For profitable trading in the financial market, traders use analytics and statistics. Before starting work, they must conduct a forecast of market movement. One of the most popular methods is candlestick analysis of changes in the direction of the financial market.
What are Japanese candles?
There are specific terms in trading. Japanese candles are graphic images of changes in market quotes. Using these signs, traders analyze the direction of prices of trading assets. The financial market changes its indicators every second, so it is very important for analysts to know any changes in movements.
The candlestick analysis is based on quotes images. They are bullish and bearish and are painted in different colors. Candles of the upward direction have a green or white hue, descending - black or red. On the graphs they are depicted in the form of rectangles, most often having shadows (“tails” in the form of dashes).
Their function in candlestick analysis is to determine the direction of market movement, so that the trader can know which way, to buy or sell, to open a transaction, and also when to close it.
Candlestick charts: the history of occurrence
Charts based on Japanese candles became popular among traders at the end of the twentieth century. They came to trading from a flourishing country - Japan - and got their name from it. Initially, only selected traders used this technique to forecast market quotes and change the direction of the financial market, and it was strictly classified.
At the moment, Japanese candlestick analysis is the most informative, advanced and popular way of analytical forecasting in the whole world. This technique is used by all traders - both professionals and beginners, investors and analysts.
Types of market analysis
To understand which way to open a position and find the most favorable point for entering the market, traders use various types of analytical forecast of market movement.
Types of analysis:
- The fundamental way of analytics.
- Technical methods.
- Graphic constructions.
- Analytical and statistical data and other techniques.
The fundamental method is one of the most difficult and serious options for predicting changes in market movements. Usually for beginners this is a very complex and difficult technique, so they often use different types of technical analysis.
The technical forecast is based on a variety of tools, such as indicators, advisers, trading signals. In addition, you can conduct this type of analytics in non-indicator ways using the candlestick market analysis.
Very often, traders during work and preliminary preparation before opening deals combine several types of analytics. They can simultaneously use different trading tools and fundamental data.
Candlestick Fundamentals
This type of analytics and forecasting changes in market quotes is based on a group of graphic images called patterns. They, in turn, form a variety of candlestick patterns.
Based on patterns, traders analyze any changes in market movement. Candlestick analysis models help to more accurately open deals and get more profit (profit).
Important! Each combination must be completed and confirmed with the help of other trading tools (indicators, patterns, graphical constructions).
Classification of models and patterns
All combinations are made of Japanese candles. They are used in the analysis and forecasting of changes in market movements.
Types of patterns:
- One-candle configurations.
- Two-candle models.
- Multi-candlestick patterns.
One-candle configurations include Hammer, Hanged, Black or White Umbrella, Spinning Top and other species. Usually, those patterns are used that are at the bottom or at the top of the chart, that is, they stand somewhat apart from all the candles. They can show a “bullish” or “bearish” direction, that is, upward and downward market movement.
Two-candle patterns include models: “Absorption”, “Morning or Evening star”, “Harami” and other types.
Multi-candle configurations most often form figures: “Double or Triple bottom”, “Head and shoulders”, “Flag”, etc.
Using patterns, you can find out not only the direction of the market, but also the points of its pivot. For example, when a trader sees “Bearish Takeover” on the chart, then after analysis he assumes that a market movement will reverse in the near future, that is, he will change his direction. This pattern looks like two graphic images, with the “bullish candle” should be located below the “bearish” and have smaller sizes.
Beginners before starting trading in the financial market always study models and configurations. In the future, they use them for candlestick analysis on the "Forex" during the forecast of market movement. In the directories for trading, you can find several hundred varieties of configurations. The main patterns are no more than two or three dozen, which must be studied, since they are the basics of Japanese candlestick analysis. The remaining types of models are used more rarely, and their beginners study in the trading process.
Technical indicators for the forecast
The classic view of candlestick analysis implies the use of analytical data on patterns in trading. Professionals and analysts conduct it without the use of any additional tools, although in some cases there may be exceptions, for example, graphical constructions: support / resistance lines, banking, average daily, weekly levels and other types.
It can be very difficult for beginners and people who spend little time on trading to determine patterns on their own, so they use special technical indicators in their work. Such tools recognize candlestick configurations and models, facilitating trading.
Simple tools for trading by candlestick technique
Specialists and developers have made it easy for beginners to trade in the financial market. They can use special technical tools in their work.
The most popular indicators of candlestick analysis:
- Bheurekso pattern (with simple settings).
- Candles Figure (shows the patterns of reversal, absorption).
- Candles Star (one of the best, with great functionality settings).
- Candlestick Patterns Recognition (based on all the basic patterns).
These tools help traders to timely identify various candlestick patterns in order to open profitable trades in the future or to fix the profit received, which is especially important when the market changes its direction.
Trading strategy using candlestick analysis and the Moving Average indicator
To open trades and trade profitably using this technique, you need to set up a chart. You need to install Japanese candles on it, choose a color for them (green or white for the upward direction, and black or red for the downward movement). Additionally, you need to define the “Moving Average” indicator in the settings. Initially, it is necessary to leave the initial parameters, which can be changed in the future.
Now you need to carefully monitor all movements on the chart and wait for the right moment to enter the market.
Opening a purchase transaction:
- The direction of the indicator should have an upward movement, that is, up.
- It is necessary to wait until the “bullish candle” overlaps the “bearish” one and is larger.
This pattern is called Bullish Absorption. This candle must be closed above the "Moving Average".
Opening a deal for sale:
All actions take place in a similar mode, but only in mirror image. A trader needs to wait for the “bear candle” to overlap the “bull candle”, be large and close below it and the “Moving Average”.
Order closure
Candlestick analysis in the strategy described above is carried out according to one candlestick pattern and indicator. “Moving Average” is an additional confirmation for opening a deal. Similarly, you can trade on any other patterns and use the indicator as a filter.
The transaction is closed on the Take Profit order. Usually it is 20–40 points, depending on the market situation. The Stop Loss order is set below the open trade indicators at the level of 10–20 points. Some traders trade without it. However, in this case, it is necessary to constantly monitor any changes in the market and timely close deals on their own.
Advantages of the candle technique
This is the most popular method. Almost all traders use it. It is used both as a separate type of analysis, and in combination with other methods.
The Japanese candlestick chart is considered the most informative way of analytics. This analysis has indicators of opening and closing of market prices in a certain period of time. As well as the parameters of the highs and lows that she reached during this time. The candlestick chart is very convenient, and visually on it it is quite easy to track any fluctuations and changes in the market.
In conclusion, it is worth noting that trading can be profitable only after the beginner has completed preliminary training for trading in the financial market. He must necessarily study its basics and patterns, basic concepts, terms and rules. Particular attention should be paid to “Money Management” and deposit management. This will allow you to correctly calculate the volume of lots and open deals with the correct parameters. It is also very important to study the psychology of the market in order to further understand what is happening on it, in which direction it is moving and who controls it (bear sellers or bull buyers).
After obtaining the necessary knowledge, you must definitely choose a trading strategy for yourself and test it on a special demo account. As soon as the trading results are stable, you can switch to a real Forex and earn money on it.