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The History of Candlesticks
This technical analysis tool originates from 17th century Japan. Invented by a rice trader named Homna, from the town of Sakata. And after all this time it is still mostly the same concept.
What is a Candlestick
A candlestick consists of a vertical line and a box.
The vertical line
Also called shadow or wick. And represents all the prices the currency has been trading for that period the candlestick is representing. The top of the shadow, also called upper shadow, represents the highest price the currency has been trading. The bottom of the shadow, also called lower shadow, represents the lowest price the currency has been trading.
Also called the body or real body. It overlaps with the vertical line and represents the area between the opening and the closing price of that period. If the closing price is higher than the opening price of the period that the candlestick represents the body of the candlestick will be white or green and you can call it a bullish move. If the closing price is lower than the opening price the body will be black or red and you can call it a bearish move.
Advantages of Candlestick Charts
Candlestick Charts are very visually pleasing, because they easily encode a lot of data about price action. It shows the relationship between opening and closing price and it shows the high and the low per each time period. Which makes the information very easy to interpret and analyze.
In comparison to a bar chart you can easily see where there was buying pressure (the black bodies) and where there was selling pressure (the white bodies).
Using Candlestick Charts
The following patterns are the basics of using Candlestick Charts:
A Long White or Green Body, indicates a bullish move over that time period the candlestick is indicating.
A Long Black or Red Body, indicates a bearish move over that time period the candlestick is indicating.
A Small Body, indicates that the price is not moving much and with it comes the possibility of a change in momentum.
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Risk Disclosure: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with foreign exchange trading, and seek advice from an independent financial advisor if you have any doubts.