Forex Investment and Currency Trading

History of Candle Charts

• Technique originally devised by 18th Century Japanese Rice Traders
• Underlying theory based upon market positioning/psychology
• Commonly used since late 19th Century in the Far East
• Only recently adopted in Western countries, since early 1990s
• Since then the interest in and use of this method of analyzing financial and commodity markets has increased dramatically

A Candlestick

Can be used to display market movement for any period providing the open, close, high and low prices of the period are available.

Market “UP’ Day

Market closes higher than it opens

Market “DOWN” Day

Market closes lower than it opens

Market “NO-CHANGE” Day

Market closes where it opens

The Pattern

Pattern Definition

Market opens and closes at the same level. The smaller then day’s range the more reliable the signal.

Explanation

At the very minimum it signifies indecision. A doji occurring at the end of a strong uptrend/downtrend signifies potential reversal.

The Major Patterns … “Bullish / Bearish Engulfing”

The Pattern

Pattern Definition

“Bullish Engulfing” - market opens below the previous day’s close and closes above teh previous day’s open. “Bearish Engulfing” - reverse of the above.

Explanation

Represents the tables being turned by the bulls (bears) on the bears (bulls). A reversal pattern.

The Major Patterns … “Hammer / Dragonfly Doji”

The Pattern

Pattern Definition

In a bearishly trending market, the price opens near the high of the day and “probes” lower. A sharp rally then occurs which regains nearly all of the day’s losses.

Explanation

The bears are being punished - literally hammered - for trying to take the market even lower. The smaller the real body range of the day the more reliable the signal.

The Major Patterns … “Inverted Hammer”

The Pattern

Pattern Definition

Market opens near / below the previous day’s close and trades into the previous day’s range, before slumping back to close on / at the day’s lows.

Explanation

The small real body warns of indecision. The inverted hammer seen at the base of a bear phase signals the bears losing control.

The Major Patterns … “Hanging Man”

The Pattern

Pattern Explanation

After a strong positive move the market opens at the high of the day and “probes” lower. A rally then occurs which regains all or most of the day’s losses.

Explanation

Market participants are likely to have become long on the rally and are now susceptible to a sell-off the following day.

The Major Patterns … “Shooting Star / Gravestone Doji”

The Pattern

Pattern Definition

Market opens at or above the previous close, trades higher then sells off to a level near the open. The signal is more reliable the nearer the close is to the open.

Explanation

An attempt to force the market higher is met by aggressive sellers.