We’ve written before about the different types of forex accounts, and to be sure each one illustrates a different way to approach this unique market. But no matter how you design your forex account, you’ll need to learn to read the fluctuations in currency pairs similarly. In that regard, you can never be too prepared. As with any sort of trading or investing, it’s handy to learn to recognize as many different charts and trends as possible, so as to gain a broader and more thorough understanding of the markets.
With this in mind, one very helpful style of price charting for a forex trader to become familiar with is the candlestick (or “Japanese Candlestick”) design. Famously dating back to an 18th century Japanese trader who invented the method as a way of determining real fluctuations and trends in rice prices, candlestick charting is now so widely used in investment circles that some take advantage of it almost unconsciously.
If you’re not familiar with candlestick charting, the basic idea is to map out four different points of a stock (or in this case currency pairing) value throughout a day: the open, the high, the low, and the close. These points are essentially recorded vertically so that one is stacked above the other, and so on, with the ultimate purpose being to determine the so-called “real body” of the resource or pairing you’re measuring. The open and close form is what’s known as the real body, meaning the area only between the open and close points with no regard to the high or low. This “body” is typically identified as a vertical bar drawn between the open and close, left white if the close is higher than the open (indicating demand) and black if the close is lower than the open. The high and low points then stick up and down from the real body bar to show the full range of fluctuation that occurred.
The point of this method of denoting price movement is to show the relevant volatility that occurred in a given day (or, through the same design, week, month, year, etc.). The highs and lows are interesting, and can certainly be incorporated into an investing strategy, but the real body is thought to show the most vital range to be considered in determining a resource or currency pairing’s true value.
But the thing about the Japanese Candlestick method that’s particularly relevant to forex traders is that it’s specifically designed to be about raw data, rather than external influencers and speculation. Forex pairings operate with regard to national and international trends rather than the goings on of a single company or industry, and as such there are a lot of major factors that influence the market. And by paying attention to the full rise and fall of a pairing over a set period of time, you can find yourself attempting to explain a larger range than necessary by attempting to decipher all of those influential factors. Your analysis can become focused on trying to figure out how and why a price might hit its highs and lows. By paying attention to candlestick charting, however, you can narrow your focus to the most relevant range a pairing is trading in—the “real body”—and make
decisions based on existing data rather than perceived influences.
If this isn’t something you’re already doing, you’ll likely be surprised by how quickly and easily candlestick charting can be picked up. And at the very least, it’s worth learning as a way to gain a new point of view on the forex pairings you track.