Introduction to Candlesticks
Twenty Third session of Forex Training
Welcome to Forex professional training in financial markets.
This session is about introduction to candlesticks thus candlestick, Japanese candle, candle details, ascending and descending candles plus candles’ starting point, profit line and loss line will be discussed.
Candlestick or Japanese candle was first mentioned and used by Japanese traders.
Shape of the candle describes the buyer and the seller’s emotions in addition to their feelings about their buy and sell orders.
Usage of Candlestick
Technical analysis on candlestick has the most significant effect on future market trend, thus stock market information of any country is provided in Japanese Candlestick style with the same price and features, due to the fact that all information is represented by sole Stock Exchange organization.
On the other hand, as Foreign Exchange market is an interbank network, the style of Japanese Candlesticks represented by various brokers have different features and price, considering that each market provider has different time zone.
The shape, high, low, open, and close prices of candlesticks represented by brokers differ considerably.
The best and most accurate candles are provided by FXPro with long price history useful for better technical analysis, especially on commodities such as Oil and Gold.
Some brokers represent only limited timeframe of price history, on such commodities that would be troublesome.
Volume traded on Stock market is reliable because information is represented by a sole organization, Stock Exchange organization, however, transaction volume is not valid.
If a trader wants to check transaction volume in Forex market, it would be more appropriate to check it on FXPro, IG and OANDA platform due to their numerous clients.
There are more than 140 candlestick types with different credibility rates. Candlestick is more reliable in H4 and longer timeframe.
Technical analysis provided using candlestick information is more credible when trader uses H4 or a longer timeframe.
Candlestick has less reliable result on a shorter timeframe due to sharp price fluctuation.
There are different candlesticks based on their number used in technical analysis.
Technical analysis can be based on one candlestick.
Technical analysis can be made on more than one candle, 2 to 5 candles. The interaction between candles has significant effect on technical analysis.
Candles can be classified based on their importance.
- High importance
- Moderate importance
- Low importance
The most applicable candles have high importance on technical analysis.
Different Parts of a Candlestick
Candle has a main body, also known as real body. Open is the price that candle forms. Close is the price that candle is closed.
High means the highest amount candle met. Low is the lowest price candle touched. The area between the body and High/Low prices is called the Shadow.
The Upper Shadow is between High and main body, while Lower Shadow is between main body and Low. There would be no Shadow on a candle.
Candlestick can be categorized into two groups: Increasing or Bullish and Decreasing or Bearish.
Increasing or Bullish candlestick, in which Open position is located below Close position, is illustrated in left figure.
Price starts from the Open position, after a period of time, with some price changes, it closes with the amount higher than the entry price.
Decreasing or Bearish candlestick, in which Open position is located higher than Close position, is shown in right figure.
Price starts from Open position, after a period of time, with some changes, it closes with the amount lower than the entry price.
High and Low prices in either of them are the same.
Order price entry is different, based on candlestick type. In a Bullish candlestick, the order price should be more than High price of given candlestick.
The Buy order entry price must be over the candlestick High price. In Bearish candlestick, Sell order price must be lower than the Low price of a certain candlestick.
It is recommended that traders place their initial orders with 3 pips away from candles in H4 timeframe.
This gap for daily, weekly, and monthly would be 5, 7 and 10 pips respectively. This method reduces the failure of technical analysis based on a candlestick.
TP of a Buy order on Bullish candlestick should be placed above High price of the given candle plus the length of the candle. SL on this order should be placed on Low price of the candlestick.
TP of a Sell order on Bearish candlestick should be placed on Low price of the given candle minus the length of the candle. SL should be on Low price of the given candlestick.
That concludes this session, until next time and another session take care.