Forex Learning: The Application of Japanese Candlesticks in Forex Trading - Detailed Explanation of Forex K-Lines

When conducting foreign exchange transactions, Japanese candlesticks are one of the essential analytical tools for many investors. It is also referred to as K-line for short. For newcomers who are just getting started, they may not be familiar with the concept of Japanese candlesticks and their specific applications. This article will analyze the meaning of foreign exchange K-line in detail and introduce the practical use of Japanese candlesticks technology in foreign exchange trading.

A brief history of Japanese candlesticks

In the early days of financial marekting in Japan, local traders invented traditional techniques for analyzing fluctuations in the price of rice. A Western researcher named Steve Nison discovered this technique known as "Japanese candlesticks" and studied it in depth from Japanese experts. He invested a lot of energy in researching and disseminating this technique, and then began to write related articles. Over time, the method gradually became popular in the 1990s. It can be said that without the contribution of Steve Nison, the candlesticks technology may still be buried, and he is known as "Mr. Candlesticks".

What is a foreign exchange candlestick chart?

The foreign exchange candlestick chart is named candlestick chart because of its unique way of drawing, which resembles candles in appearance. The technology originated in the Japanese rice market more than 300 years ago. A businessperson named Tsunhisa Honma recorded daily price changes in order to predict the price of rice and plotted the fluctuations into a graph. This is the prototype of the candlestick chart, which was later introduced into financial marekt. Each candlestick chart consists of four elements: opening price, highest price, lowest price, and closing price. All foreign exchange candlesticks are organized around these data to reflect the overall market conditions and price information.

Classification of foreign exchange candlesticks

1. Divided from form

Inside the candlestick chart, there is a bar section called the entity, which represents the spread between the opening price and the closing price of the corresponding trading day. The larger the spread, the stronger the K-line. If the entity is black (or green), it means that the closing price of the day is lower than the opening price, which is called the "female line"; if the entity is white (or red), it means that the closing price of the day is higher than the opening price, which is called the "male line". Above and below the entity, there is a vertical line segment called the shadow line. The one above the entity is called the upper shadow line, and the top represents the highest price of the day. The one below the entity is called the lower shadow line, and the bottom end represents the lowest price of the day. If a candlestick line has no upper shadow, it is called a bald candlestick line, and if there is no lower shadow, it is a bald candlestick line. In addition, common candlestick lines include spindles and crosshairs: if the entity is short, it indicates that the long space is stuck, which is called a spindle line; if the entity is reduced to a horizontal line, it is a crosshair, indicating that the opening and closing prices are very close, and the buyer and seller are temporarily balanced.

2. Classification in terms of time

The foreign exchange K-line chart can be divided into daily K-line, weekly K-line, monthly K-line and annual K-line according to the calculation period. The daily K-line is drawn based on the opening and closing four price levels of the day; the weekly K-line is drawn with the opening price on Monday, the closing price on Friday, and the highest and lowest price of the whole week; the monthly K-line is drawn using the opening price on the first trading day of the month, the closing price on the last trading day, and the highest and lowest price of the whole month. In the same way, the definition of the annual K-line can be deduced. The weekly K-line and the monthly K-line are often used to judge the mid-term market, while short-term operators pay more attention to the 5-minute, 15-minute, 30-minute, and 60-minute K-line

Key points to pay attention to in foreign exchange K-line analysis

In foreign exchange trading, the key to K-line analysis is to choose the appropriate period according to the individual trading strategy. Usually the following points should be noted:

If you engage in short-term trading, a 15-minute candlestick chart is more suitable, especially for beginners. Careful analysis of the cycle usually leads to stable returns.

2. Before placing an order, it is advisable to check the 4-hour candlestick chart to determine the trend and direction of the exchange rate, and then analyze the 1-hour chart to analyze the trend of the transition period.

3. The shorter the K-line cycle, the higher the market sensitivity. The 5-minute chart is suitable for ultra-short-term trading, which is of great help to the selection of entry and exit points.

4 or 5-minute charts are only suitable for ultra-short-term trading, making it difficult to determine trends and generally not suitable for beginners.

5. The moving average will also deviate from the phenomenon. If the hourly moving average goes up and the 15-minute moving average goes down, it may suggest that a reversal is imminent, and investors can prepare in advance.

6. Short-term moving average divergences are more indicative of future market trends than long-term ones, and moving average divergences on the 15-minute chart are usually more important than those on the hourly chart.

Tips for using foreign exchange candlestick charts

There is a trick to look at the foreign exchange K-line chart: "Look at the yin and yang first, then the entity, and finally the shadow line". Yin and yang refer to the yang line and the yin line: the closing price of the yang line is higher than the opening price, which means that the power of multiple parties is strong; the closing price of the yin line is lower than the opening price, which means that the power of the empty side is strong.

Look at yin and yang

Yin and yang represent the direction of the trend. The positive line indicates that it will continue to rise, and the negative line indicates that it will continue to fall. Take the positive line as an example. After a long and short game, the closing is higher than the opening, indicating that the bulls have the upper hand. According to trend inertia, the positive line often indicates that the next stage will continue to rise, which is in line with the core idea of trend fluctuations in technical analysis. Similarly, the negative line continues to fall.

Second, look at the size of the entity

The size of the entity represents the internal motivation. The larger the entity, the more obvious the upward or downward trend. Take the positive line as an example, the larger the entity, the more sufficient the upward momentum, and the larger the positive line represents the long power.Raise one's headMoving forward, its continued upward momentum is also more abundant. Similarly, the larger the negative line entity, the stronger the downward momentum.

Three look at the length of the shadow line

The shadow line represents a turning signal. The longer the shadow line in one direction, the more unfavorable it is for the exchange rate to move in that direction. The longer the upper shadow line, the more unfavorable it is for the rise; the longer the lower shadow line, the more unfavorable it is for the fall. Take the upper shadow line as an example. After the long-short struggle, the bulls retreat. Regardless of the yin and yang of the K line, the upper shadow line has formed the next stage of resistance, and the probability of the exchange rate adjusting downward is greater. In the same way, the lower shadow line indicates that the exchange rate has a greater probability of attacking upward.