Candlestick analysis and its use in trading strategies

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Japanese candlesticks are the oldest chart analysis tool …

the first mention of the transformation of a dynamic price series into a graphical form dates back to the 17th century AD. The homeland of this kind of indication is Japan. Further in the text, we will refer to such a price presentation as a candlestick indicator. 

A candlestick is a graphical figure with a body and shadows. The body of the Japanese candlestick is divided into descending or full (since it often has a color different from the color of the surrounding “chart” background) and ascending or empty (the fill color often matches the background color). Japanese candlesticks, like any other indicator of price presentation, are marked in a plane of two coordinates:

  1. Time (t)
  2. Price (p)

The body of a Japanese candlestick represents the range between the opening and closing prices for a given period. The shadows of the candlestick (upper and lower) correspond to the past price change above or below the open and close prices, respectively, during the used time period.

The convenience of using Japanese candlesticks consists precisely in the simultaneous display of the minimum and maximum prices, the opening and closing prices, as well as the difference between them (it is the difference and the width of the range that has the greatest value in candlestick analysis). Based on the difference between the minimum price and the closest price of the candlestick body, a conclusion is made about the prevalence of one or another force in the market. Based on the difference between the maximum and minimum prices, a conclusion is made about the volatility and efficiency of using the contract volume.

The basics of candlestick analysis and its application in your own forex trading strategies.

Determining the true market trend “market target”

The Japanese candlestick indicator is an excellent tool for determining the market trend without using additional technical systems and rules. Usually, to determine the market trend on the chart, it is sufficient to have a volume indicator (if a trend is detected, the tick volume is also suitable, although it is better, if possible, to have information about the real contract volume). It is very simple to interpret candles:

A) The “bearish” candlestick has a pronounced upper shadow and a short lower shadow, the range of the body is less than the range of the upper shadow, against this background, the volume is growing – boldly sell, bears are in the lead.

B) The “bullish” candlestick has a pronounced lower shadow, the range of the body is less than the range of the lower shadow, against this background the volume is growing – boldly, buy, bulls are in the lead.

C) The “bearish” candlestick has a pronounced lower shadow, the range of the body is less than the range of the lower shadow, against this background the volume is growing – boldly, buy, bulls are in the lead.

D) The “bullish” candlestick has a pronounced upper shadow, the range of the body is less than the range of the upper shadow, against this background the volume is growing – boldly, sell, bears are in the lead.

E) The “bearish” candlestick has long shadows, and the range of the body is less than any of the shadows, against this background the volume falls – the bulls are in the lead.

E) The “bullish” candlestick has long shadows, and the range of the body is less than any of the shadows, against this background the volume falls – bears are in the lead.

G) The “bullish” candlestick has no lower shadow or a short one, there is an upper shadow, but its length is less than the range of the body, against this background the volume falls – we continue to buy.

H) The candlestick “bearish” upper shadow is absent or short, the lower shadow is present, but its length is less than the range of the body, against this background the volume falls – we continue to sell.

I) The candlestick “bearish” upper shadow is absent or short, there is a lower shadow, but its length is less than the range of the body, against this background the volume is growing – we stop selling, close some of the short positions.

J) A bullish candlestick has no lower shadow or a short one, there is an upper shadow, but its length is less than the body’s range, against this background, the volume grows – stop buying, close part of long positions.

Following the above rules, a trader will be able to avoid part of the losses if the forex trading strategy used indicates the opposite. Remember, in no case should you open against the rules of candlestick analysis. If the signals of the forex strategy used coincide with the rules of the Japanese candlestick indicator, which I indicated above, feel free to follow them. 

Japanese candlesticks are an integral part of volumetric analysis, this chart representation is most often used in trading by professionals and it is absolutely justified.

The concept of summing up market positions

Pay attention, in the case when a sequence of 6-10, or even 12 bullish or bearish candles with constantly growing volume appears on the chart, and then a so-called squat bar appears (there is practically no body, shadows are present with a clear predominance of a shadow towards the opposite tendencies) and at the same time the volume on the “squat” bar is also growing, we can talk about the further continuation of the trend.

I recommend that you pay special attention to candlestick analysis and use it in your trading practice. Japanese candlesticks are one of the best indicators ever created for a comprehensive understanding of the market.

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