What is Forex Chart trading tool?
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What is the candlestick forex chart?
In a nutshell, it is a type or a style of bar-chart, which describes the movements of prices of equities, over a period of time and is a combination of a line-chart and bar-chart, with each bar representing the price movement range, over a given interval of time. This type of chart is most frequently used in the technical analysis of equity price patterns.
History of the the candlestick forex chart
Whilst the exact history of the candlestick chart is not 100% clear, they are reputed to have been most effectively used by a successful Japanesericetrader called, Munehisa Honma, who made an absolute fortune, with their usage, in the 17th century and these charts gave him (and others) a clear snapshot of open, high, low, as well as close market prices over a given time frame.Using candlestick charts, for charting, has become one of the most popular means, for technical analysis, of financial movements/signals, due to the ease in being able to read the charts and understanding the graphs.From the 17th century, much effort has gone into relating the chart patters – to predict the likely future market tendencies and this method, of price charting, has become interesting, because of the ability to display four data-points, instead of just one. Moreover, the Japanese rice traders found that the resulting charts could, more or less, predict with accuracy, future demands for their rice.Candlestick charting was only really introduced, to the US, in the early 1900’s by a Mr. Charles Dow who developed a different approach to technical analysis, with the candlestick charts; whilst retaining many of the original guiding principles, which were:
- The "what" (price action) is more important than the "why" (news, earnings, and so on).
- All the 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.
The candlesticks themselves and the formations they shape were given colorful names by the Japanese traders. This was, in part, due to the military environment of the Japanese feudal system during this era, candlestick formations developed names such as the "advancing three soldiers".
A simplified explanation of candlestick chart layout overview
Candlesticks are, as a rule, made up of the body, which may be black or white, with an upper and a lower (the wick) shadow. The wick points to the highest and the lowest traded prices of a stock; and the body, the opening and closing trades. When the stock moves up – the body is white, with opening price at the body’s bottom and the closing price at its top. If the prices went down, then the body is black – with the opening price at the top and the closing price at the bottom. However, a candlestick does not, necessarily, need to have a neither a body nor a wick.
Why do many traders favour candlestick charts over other charts?
As I mentioned earlier, in this article, many traders prefer candlestick forex charts, primarily because they are more aesthetically appealing to the eye and, moreover, they have the distinct advantage of being far easier to interpret. Why? Because each candlestick provides an easily decipherable snapshot of the price action – a trader can immediately see and compare the relationship between the open and the close; together with the high and low.
The relationship, between the open and close is of vital information to a forex trader and this forms the very essence of candlesticks. With hollow candlesticks, where the close is greater than the open – indicates buying pressures. With filled candlesticks, where the close is less than the open – indicates selling pressures.