Last post, I talked about the simplest version of forex charts: the line chart. The kind of forex chart that the “professionals” use looks more like this. This somewhat overwhelming chart contains a series of candlesticks as opposed to single data points, which makes it look much more complicated than it is (in my view at least). If you ever are stuck talking to a serious forex trader about candlesticks, don’t be fooled by any nonsense jargon: the candlestick chart isn’t that intricate.

What is a Candlestick?

A candlestick looks like this:

https://en.wikipedia.org/wiki/Candlestick_chart

Why is it called a candlestick? Well, it looks like a candle with a thick body and a wick at either end. According to BabyPips, the candlestick was created by Japanese rice traders to keep track of price movements, and was eventually stolen by western traders in the 1990s. The top and bottom of the thick body represent the opening and closing prices of the day on a daily chart, while the ends of the two wicks represent the highest and lowest price of the day. If you are looking at a weekly chart, the candle body represents the opening and closing prices of the week while the ends are the highest and lowest price during the week, and so on for charts representing different time periods.

When you are reading candlestick charts, a red candle means that the closing price is less than the opening price. A green candle means the opposite: the closing price is more than the opening price. When you have lots of red candles, you get a down-trend; lots of green candles and you get an up-trend.

What is the point of the candlestick?

A candlestick lets you see the volume of trading in a particular timeframe. The longer the body and wicks of a candle, the more variation in the prices throughout the timeframe. This could represent a greater volume of trades. Alternatively, a long body and small wicks means the closing and opening prices more closely reflect the high and low prices of the candle-period, suggesting that either the buyers or sellers have control. When a chart starts to show many candles with long bodies, this could indicate that a trend is forming (http://www.babypips.com/school/elementary/japanese-candle-sticks/basic-candlestick-patterns.html ).

What do I do?

I personally don’t look too much at candles. Since I want to follow long-term trends, I think candles are somewhat unnecessary. They also try to seduce you into predicting the future (for example, I may see that the last candle on the chart had a long body and I would then predict a trend is forming). I really really really really don’t want to get into the business of trying to predict the future. There is a great book on why this is a terrible idea, called Thinking Fast and Slow.

I prefer line charts because they make it very clear when a trend is going on. Look again at this line chart from my last post:

FOREX.com. (2017). Forex Trader for Iphone (Version 2.9.12) [Mobile Application Software]. Retrieved from https://www.forex.com/en-us/services/trading-platforms/forextrader/mobile-apps

This chart has a clear up-trend over the course of years! When I buy this currency pair, I may still be predicting that the up-trend trend will continue into the future, but at least I am on very strong historical footing. By following strong monthly trends, I hope to avoid relying on my own faulty logic to decide whether to buy or sell.