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An Introduction to Forex Candlestick Charts

Aug 17, 2007
If you have an interest in the foreign exchange market (more commonly known as Forex), candlestick charts are the most readable and useful graphic depiction available.

A combination of a line chart and a bar chart, a candlestick chart shows the range of price movement over a set period of time. Candlestick charts are an excellent aid when you are making decisions as you can see a lot of information about the Forex trading currency movement and with a little bit of education about what the chart represents, you will soon see why.

A rice trader by the name of Honma Munehisa was said to have developed the candlestick chart during the Tokugawa Shogunate, a period of feudal dictatorship in Japan. Honma was far ahead of his time; legend has it that he had men stationed every 6 kilometers along the road, positioned to relay the current prices of rice to his headquarters.

Honma's charts gave him an overview of the rising and falling market prices over an extended period of time, and after they were codified, they were an invaluable tool for his operation.

These charts were used (and continue to be used today!) to predict future trends. In 1900, the American journalist and founder of the Wall Street journal, Charles Dow, discovered this technique and added it to his series of tools for understanding market behavior.

Candlestick charts are named for their distinctive shape. One entry on a candlestick chart is a black or white rectangle with a "wick" coming from each end. While this entry might seem a little hard to understand at first, it is really very simple.

A forex candlestick chart will show opening and closing prices as well as the highs and low. A single entry on a candlestick chart will show a vertical rectangle that has vertical lines protruding from the top and bottom, the "wicks" mentioned above.

Where a simple bar chart will only show you vertical lines that display the highs and lows of each time period, a forex candlestick chart will provide more information. The rectangle that is absent in the bar chart will display the range between the opening and closing prices. The top of the block is the opening price, the bottom of the block is the closing price.

There are many advantages to a candlestick chart.

A line chart, for instance, only shows the closing price over a certain period of time and a bar chart will only show you a range of the highs and lows in the price.

A candlestick chart, alternately, will show you what a bar chart does as well as give you a pictorial representation of the range between opening and closing period. With this information in hand, you can make well thought out and considered decisions.

To protect your investment on the Forex market, you need to pay attention to the trends that the candlestick charts can alert you to.

The coloring and size of the bars can also represent different things.

The size of the wicks can represent bearish or bullish trends, while the position of the rectangle on the wicks can also hint towards a bearish or bullish position during an uptrend.

Forex candlestick charts can be invaluable tools when considering the choices that are presented. By learning to read and use them, a Forex trader can gain distinct advantages in decision-making on the foreign exchange market.
About the Author
Dave Hikade began trading over 10 years ago and provides a FREE Forex Trading Newsletter:


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