much lesser buying pressure. For this example, we see that the longer the body is, the further the close is to the opening price of the market. This means that market price increases considerably from the opening to the closing, showing strong buying pressure. The reverse is also true for a red candlestick. For a red candlestick, the longer the body, the more dominant the selling pressure is. Understanding how buying and selling pressure influences the shape of the candlestick is step 1 to effectively using the candlesticks to trade. Think about how you can decipher a short body candlestick versus a long body candlestick. Lets say that there is an uptrend, with numerous long green body candlesticks followed by a short body red candlestick, does it means that the uptrend is over? Personally, I would look at the next candlestick to determine the possible end in the uptrend. However, if what follows the uptrend is a long body red candlestick, the chances of the uptrend ending is more plausible.
Finally, I will be touching on shadows. Using the candlesticks' shadows with the body of the candlesticks can give you a better read on the market situation. Pay attention to the colour of the body, as well as the upper and lower shadows in the figure below:
As you can see from the figure above, the green candlestick on the left shows buyers attempted to bid the price up before seller came into the market and drive the price down. As a result, a shorter body is formed due to selling pressure. On the other hand, the red candlestick on the right shows sellers attempted to bid the price down but buyers came into the market and with their strong buying pressure, prevented the price from falling too far down. Hence, the market closes at a price that could be lower but did not due to additional buying pressure. Combining the body of the candlesticks and the length of the shadows can give one a deeper insight into the market. 

No comments:

Post a Comment