Use Japanese Candlesticks to Trade Currencies

There are two basic ways to make money trading Forex. One is to correctly anticipate major fundamental changes in the market and buy or sell currencies accordingly. The other is by way of technical analysis of Forex currencies. Traders who take the fundamental route study the economies, monetary policies and trade balances of countries whose currencies they trade. These traders look for impending changes in the rate of exchange of one currency versus another. They buy one currency with another and wait for the expected changes to happen and then sell the now more expensive currency and pocket the profit. This is commonly known as swing trading. Technical traders use tools such as Japanese candlesticks to trade currencies. What the heck, you ask, are Japanese candlesticks and does this mean trading the Yen?

Japanese Candlesticks

Forex charting with candlesticks is a technique for following and price patterns and letting these patterns predict the next phase of the Forex market. The essence of using Japanese candlesticks to trade currencies or using any other technical tool is that trading price patterns repeat themselves and those who recognize these patterns can often predict the immediate future of the market. Japanese candlesticks are so named because they were first used in Japan. The candlestick is a symbol that is superimposed on a price chart. This was first done by rice traders in the days of the Samurai. The body of the symbol is a rectangle. The bottom and top of the rectangle superimposed on the price chart are the opening and closing prices of the trading day. If the traded currency closed higher than it opened the rectangle is white and if it closed lower than it opened the rectangle is black. There are lines extending up and down from the rectangle like wicks of a candle. These are called the shadows and they represent the highs and lows of trading for the day. But, how do you use Japanese Candlesticks to trade currencies?

The Doji Signal

This is a simple example of how to use Japanese candlesticks to trade currencies. The traded currency has been falling steadily for a couple weeks. This is an established pattern. Fundamental traders are starting to think that the trend will soon reverse. Technical traders are waiting for a cue. The cue might be the Doji signal. What happens in the market is that the traded currency which has been in a persistent downward trend opens and closes as virtually the same price. It may trade higher and lower during the day but it pretty much ends up where it started. This trading day is represented on the Forex chart by a nearly flat rectangle with lines extending both above and below. What this tells the Candlestick trader at a glance is that the market is uncertain about how to price this currency pair. This is happening after a period in which the market was pretty certain and was taking the traded currency down every day. The predictive value of the Doji signal is than when it occurs in an established upward or downward trend it indicates not only market indecision but a likely reversal of the trend. When this signal occurs in a flat market it also signals market indecision but does not tell the trader which way the market is going.