How to Read FOREX Candlestick Charts

These charts have found great popularity with currency traders. Candlestick charting is usually credited to the Japanese rice trader Munehisa Homma in the early eighteenth century, though many references indicate that this method of technical analysis probably existed as early as the 1600s. Steven Nison of Merrill Lynch is credited with popularizing candlestick charting in Western markets and has become recognized as the leading expert on their interpretation. See Figure below.

[caption id="attachment_13104" align="alignleft" width="370"]Candlestick Chart Candlestick Chart[/caption]

The candlestick is the graphic representation of the price bar: the open, high, low, and closing price of the period.

The algorithm to construct a candlestick chart follows.

The elements of a candlestick bar are shown in Figure below.

[caption id="attachment_13105" align="aligncenter" width="550"]Anatomy of Candlestick Bars Anatomy of Candlestick Bars[/caption]

The nomenclature used to identify individual or consecutive combinations of candlesticks is rich in imagery: hammer, hanging man, dark cloud cover, morning star, three black crows, three mountains, three advanced white soldiers, and spinning tops are only a few of the candlestick patterns that have been categorized and used in technical analysis.

Candlestick Chart Algorithm

  • Step 1—The candlestick is made up of a body and two shadows.
  • Step 2—The body is depicted as a vertical column bounded by the opening price and the closing price.
  • Step 3—The shadows are just vertical lines—a line above the body to the high of the day (the upper shadow) and a line below the body to the low of the day (the lower shadow).
  • Step 4—It is customary for the body to be empty if the close was higher than the open (a bull day) and filled if the close was lower than the open (a bear day).
A thorough description of how to interpret candlestick charts is given in Steven Nison's books: Japanese Candlestick Charting Techniques (Hall, 1991) and Beyond Candlesticks: More Japanese Charting Techniques Revealed (John Wiley & Sons, 1994).
By Michael Duane Archer
Michael Duane Archer has been an active futures and FOREX trader for more than 35 years. He has worked in various advisory capacities, notably as a commodity trading advisor, registered SEC investment advisor, and branch manager for Heinold of Hawaii. He currently trades FOREX and futures and is involved in several technical analysis research projects.

Copyrighted 2020. Content published with author's permission.

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