Technical analysis is the most widely used way of analyzing the Forex market. The technical analysis itself has many tools of analyzing the market. Probably the most popular one is identifying the candlestick chart patterns. These candlesticks first appeared in Japan sometimes in 18th century. They were used by Japanese rice traders to plot the price movement. That’s why candlestick charts often called Japanese candlestick charts.

Long time before candlestick charts were invented traders would use line connecting the prices over time. Bar charts substituted the line charts because a bar gives much more visual information about the price movement. Looking at the bar of certain time frame you could tell at what price it opened, closed, what was the high and low of the price for that particular period period. However a candlestick could make visualization even better.

Early in 20th century American stock market traders started to use candlestick charts. The one who introduced them to candlesticks was Charles Dow. We know him as a co-founder of the Dow Jones company.

Forming of a Candlestick Pattern

Candlestick chart consists of rectangular shaped candles with vertical lines that are called upper and lower shadows. Those candlesticks have two different color depending of the difference between open and close prices over the period of the candlestick. Usually bullish candlestick (open price is lower than close price) have a brighter color than a bearish candlestick.

The wick represents the highest or lowest price point during the time period that candlestick was formed. The horizontal lines represent the opening price and closing price for that time period. Let say we have a bearish candlestick. It can be identified by the color of the candlestick. Then the open price will be higher than the close price for such a candlestick.

The Ways to Use Candlestick Patterns for Trading

Candlesticks are the best way to visually identify the trend. For example if you have a candlestick chart of 5 minute time frame over several hours and the majority of the candles are green (or whatever color on your chart means bullish movement) then you can tell that the uptrend is developing.

That’s why candlestick charts can be an invaluable tool. A quick glance at the chart can tell you if market is trending or if the movement is basically horizontal without any major trend. Forex is an environment where a trader needs to make a decision in a very short time. Such chart patterns can help.