Japanese candlestick charts have provided traders with a unique insight into the future direction of markets since their invention by a Japanese trader in the mid 1700s.

Candlestick charts - unlike conventional open, high, low, and close or OHLC charts - convey all of the same information, in addition to whether the instrument was up or down for the period in question.

By coding every entry with one of two colors, candlestick charts tend to give a more detailed depiction of market action. This can allow forex trader using Candlestick charts in their technical analysis to see the market in greater depth.

Brief History of Japanese Candlestick Charts

Candlestick charts were invented by a legendary Japanese trader named Homma Munehisa of Sakata, Japan.

Munehisa - one of the most successful traders of all time - primarily dealt in rice and was also one of the originators of futures contracts. Munehisa is said to have earned the equivalent of over $100 billion dollars during his trading career, and he often made as much as $10 billion in just one year.

The charting technique was first brought to the attention of western traders by Charles Dow - of Dow-Jones fame - and has been increasingly used in the West since the early 1900s, primarily among stock and commodity traders. Forex traders have more recently discovered the benefits of using this more sophisticated Japanese charting method.

Candlestick Charts: Definition and Interpretation

A candlestick chart consists of a chart where each individual entry is represented by a "candle." The candle is made up of a body and an upper and lower "shadow" or "wick".

Candlestick Body

The body of the candle represents the space between the opening price and the closing price, with the opening price being at the bottom of a white candle and the top of a black candle.

If the body of the candle is white, then the price of the instrument or currency has gone up for the time period represented by the entry. The opening price would be at the bottom of the white candlestick body while the closing price would be at the top.

Conversely, if the currency has declined, then the body of the candle would be black with the opening price at the top of the body and the closing price at the bottom.

Candlestick Shadow

The shadow or wick of a candlestick extends from both the top and the bottom of the body of the candle, and represents the upper and lower trading ranges outside of the opening and closing prices.

Shadows can be on both the top and bottom of the body. A long shadow represents a wide range of trading activity, while a short shadow represents a narrow trading range.

Single Candlestick Types

Depending on their shape, candlesticks can fall into several distinct types that can provide useful information to the forex trader about the market. Some of the more common single candlestick types include the following:

• Marubozu - this type of candlestick consists of a solid body with no shadows and indicates strong demand or supply in the market.

• Doji - a market reversal candlestick, this type of candlestick has the same opening and closing prices. The absence of a body gives the Doji the appearance of a cross, a T or an upside down T. The T Doji is called a Dragonfly while the reversed T is called a Tombstone Doji. The cross is known as the Star Doji.

• Spinning Top - this candlestick often indicates a lack of direction and indecision in the market and is characterized by long upper and lower shadows and a small body.

Candlestick Chart Patterns

In addition to analyzing the appearance of single candlesticks, the Japanese Candlestick Charting method also has many well defined Candlestick chart patterns which can provide useful trading signals to forex traders.

In general, candlestick chart patterns are divided into reversal patterns and continuation patterns. They can consist of just one candlestick or can be more complex in nature.

The Japanese traders who developed this technique have given colorful names to the different chart patterns and have incorporated sound trading principles behind the classic interpretation of each particular pattern.

Understanding Candlestick chart patterns can be a powerful trading tool for just about any trader operating in any market.

Furthermore, for the forex trader, using and interpreting candlestick charts intelligently can help add further depth to their technical analysis of the forex market.

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