Perhaps you didn’t know that candlesticks, much like many other sweet and dear inventions that you are using today, originate in the country of Japan.
Candlesticks have turned into one of the most popular forms of chart analysis in all financial markets. The foreign exchange market is no exception. Candlesticks also play an important role in the forex market and the analyses that are carried out in order to find the best signals.
In this article we are going to discuss the origins of candlesticks, their definitions, what they look like, how they can be used in trading specially forex trading, and also compare them with some of the other popular forms of charting.
Are Candlesticks Related to Rice?
You might be thinking “what a weird title!” But the reality is that candlesticks are in fact somehow tied to this rather bland but at the same time delicious food.
You see, the origins of candlesticks have their roots in the trade of rice that used to take place in Japan hundreds of years ago. Different merchants and businessmen throughout the years wanted to understand the market better.
Although there are certain names that stand out much better, the whole thing can be regarded as collective effort that took years. In any event, the Japanese rice merchants wanted to understand the market better. So they noticed that there can be patterns in the market.
Patterns that are might be under the influence of various factors. Among these factors we can refer to the psychology of traders. But whatever it was that could affect the price values and the volume of price traded over a certain period of time led to the creation of candlestick.
In essence, candlestick is a way for showing price action in a certain period of time. But are candlesticks different from Japanese candlesticks?
What Are Japanese Candlesticks?
If we want to look at candlesticks and the whole charting approach related to them, then it can be concluded that there is no such thing as Japanese candlesticks. Candlesticks are candlesticks! They do not have a nationality.
However, because candlesticks have their roots in the Japanese trading tradition, sometimes they are also referred to as belonging to this country. At the same time there are some special forms of candlestick charts that have kept their conventions, such as the Heikin Ashi charts. There are even certain forms of candlestick charts that have kept their traditional Japanese candlestick charting approach and they are literally called that.
But if we do not want to be so pedantic, then they all share the same characteristics.
What Are the Characteristics of Candlesticks?
First of all, candlesticks are named that because of a reason. They do indeed look like candles. As a result, they have a body and also a wick, or maybe two, depending on market condition.
In essence, each candlestick is formed with the help of 4 pieces of data – these are the opening price, the closing price, and also the highest high and the lowest low recorded for the candlestick, which are simply referred to as high and low.
First there is the main part of the candle, also called body. The body of the candle can either be filled or hollow. If it is filled, then it means the opening price is lower than the closing price.
If the body is filled, on the other hand, it means that the opening price is indeed higher than the closing price of that particular candlestick.
Then there are the wicks, also known as shadows, that are attached to the top and bottom of the body. The top wick is indicative of the high prices recorded and the highest point of the top wick is the “high” of the candlestick.
On the contrary, the bottom wick consists of the lower prices that were registered for the candle and the lowest point in the lower wick is the so-called “low” of the candle.
Candlestick Charts Compared with Other Charts
As you might know we have different approaches to charting that result in the different forms of charts that we have. For instance, we have line charts or bar charts. But what is the difference between candlestick charts and these charts?
The fact is that all the different types of charts, though having different names and presenting data in visually different ways, might all be trying to tell us the same thing. This is more pronounced in the case of candlestick charts and bar charts. Both of these charts provide the same type of information just in different ways.
Although there are still differences. For instance, with a bar chart, you might not be able to receive the same smooth information that you can receive with candlestick charts. This is especially true with the identification of trends.
The type of visualized data and information with candlestick charts are just so smooth compared with the data you receive from other types of charts. For this reason, perhaps candlestick charts are heavily favored by traders who are not seasoned and experienced. But even professional traders might want to opt for candlestick patterns because of the averaged out data that they present.
But what are the benefits of using candlestick charts in the forex market? And are there any limitations or downsides that come with them? Let’s find out.
The Advantages of Candlesticks in Forex Trading
There are many advantages associated with the use of candlestick in forex trading.
- The way candlesticks are presented and the whole different patterns that can be found with the help of them will allow you to customize and personalize them as much as it is necessary.
- Despite their smooth and simple presentation of data, candlesticks are able to provide traders with a great amount of insight about the market.
- Because they are smoothed and without unneeded clutter, even beginner traders can try to understand them and actually be successful in doing so.
- Another advantage of candlesticks is that they incorporate the psychology of traders. Something that many technical analysis tools and charting tools do not take into account. Market sentiment is an important factor in all conditions that can impact price movements.
The Disadvantages Candlesticks in Forex Trading
There are certain downsides that are associated with candlestick. But the biggest one is related to the lack of details. Because of the nature of candlesticks, some traders and market experts express their doubt and fear that this charting approach is not able to detect small price movements and some small fluctuations might go unnoticed. Small fluctuations that, in their opinion, might build up to something bigger.
Although this downside can be easily mitigated by the use of many different analysis methods in conjunction with candlesticks in order to provide confirmation.
Candlesticks are a way of representing data on a trading chart. Although this charting approach has developed into a large field of chart analysis, its roots are simple and go back to the tradition of rice trade in Japan. Over the years, they have become one of the major charting approaches in all markets including the forex market.