The Japanese began using technical analysis to trade rice in the 17th century.
Much of the credit for Forex candlestick development and charting goes to a legendary rice trader named Homma, from the town of Sakata.
While this early version of technical analysis was different from the US version, which was started by Charles Dow around 1900, many of the guiding principles were very similar:
- The “what” (price action) is more important than the “why” (news, earnings, and so on).
- All known information is reflected in the price.
- Buyers and sellers move markets based on expectations and emotions (fear and greed).
- Markets fluctuate.
- The actual price may not reflect the underlying value.
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Blackbull Markets
Candlesticks are usually composed of the body (black or white), and an upper and a lower shadow (wick). The wick illustrates the highest and lowest traded prices of a security during the time interval represented. The colour of the body illustrates the opening and closing trades.
If the security closed higher than it opened, the body is white or unfilled, with the opening price at the bottom of the body and the closing price at the top.
If the security closed lower than it opened, the body is black, with the opening price at the top and the closing price at the bottom. A Forex candlestick doesn’t need to have both a body and a wick.
Types of Forex Candlesticks
There are 14 simple patterns and a huge number of complex patterns. Based on the original 14 candlestick patterns and other market analysis and research tools, each experienced trader can come up with his or her own patterns
1. “White candlestick” – signals uptrend movement (those occur in different lengths; the longer the body, the more significant the price increase)
2. “Black candlestick” – signals downtrend movement (those occur in different lengths; the longer the body, the more significant the price decrease)
3. “Long lower shadow” – bullish signal (the lower wick must be at least the body’s size; the longer the lower wick, the more reliable the signal)
4. “Long upper shadow” – bearish signal (the upper wick must be at least the body’s size; the longer the upper wick, the more reliable the signal)
5. “Hammer” – a bullish pattern during a downtrend (long lower wick and small or no body); “Shaven head” – a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); “Hanging man” – bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
6. “Inverted hammer” – signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); “Shaven bottom” – signalling bottom reversal, however confirmation must be obtained from next trade (no lower wick); “Shooting star” – a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)
7. “Spinning top white” – neutral pattern, meaningful in combination with other candlestick patterns
8. “Spinning top black” – neutral pattern, meaningful in combination with other candlestick patterns
9. “Doji” – neutral pattern, meaningful in combination with other candlestick patterns
10. “Long legged doji” – signals a top reversal
11. “Dragonfly doji” – signals trend reversal (no upper wick, long lower wick)
12. “Gravestone doji” – signals trend reversal (no lower wick, long upper wick)
13. “Marubozu white” – dominant bullish trades, continued bullish trend (no upper, no lower wick)
14. “Marubozu black” – dominant bearish trades, continued bearish trend (no upper, no lower wick)