While analyzing the Japanese candle stick charts we usually pay attention on the historical movements and trends of the certain currency pair including the support and resistance levels. The historical data gives us more or less correct information about what we can expect from the market in the nearest future and trade accordingly.
If analyzing a candle stick chart you see that there is a big trend so it must be a signal for any trader where the market is heading and what direction to trade. Before you enter the trend you should also consider using the moving averages or Fibonacci levels and set up the stop-loss orders accordingly.
There is another approach to trading on candle stick charts. It is using the theory of support and resistance levels. According to this theory, if the price did not break the resistance, then it would return to the level of support. The support and resistance levels are defined for a period of few days, depending on the time frame of your trading. It is also very effective to add Fibonacci levels to this strategy.
And now few words about Japanese candle stick analysis. This is an ancient method of construction of charts that appeared in Japan in the 17th century. A candlestick perfectly shows the battle between bulls and bears and gives a clear picture on which side is an advantage. In addition it shows a moment when the fighters change their places.
Graphically a Japanese candlestick is composed of body and shadows. The upper shadow on the daily chart shows the maximum that the price reached during the day, the lower shadow – minimum price. The body of a candle shows the price of opening and closing of a trading day. If a candle is white or green, so the closing price is above the opening one. If a candle is black or red, so it is on the contrary, the price at the end of the day was lower than the beginning of the day.
While analyzing a candle stick chart, we examine the figures that a group of candles form. Usually we need three-five candles in order to form a figure. The most important figures in chart’s analysis are Falling Star and Dodges. These figures will let you know if a current trend is reversing or continues.
The Japanese candle stick analysis technique is mostly used for a long term trade and for cross-rates like EUR/GBP. It works great for trading in corridors by defining the historical trends.