Trading Japanese Candlesticks

"Char t s may b e deaf and mu t e , y e t the y communicat e v e r y
wel l . Candles t i ck format ions are the s ign language of the
market . They tel l the t rader a large major i ty of the t ime
where U- t u rns o r reversal s are and where the market i s
going."

Most traders prefer learning how to read charts using what is called a
Japanese candlestick. A Japanese candlestick monitors price movements
against time. When a trader looks at a chart, they have three viewing
options: a line chart, a bar chart, or a Japanese candlestick chart. Bar charts
dominated the financial industry until just recently. Now even the world’s
best traders are using Japanese candlestick charts due to the stories they
can tell.
One of my most amazing discoveries that turned my trading world around
was learning that the market talks and communicates through candlestick
formations. It is one of the most amazing things I constantly see in the
market on a daily basis. It is somewhat like talking to a deaf person who
does not verbally talk, yet they communicate via sign language. Learning to
read candlestick formations opens up the world of trading every bit as much
as sign language opens up the communication world for the deaf.

Reading a Japanese Candlestick

Japanese candlestick charts are very unique in the way that they monitor
price movements during a certain period of time. As the candlesticks form,
they begin to tell a story of the activity in the market as well as reflect the
mood of the market during a specific time frame. Candlesticks then become
the sign language of the market as they communicate, via certain
formations, the future potential moves of the market. Financial profits are
made from predicting correctly where the market will go, not where it has
been.
Successful traders visually take the time to study and understand this sign
language of the Forex market. Candlestick formations give off buy and sell
signals. They are communicating to the trader that it is time to enter the
market or it is time to get out. Our decision-making processes will be
directly influenced by how clearly we understand these formations.

Japanese candlestick formations can become the markets first sign of a
change in direction, making a U-turn, or signaling a market reversal. They
will appear in the form of a single candlestick or a combination of
candlesticks. There are hundreds of formations, yet only a handful offormations carry substantial weight when looking for good market entry
points. A good entry point is described as a location where the market goes
your way from the beginning. Let’s look at what a Japanese candlestick looks
like and how it forms.

Japanese candlesticks can also tell you about a certain period of time. For
example, you can set your charts to provide you with 5-minute candlesticks,
10-minute candlesticks, 15-minute candlesticks, 30-minute candlesticks;
even hourly, daily, weekly, monthly, and yearly candlesticks. As seen in the
image above, candlesticks are monitoring price movements in relation to an
amount of time passed. They provide the trader with four key levels of
information for that specific time period: the opening price, the closing price,
the high selling price, and the low selling price. They are made up of full
bodies and wicks. As prices move up or down from the opening of the
candlestick, the body begins to form. If prices begin to rise from the original
opening price then close higher than the opening price, a bullish candlestick
is formed. If prices begin to fall from the opening price and close lower than
the opening price, a bearish candlestick is formed. The lines on the north
and south sides of the candle bodies are called wicks. They are monitoring
the highest price and the lowest price of that time period.
Trading is a financial game. It involves two sides: the bulls and bears. We all
know that there are not actual bulls and bears trading in the market, but

rather investors and traders that have either invested in a bullish direction
or a bearish direction. Both sides have clear objectives and want the market
to move in their direction. Bulls want the market to go up or rally and if it
does, they are going to want the market to make higher highs. The bears
want the market to go down or have it dip to make lower lows.
Before you even think about trading, make sure you educate yourself on the
10 major bullish and bearish candlestick formations professional traders use
to discover entry and exit points in the market.

What is the Forex

Bretton Woods Accord

The modern foreign exchange, or Forex market as we know it today, was put
into play around 1973. The establishment of the Bretton Woods Accord in
1944 is generally accepted as the beginning of Forex market. It was
established to stabilize the global economy after World War II. It not only
created the concept of pegging currencies against one another, but also led
to the creation of the International Monetary Fund (IMF). Currencies from
around the world were pegged against the U.S. dollar which were in turn
pegged against the value of gold in an attempt to bring stability to global
economic events. In 1971, this act finally failed. However, it did manage to
stabilize major economies of the world including those within the Americas,
Europe and Asia.

Free-Floating Currencies

Late in 1971 and 1972, two more attempts were made to establish freefloating
currencies against the U.S. dollar (namely the Smithsonian
Agreement and the European Joint Float). The Smithsonian Agreement was
a modification of the Bretton Woods Accord with allowances for greater
currency fluctuations while the European Joint Float aimed to reduce
dependence of European currencies upon the U.S. dollar. After the failure of
each of these agreements, nations were allowed to peg their currencies to
freely float and were actually mandated to do so in 1978 by the IMF. The
free-floating system managed to continue for several years after the
mandate, yet many countries with weaker currency values failed against
those countries with stronger currency values.

European Monetary System

European currencies were among those that were affected the most by the
strength of stronger currencies such as the U.S. dollar and the British pound.
In July of 1978, the European Monetary System was created to counter the
dependency on the U.S. dollar. It became increasingly clear by 1993 that
this attempt had failed. Shortly thereafter, retail currency trading
opportunities, as we know them today, started to be enjoyed not only by
those familiar with the foreign exchange market, but also by small investors
willing to take similar risks like the banks and large financial institutions.

The Impact of Devaluation

By the late 1990s, stability issues increased in Europe as did major financial
problems in Asia. In 1997, there was a major currency crisis in Southeast
Asia. Many of the countries’ currencies were forced to float. The devaluation
of currencies continued to plague the Asian currency markets. Confidence in
trading the open Asian Forex markets was failing. Those currencies that had
continued to be valued relatively higher remained unchanged and kept the
concept of trading currencies out of those economically strong nations.

The Introduction of the Euro

Though Europeans were already very comfortable with the concept of Forex
trading, this trading arena was still unfamiliar territory to the rest of the
world. The establishment of the European Union later gave birth to the euro
in 1999. The euro was the first single currency used as legal tender for the
member states in the European Union. It became the first currency able to
rival the historical leaders such as United States of America, Great Britain,
and Japan in the foreign exchange market. It created the financial stability
that Europe and the Forex market had long desired.

What is the Forex?

“Forex” is an acronym for Foreign Exchange. It is a market where people
exchange one country’s currency for another country’s currency. It is called
the cash market or spot market. The spot market means trading right on the
spot at whatever the price is at the moment the transaction occurs. This
market was established in 1971 as was previously mentioned. The Forex
market is the arena in which the currencies of countries around the globe
are exchanged for one another. Payments for import and export purchases
and the selling of goods or services between countries all flow through the
foreign exchange market. This part of the Forex market is called the
consumer Forex market and this is where the majority of the daily volume
takes place.
Prior to 1994, the Forex retail interbank market for small individual
speculative investors or traders was not available. A speculator investor is
one who looks to make profit on price movements and is not looking to hold
onto the currency for the long haul. With the previous minimum transaction
size, the smaller trader was excluded from being active within the market. In
the late 1990s, retail market maker brokers (i.e. Forex Capital
Markets/FXCM) were allowed to break down the large interbank units in
order to offer individual traders the opportunity to participate in the market.
The Forex market is the largest financial market in the world. The term
“market” refers to a location where buyers and sellers are brought together
to execute trading transactions. Nearly $4 trillion is traded on the Forex
daily. To give one a perspective of how big this market is, consider the
following: $300 billion each day is traded on the U.S. Treasury bond market
and $100 billion is traded on the U.S. stock market every financial day the
market is open. That is a total of $400 billion per day. The Forex trades
almost ten times that volume. The Forex marketplace has no physical
location. It is comprised of an electronic medium where transactions are
placed automatically through the Internet or via telephone. It is comprised
of approximately 4,500 world banks and retail brokers who all monitor
current prices, as they constantly change, and who execute transactions for
their clients. Individual traders wanting to capture profit by speculating on
price changes get access to the market through a Forex broker.

How Do Traders Get Paid?

The word pip is an acronym for price interest point. The pip system monitors
price movements in the market. Pips are usually measured in decimals.
Depending on the pair being traded, pips are usually the last number of the
decimal in the price evaluation. A trader’s financial reward is measured in
pips and those pips are converted into dollars. Most traders in the Forex
market trade with what is called leverage. Trading with leverage means you
are either borrowing or using someone else’s money to trade. You do this by
posting a deposit with a broker who will let you use their money. The
minimum deposit, with some brokers, for trading with leverage is 1%, but
this number can go up as high as 4%.
Trading on the Forex is done in currency lots. There are three types of lots.
A micro lot is approximately $1,000 worth of a foreign currency. A mini lot is
approximately $10,000 worth of a foreign currency. A standard lot is
approximately $100,000 worth of a foreign currency. To trade on the Forex
market, a margin account must be established with a currency broker. This
is an account into which profits will be deposited and from which losses will
be deducted. These deposits and deductions are made instantly upon exiting
a position.

These three types of lots create different payouts per lot. A $100,000 unit is
called a standard lot and pays approximately $10 per pip captured. A
$10,000.00 unit is called a mini lot and pays approximately $1 per pip
captured. A micro lot is a $1,000 unit and pays approximately $0.10 per pip
captured.
Forex traders love the Forex market for its availability, liquidity, volatility,
and diversification that leveraged trading allows.