How to Use Japanese Candlesticks in Forex Trading

In the 1700s a Japanese man named Homma, a trader in the futures market, developed a method of technical analysis to analyze the price of rice contracts known as candlestick charting. Candlestick charts display the high, low, open, and close for a commodity each day over a specified period of time, in a format similar to a bar chart, but in a manner that maximizes the relationship between the opening and closing prices.

A narrow line shows the day's price range. A wider body marks the area between the open and the close, referred to as real body. If the close is above the open, the body is white or green (not filled); if the close is below the open, the body is black or red (filled). Steve Nison is normally credited with popularizing candlestick charting in the west and is recognized as a leading expert on how a trader might interpret the readings.

Candlesticks provide specific visual cues that make understanding price movement easier. Trading with Japanese Candle Charts allow speculators to better comprehend market feelings. Offering a wider range of information than traditional bar charts candlesticks give emphasis to the relationship between close price and open price.

Traders who use candlesticks are likely to more quickly identify different types of price action that tend to predict reversals or continuations in trends. Furthermore, combined with other technical analysis tools, candlestick pattern analysis can be a very useful way to select entry and exit points.

Candlestick charts are much more appealing and understandable than a standard two-dimensional bar chart. There are four elements necessary to construct a candlestick chart, the OPEN, HIGH, LOW and CLOSING price for a given time period.

There are multiple forms of candlestick chart patterns:

White candlestick - signals uptrend movement

Black candlestick - signals downtrend movement

Long lower shadow - bullish signal

Long upper shadow - bearish signal

Hammer - a bullish pattern during a downtrend; Shaven head - a bullish pattern during a downtrend;

Hanging man - bearish pattern during an uptrend

Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade;

Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade;

Shooting star - a bearish pattern during an uptrend

Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns

Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns

Doji - neutral pattern, meaningful in combination with other candlestick patterns

Long legged doji - signals a top reversal

Dragonfly doji - signals trend reversal

Gravestone doji - signals trend reversal

Marubozu white - dominant bullish trades, continued bullish trend

Marubozu black - dominant bearish trades, continued bearish trend

Candlestick charts are a visual aid for decision making in stock, forex, commodity, and options trading.

This is a very simplified primer on Japanese Candlesticks.

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Forex Scalping- A Key Market Factor You Must Know

Forex scalping requires a completely different mindset to other forms of day trading. Those who engage in Forex scalping normally make a number of trades a day taking somewhere between 5 to 10 pips from the market each time in many cases. Of course, the more trades that are made, the higher probability the scalper will have losses.

Hence the need to exercise discipline and not shoot at everything that moves. Look for only high probability trades. This however is easier said than done. That is why the following piece of information is critical in understanding market behavior from a Forex scalping point of view.

A Crucial Piece Of Information

The crucial piece of information we are referring to is this:

Somewhere between 60 - 80% of the time, the market is in consolidation.

This means that most of the time, the market is not making significant moves. It tends to range in a consolidation channel for hours at times before another significant move takes price to another level.

This market behavior pattern is ideal for Forex scalping once the trader fully understands it.

Develop Recognition Skills

Whenever the trader opens a chart, key support and resistance levels need to be identified. Previous highs and lows should jump out at the trader and be quickly recognized and identified.

To this end it helps to draw horizontal lines on the charting software to mark the top of a channel and the bottom of a channel on whichever time frame the trader is using.

The Key Forex Scalping Principle

The main principle that governs Forex scalping is the same principle that applies to all forms of day trading:

Sell The Rallies - Buy The Dips

Hence, when Forex scalping, the trader will look for ranges or consolidation channels where price is obviously moving (often within a 20, 30 or 40 pip range) and set an entry order to go long when price hits the bottom of the range, or an entry order to go short when price hits the top of the range.

There is always the possibility price will breakout at that point in which case it will be a losing trade. That's why it is important to maintain tight stops, perhaps no more than around 15 pips to keep the profit/loss ratio within reason.

Be Selective

To make Forex scalping trades higher probability it is important to select trades that have a number of elements going for them.

It is often not enough to just jump in on any range you see and enter an order to go long or short at the top or bottom of the range.

You want to look for ranges where the top or bottom coincides with other indicators. For example, the 200 EMA (Exponential Moving Average) is a very powerful indicator on the 4 hour, 1 hour, and 15 minute time frames. Seeing it is one of the most popular indicators of all time used by traders in the global market place, it pays to take notice of where price is in relation to the 200 EMA.

So if you see a trading range where the top or bottom also coincides with the 200 EMA on one of the higher time frames, zero in using the 5 minute chart, draw your horizontal lines to mark the range or consolidation channel, and choose a suitable order entry point. The 200 EMA provides a strong level of support or resistance, depending on which direction you are trading.

Likewise, if the top or bottom of the range is also lining up with a pivot level, or a Fibonacci retracement or extension level, you have added reasons to believe price is going to respect that level, at least for a while. You can then enter an order at the price point with reasonable certainty that you can grab 5 to 10 pips from the market, depending on the height or depth of the trading range.

Why Forex Scalping Methods Should Be Part Of Your Overall Strategy

This characteristic of market behavior, the fact price spends most of its time in trading ranges, makes Forex scalping a very profitable method once the trader has acquired experience and developed understanding and recognition skills.

Rather than waiting for the occasional significant price move, the trader who also has a Forex scalping strategy in his toolkit can utilize those long periods in the trading day when price doesn't go anywhere.

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