The well-known technique of trading with candlesticks, although it has Japanese origins, is becoming an essential means to trade with Forex in the technical analysis. In fact, candles charts use indicators to show the values of openness of a candle, the high, low and closing value.
A candlestick chart consists of two parts. The rectangular body that includes the area between the opening value and the closing one, gives the candlestick chart its distinctive appearance. The body is black or red if the opening is above the closure, while it is white or green if the closure is greater than the opening. The situation in which the opening price and the closing one are the same is commonly defined as a doji candle, and it represented by a single horizontal line at a given level.
The top and the bottom are often seen as keys market. Through these variations we can indicate the significant price changes. Candles are useful for this task. The maximum value of the body provides the initial point of resistance, the base to refer to for the next action. This includes that the prices above the resistance value may rise towards a new high or even to a lower value. Depending on the trend, it is possible to understand how to move on the markets and open some positions.
Besides, the value of the candles on the market can also be considered as a breakout level. Identifying the breakout level is fundamental to understand the best way to move on the markets in consequence of the breakage trend, using the same levels as supports or resistances.
Here we can see some examples of how to exploit the candlestick technique in the world of Forex. The graph CAD / CHF gives us a good starting point. In July 2011 CAD / CHF pierced the support linked to the bottom of 2008 - 0.8502 downward with a long black candlestick. Apparently, this breakout movement was the confirmation for traders that the bearish trend was restarted. The month of august seemed to confirm this view, but during the closure time it led to the creation of a candle known as "dragonfly doji"; this candle is shaped at the end of the decline of an oversold market. This was the signal that traders had to equip themselves with hard profit take and stop loss, and in fact, the month of September revealed the true nature of the bearish movement in July, or a false signal.
Forex candlesticks confirmation
The following graph concerning GBP / NZD is a clear example of how to use candlesticks to determine significant levels of support / resistance and to determine the right time for a reversal trend. In November 2011, GBP / NZD registered a top at 2.1040 but in the next session a candle, known as bearish engulfing pattern, cancelled the whole bullish body of the previous candle, a clear signal of a trend reversal. The trader should have opened a short position below the minimum of the bearish engulfing pattern with a maximum stop loss of 2.1040. On May the 23rd 2012 the market touched once more the same level of 2.1040, but again a double inversion signal appeared confirming the value of this resistance level. Firstly a shooting star and then a bearish engulfing pattern signaled as appropriate the opening of a short trade on GBP / NZD below the low of the bearish engulfing pattern with a stop loss always at 2.1040.
Forex candlesticks confirmation - GBP/NZD
A window is the equivalent of a gap in the classical technical analysis and means a price zone without any exchange. A rising window is a clear bullish signal (bearish falling windows). When we form a rising window, not only we have a clear signal of breakout that will allow traders to open long positions, but also a strong support in the next pullbacks. The EUR / TRY graph clearly shows the two characteristics of this pattern.
Forex candlesticks confirmation example
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