Candlestick charting was developed as an effort to add market sentiments to the normal charts and to enhance the understanding of the market movement even more.
Market prices are not only governed by the facts. The market is not ONLY governed by the fundamentals or technicals (technical analysis). There is this third factor and which plays a very important role. This is market psychology or the general market sentiment. The market may go upside down in one day or even in one hour… but if you would really see, no economic fundamentals would have changed during that day or that hour. What really changed was the market sentiment. It’s Fear and Greed but many times just simple fear. Candlestick charts can give an understanding of those market sentiments.
It’s believed that Candlestick charts were developed in the 18th century by famous Japanese rice trader Homma Munehisa. The basic idea behind candlestick charting was to have an overview of open, high, low, and close market prices over a certain period. Candlestick charts make it very easy to read and understand the market sentiments hidden behind the price movement in trading be it Forex Trading or any stock and commodity trading. Since the conception there people have been putting great efforts to relate specific chart patterns to the likely future behavior of a market.
Around 1900 Charles Dow had picked up the candlestick charting and since then it has been commonly used by financial instruments’ traders. In this article we will mainly be talking in terms of Forex (currency) trading.
There are many candlestick patterns but we will be talking about the important ones.
Please also note that these patterns must be combined with other technical analysis indicators and not in isolation.
Groups of candles or certain candlestick formations indicate the underlying psychology and intentions of traders. Couple with chart patterns and technical analysis, knowledge of the most common candlestick patterns – as one of many tools to be used – can greatly increases a trader’s success.
Bullish Candlesticks Patterns
Bearish Candlesticks Patterns
While candlesticks may offer useful pointers as to short-term direction, trading on the strength of candlestick signals alone is not advisable. Jack Schwager in Technical Analysis conducted fairly extensive tests with candlesticks over a number of markets with disappointing results.