Many traders call it “the candlestick forex strategy”, however, candlesticks is just a way to visualize the dynamics of the financial market. The strategies can be developed based on the patterns in the candlestick charts. Of course, no strategy is foolproof but an experienced trader learns to identify forex candlestick patterns quickly and profit from this insight.
A candlestick is a graphical representation of price action over a set duration of time. For example, on a daily candlestick chart, each "candle" comprises a full day of price action. The candle's top is the highest price of the day, the bottom is the lowest point, while the rectangular "body" in the middle of the candle represents the opening and closing prices of the day. A green or white candle means the upper border of the body was the close, while the bottom of the body was the open. A red or black candle indicates the opposite: that the period's closing price was lower than its open.
When the forex traders compare adjacent candlesticks, they identify certain patterns that often lead to accurate predictions.
One of the easier candlestick patterns to see is the "engulfing" strategy. A "bullish engulfment" occurs when a white candle's body extends above and below the full prior candle, which must be black. This pattern shows that prices didn't just reverse direction from the prior period, but did so dramatically by "undoing" the effect of the prior candle's decline and ending above the prior candle's starting price. Such a pattern can signal a major trend reversal.
It is relatively easy to spot obvious patterns even for the beginner of forex, however, experienced candlestick traders can extract many complex candlestick patterns that may involve multiple adjacent candles.
For example, "continuation" patterns may help a trader to confidently expect Forex prices to continue moving in the direction of an established trend, either up or down. One such pattern, the "falling three," requires five candles in a strict formation of one long dark body followed by three short rising candles and a final long dark body that extends further than the prior four candles.
Critics of candlestick strategies the patterns may change entirely with the time period of the chart. Some patterns will disappear and others will show. For example, a chart of daily candles will no longer show its patterns if you change it to an hourly chart, where each candle covers 60 minutes of trading. However, it often happens with any method of measurement in physics because different any process is a superposition of many sub processes characterized by a different time scale.
Some examples of candlestick patterns are given below
See 16 basic candlestick patterns at http://en.wikipedia.org/wiki/Candlestick_chart
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