It’s hard to believe that a 400 year old way of tracking a commodities market is still one of the most popular and efficient ways of graphing the Forex market today, but that’s exactly the case with candlestick charts. The Japanese were the first to use technical analysis, and the story goes that candlestick charts were an invention of a Japanese man named Homma.

There was trading in commodities in Japan, specifically in the rice market starting in the 1600s. In the 1700s Homma discovered that while supply and demand was a basic truth, he noticed there was also a direct link between the prices in the markets and the general emotions of the traders involved.

Homma realized that he could benefit from understanding their emotions to help predict the future prices. He was one of the first to understand that there could be a vast difference between value and price of rice - that perceptions could be used to take advantage and make a profit!

A candlestick chart is so called because prices are measured with a bar and two lines on each side, making it look like a candle. The color determines whether the price rose or fell during the predetermined amount of time. The line on top of the bar measures the absolute highest price achieved outside of the open to close range during the day, while the bottom line is the absolute lowest price outside of the open to close range.

There are four prices that are tracked for each measured amount of time during a trading period. Depending on the chart the bar could represent a week, a day, four hours, one hour, 15 minutes, 5 minutes, or something else, so pay attention to the time frame. The four prices in each candlestick are the high, low, open, and close. The high is the absolute highest value the currency achieved during the entire period while the low is the lowest value. Open is still open, and close is close. Just that easy.

The color of the bar will depend on whether the currency ended up higher than the open or lower than the open at the end of the measured session. Often there will be green for gain and red for loss, or white and black, but the two colors really don’t matter, as long as you understand what each one represents. Why are candlestick charts great to use?
1. You can see the open, close, high, and low all in one glance
2. You can access a lot of information easily and quickly at a glance
3. Trends are very easy to spot at a glance once you’re used to these charts

This kind of chart offers you an incredible amount of information and makes finding and locating potential patterns and trends far easier than any other type of graph or method. This will be a major tool for analyzing currency pairs, so it’s one you will want to become familiar and comfortable with to add in your Forex arsenal.

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From Jason Fielder - Founder, ForexImpact.com