Why you need to use the candlestick chart in the Forex market

Introduction

Professional traders always take their trades in the Forex market by analyzing the critical market data. Usually, the candlestick chart is used in the technical analysis process as it provides better insight into the market.

Key Takeaways

  • Traders use candlestick charts to plan trades based on the possible price movements on past market patterns.
  • Candlesticks display four price points. The display Open, Close, High and Low. Each point is being displayed for the period of time that the trader specifies.
  • Candlestick charts are the most popular in the professional trading community.

Professional traders always take their trades in the Forex market by analyzing the critical market data. Usually, the candlestick chart is used in the technical analysis process as it provides better insight into the market.

Thousands of traders have mastered the art of Forex trading and secured their financial freedom. But learning to trade the financial instrument is not an easy task. So, if you are thinking to become a millionaire by using the leverage trading account offered by the retail brokers, you are making a big mistake.

So, how can we become successful traders?

To become a successful trader, we need to learn a lot about the market. We have to find a perfect way by which we can find the potential support and resistance level and take the trade with a high level of precision. These will be possible when you have strong knowledge of technical analysis. By using the technical analysis, we can easily predict the price movement of the currency pairs.

Technical analysis greatly varies among the retail traders. To get into the details of the technical analysis, we need to know the different types of charts used by the Forex traders. In general, the market data can be analyzed in three different charts. These are –

1. Bar chart

2. Candlestick chart

3. Line chart

Candlestick charts are the most popular in the professional trading community. Each candle is formed based on the open, high, low, and closing price of the asset. So, evaluate the candle in the 1-hour chart, each candle is showing 1 hour worth of data. So, if you see the formation for four candles in the 1-hour time frame, you can easily know about the price dynamics for hours. But if you use the line chart, there is no way you are going to understand the price movement for the last 4 hours.

Some of you might say the Bar chart can be used in the same way as the candlestick chart. Though this is true the analytical process will be a lot harder. If you analyze the bar chart and the candlestick chart, it will not take much time to understand that the data represented in the candlestick chart are much easier to learn and provide a great level of ease to the retail traders. Let’s find out some key reasons for which we need to learn the proper use of the candlestick chart.

Bullish bounce and bearish rejection

The elite traders execute the long and short trade by analyzing the bullish bounce and bearish rejection in the asset. If the price of a certain asset tests a support or resistance level, we can easily identify the direction of the market by evaluating the bounce of the rejection pattern. In general, the bullish bounce in the price results in the bullish price action signal. So, if you spot the bullish bounce at the support level, you can expect the price is going to rally higher.

On the contrary, when the price of a certain asset rejects the major resistance, the candlestick pattern usually exhibits bearish momentum. Elite traders usually take the short trade after the bearish rejection takes place. But remember, the bounce and rejection concept is the most basic of the use of the Japanese candlestick pattern. As you keep on trading, you have to know the details about the Japanese candlestick pattern.

Price action trading strategy

Price action trading strategy is based on the Japanese candlestick patterns. It provides the retail traders amazing buying and selling opportunities. The trade signals are formed based on the different formations of the Japanese candlestick pattern. So, if you use the line chart or the bar chart, you will never learn to trade the market with the price action confirmation signals.

Being a full-time price action trader, you can easily execute high-quality trades without using a wide stop loss. Since the reliable candlestick patterns are used to take the long and short trade, traders must learn to use the candlestick chart. In short, without having a strong knowledge about the candlestick chart pattern, it is impossible to learn about the price action trading strategy.

So, why do we need to learn price-action trading strategies?

Price action trading strategy is one of the most reliable trading systems in the world. If you learn to use the Japanese or the candlestick chart, you can expect to find the classic trade signals without using too many complicated trade setups. The majority of the rookie traders are losing money since they don’t rely on a simple strategy. They make their trading system too much complex and eventually fail to keep pace with the market dynamics.

But if you develop the habit of using the candlestick chart, you can easily sync yourself with the market change. You don’t have to depend on complex indicators or tools. Many professional price action traders execute their trades without using any kind of indicators. So, you can see the amazing benefit of using the candlestick chart in the Forex trading business.

Analyzing the news events

News factors are the most powerful price driving catalyst in the Forex market. If you evaluate the market data during the major news release, you will be surprised to see specific patterns in the candlestick chart. During the major news release, the candlestick tends to form the pin bar or the doji patterns. The long spikes in the candlestick suggest the intense volatility of the market. So, if you are good at analyzing the candlestick pattern, you can easily evaluate the severity of the major news.

By learning to analyze the Japanese candlestick pattern, you can even trade the major news. But for that, you need to learn multiple time frame analyses. Before the news release, look at the candlestick pattern in the lower time frame. Once the news is released, move to the 30 minute time frame and look for reliable trade signals. By evaluating the formation of the Japanese candlestick pattern in two different time frames, you can easily predict the direction of the trend. So, by learning to analyze the candlestick pattern, we do get the opportunity to trade the market based on the technical and fundamental details.

Ease in the strategy development process

Everyone knows that they need a valid trading strategy to deal with the critical market dynamics. To make a consistent profit, you need to follow a strategic approach. The majority of rookie traders fail to develop their trading strategy as they rely on the bar or the line chart. On the contrary, elite traders use the candlestick chart so that they can create a robust trading method and develop a perfect trading system. It might take a while to get used to the candlestick chart but once you do, you will never have to look back again.

Once you start to utilize the different forms of the Japanese candlestick patterns to trade the major support and resistance, you will notice a dramatic improvement in your trade execution process. After creating the draft trading strategy, make sure you backtest your trading strategy in the demo account for a few months. If you manage to make some consistent profit, you can switch back to the real account.

Precision in the trade execution process

Maintaining a high level of precision is only possible when you evaluate the market data in the candlestick chart. If you rely on the bar or the line chart, you will never get accurate data. Bar and line charts are perfect for evaluating the trend direction in the higher time frame. But when it comes to the trade execution process, every point counts. The only way by which you can take the high-quality trades in the market is by taking the trades in the candlestick charts.

Multiple time frame analysis is an amazing way to filter the low-quality trade signals. If you want to succeed as a professional trader, you must learn to analyze different time frame trade signals by using the candlestick chart. And make sure you give priority to the higher time frame data signals as it will give you a better overview of the market. Never take the trades without doing the proper market analysis as it will make the overall trading process much different. And use a demo account to learn the technique of multiple time frame analysis so that you don’t have to lose any real money in the learning stage.

Useful tips

As you keep on using the candlestick charts, make sure you learn about the technical process. Study the anatomy of the Japanese candlestick chart so that you can take the trades without having any confusion. Those who are looking to trade the major news must focus on the reliable candlestick patterns in the lower time frame. Use a reliable broker and focus on the anatomy of the candlestick so that you can correctly place the stop loss.

Summary

Unless you use the candlestick chart, you will never realize its importance. Feel free to learn the proper use of candlestick charts in the demo account. Reinforce your trading strategy by using the price action confirmation signals and take trades like a professional trader.

Sources

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