In the world of forex trading, one of the initial questions that often arises is what is a candlestick.
Beginners are usually a little confused when reading the analyzes provided by experts alluding to the word candlestick and its effect on decision making.
The following article will discuss what candlesticks are and how to analyze them.
What is Forex Candlesticks Chart?
Candlestick is one type of price chart (chart) to map and read price movements in the financial market technically.
When we hear the word ‘candlestick’, what comes to our mind is of course a long cylindrical object with a wick that can be lit to light up the room when the power goes out.
Not entirely wrong, because the name of the candlestick does come from its shape. However, the definition of candlestick that we are talking about here is one type of price chart (chart) for analyzing the market that was first discovered by Munehisa Homma.
In its history, Munehisa Homma was recorded, a rice trader in Sakata, Japan, in the 17th century who studied the movement of rice prices in Osaka.
In 1755, he wrote a book entitled ‘San-en Kinsen Hiroku’ which reviewed the psychology of markets for the first time in the world. Homma claims that the psychological aspect of the market is important for successful trading, and that traders’ emotions have a significant influence on rice prices.
He notes, ‘when everyone is bearish, there is a reason for prices to go up’; And vice versa, when everyone tends to be optimistic that prices will go up (bullish), there is a reason for prices to go down.
Around 1900, the technical analysis used by Homma was further developed by various experts, until then the use of ‘candlesticks’ was perfected and disseminated by Steve Nison through his books. Candlesticks continue to be used today to analyze the price movements of stocks, commodities, forex, etc.
Also Read: What is Forex Market Sentiment?
Important Elements of Candlestick Charts
After knowing what a candlestick is and its history, the next thing to understand is the elements that make it up.
To create a candlestick chart, we must have data on the opening price (Open), the highest price (High), the lowest price (Low), and the closing price (Close), or OHLC, within a certain time period. Price data in one period will then form one complete candle.
In one candle, there is a middle part called the ‘body’. For the thin line, drawn at the top and bottom of the body, it is called a ‘shadow’ or ‘tail’. Pay attention to the anatomy of the candlestick chart below:
Actually, the color of the candlestick chart can be changed as desired, as long as we understand how to read it. Many traders like to use green and red, or something else.
Understanding of this candlestick chart will be honed as time goes by we learn. However, for initial understanding, in this article we use candlesticks with an empty body (white) or containing only (black). The rules:
- A candlestick with a black body or a black body, indicating a Close price is lower than the Open price. This indicates a bearish condition (price is depressed because sellers are stronger in the market).
- If the candlestick shows an empty body or a Close price above the Open price, it means that the market price tends to rise and is bullish (the price increases because buyers are stronger in the market).
For a more concrete picture, let’s take a look at the screenshot of an example candlestick chart that shows price movements in the following EUR/USD currency pair:
The candlestick chart above shows the movement in the Daily timeframe. That is, each candle displays the OHLC price in one day. When the Candle is green, it means that the Open price is lower than the Close price on that one day.
Meanwhile, when the candle is red, it means that the close is lower than the open. Also note that the last candle at the far right has not yet formed completely, because the trading day is not over.
Conclusions About the Meaning of Candlestick
Many things cause candlesticks to be chosen as the basis for technical analysis, one of which is because it is more visually attractive than conventional price charts which are only lines.
In addition, each candlestick shows price movements which are easier to read. Keep in mind, the OHLC price on a candlestick is important information that can be used to analyze the market.
If studied more deeply, this understanding of the meaning of candlesticks will lead us to more detailed topics such as the types of candlesticks, candlestick patterns and their more complex uses in technical analysis.
If you do not understand the specific terms in forex on this page such as technical analysis, you can visit the Forex Dictionary. Take advantage of Forex Dictionary when you encounter new vocabulary for optimal understanding.