Candlestick charts, also known as Japanese Candlesticks, are considered the most optimal choice in technical analysis. This article explains why every trader should use them.
Types of Price Charts
Traders entering technical analysis usually encounter three types of charts:
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Line Chart
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Bar Chart
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Candlestick Chart (Japanese Candlestick)
1. Line Chart
- The line chart is the simplest and most widely used chart type.
- It is based solely on closing prices, so it does not show price movements within the session.
For in-depth analysis, traders often need to examine:
- Slope of the line (to detect momentum)
- Price range movement
- Density of fluctuations near key levels (support/resistance)
This makes line charts less informative and slower for advanced analysis compared to bar and candlestick charts.
2. Bar Chart
- Bar charts provide more detailed information than line charts.
- They show the highest and lowest prices within a trading session, which line charts cannot.
This allows traders to see:
- Market momentum shifts
- Changes in market sentiment
- Reactions at critical levels (support/resistance)
Bar charts are nearly as informative as candlestick charts but less visually intuitive.
3. Candlestick Chart – The Optimal Choice
- Candlestick charts were invented in Japan and are the most popular chart type today due to their superior advantages.
- Each candlestick consists of:
- Body: distance between opening and closing prices
- Upper shadow: distance from the highest price to the body
- Lower shadow: distance from the lowest price to the body
Candlestick charts show:
- Whether the price closed higher or lower
- Open, close, high, and low prices for the session
- Market strength (bullish/bearish momentum)
- Market sentiment (decisive or hesitant)
While bar charts can show similar data, candlestick charts are more vivid, intuitive, and faster to interpret.
Common Candlestick Patterns and Their Interpretation
- Short upper and lower shadows: strong momentum
- Long upper shadow, short lower shadow: bearish signal
- Long lower shadow, short upper shadow: bullish signal
- Doji (close near open): indecision between buyers and sellers
These patterns have been statistically tested and widely used. Traders who focus solely on candlestick charts can develop a highly sensitive intuition for market movements over time.
Example: EUR/USD Daily Chart (D1)
- Using a line chart, price action at a key level may appear indecisive; it’s unclear whether the market will bounce or break a support/resistance level.
- Using a bar chart or candlestick chart, price action becomes clearer:
- A pin bar touching resistance indicates seller reaction
- A doji reflects market indecision
- A subsequent pin bar with a long lower shadow signals buyer reaction at support
This allows traders to make timely and informed trading decisions.
Advantages of Candlestick Charts
- Clear and Visual: Shows market psychology in a glance.
- Faster Analysis: Easier to interpret compared to line or bar charts.
- Actionable Patterns: Provides strong signals for entry and exit decisions.
- Applicable Across Markets: Forex, stocks, commodities, metals, and more.
Candlestick charts are an essential tool for any trader. In future articles, we will cover specific Japanese candlestick patterns and how to use them effectively in trading strategies.
Thank you for visiting our blog, and we welcome your comments and feedback!
Internal Links for Further Reading:
- Trading Psychology – How to Develop a Strong Trader Mindset
- Understanding Bid, Ask, and Spread in Forex
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