Candlestick charts are believed to be one of the oldest charts used to predict price movements. The origins of candlestick charts date from the beginnings of 18th century. It is believed that Japanese trader Munehisa Homma (a.k.a. Sakata), who became very successful and wealthy rice trader, had invented them.
Candlestick charts represent a method of technical analysis and are used primarily to describe price movements of equity over time. They give an overview of open, high, low, and close market prices and they are getting very popular in stock market as well as in forex trading, mostly because of their dynamic features.
Candlestick charts show the direction of a trend and strength of particular price movement (open, high, low, close) in some specific time period. Candlestick charts also provide earlier reversal signals and can be used with other technical indicators.
Candlestick charts use the same price data as bar charts and bear resemblance to candles with wicks on both sides. Candles represent opening and closing trades, while wicks (also known as shadows) illustrate highest and lowest traded prices of a currency (or stock). If the wick is longer, it means that the trading was extended beyond opening/closing price. Candlestick charts form various patterns over different time periods and these patterns can be used to predict certain trends.
If the candle is white, it is the signal of up trend movement and increasing of price. If the candle is longer, the increase of price is more significant. Black candle is the signal of down trend movement and decreasing of price. Again, the longer the candle, the decrease of price is more significant.
When the lower wick is longer than candle and upper wick, it is a signal of bullish market trend. Bullish trend reflects increasing confidence and optimism of the investors. When the upper wick is longer than the candle and lower wick, it is a signal of bearish market trend. Bearish trend respectively reflects decreasing confidence and pessimism of the investors.
Pattern of candles without wicks is called Marubozu and depending on the candle colour can be Marubozu white and Marubozu black. Marubozu white indicates dominant bullish trades where bullish trend is expected to continue, while Marubozu black indicates dominant bearish trades and where bearish trend is expected to continue.
One also significant pattern in candlestick charts is doji. It is neutral pattern and has meaning only in a combination with other candlestick patterns and usually points to trend reversals. Dragonfly doji looks like the letter T, while gravestone doji looks like inverted letter T.
Beside these patterns in candlestick charts there are many others like hammer, inverted hammer, spinning top white, spinning top black, hanging man, shaven head, shaven bottom, shooting star, as well as more complex patterns.
Candlestick charts may seem complicated at first, but they are very easy to comprehend and read. When you start using them, you will see how simple they are. They illustrate more information than other charts and can be even colorized for better definition. Using candlestick charts is a great decision making aid in forex market.