One of my valued readers sent me an email today, regarding my thoughts on using Candlestick charting in Forex trading. As you might have noticed I use candle exclusively in my trading, so this must be the reason why he asked me. He used somebody else’s opinion ( I don’t know whose) which he found on one of the Forex forums.

“Candlesticks are BS in forex. No central exchange means no universal price means no universal candlestick. Compare your candlestick charts for Oanda vs others. All are different. If no universal candlestick, how can this effect herd behavior, and hence price outcomes? So also with trend lines. They cannot be drawn too precisely for same reason. TA in forex is fuzzy TA.”

My reader, Mad Ollie, is just curious how I combine candles into my trading, with the above comment in mind. BTW, Ollie, I hope you don’t mind me using your name here. First let me put my usage of candlesticks into perspective. I started using them in early 90′s, when my primary interest was in trading futures. At that time they were not as widely known as they are today. Very little was available in terms of literature on the subject. One of the sources was weekly “Futures Candlestick Charts” issued by Commodity Trend Service. With the subscription they also provided very useful, and excellent, guides on the subject. Literature was great and the chart books were fantastic, too. Mind you, this was just before Steve Nison popularized candles with his book “Japanese Candlestick Charting Techniques”. As a matter of fact, I think he was involved with CTS services. I do not know in they are still in existence, but at the time, their services were ground breaking. I scanned a page from one of the tutorials, from 1991, I think.

Here is the how actual chart looked like.

Click on the images couple of times to see full size. This is how candlestick trading before computer age looked like. The reason I bring it up is to demonstrate that I have been around this candles for a long, long time.
This type of charting was first used for rice trading in 1700′s Japan. They originally used as daily charts, so classical use of them would be for longer term perspective. When used in spot Forex trading, 24h market, they miss one of key elements used for their analysis- gaps. In this respect yes, candles lack one of the original dimensions, but it doesn’t make them useless. Another major misconception is using, or trying to use, each and every possible candle formation and pattern(they are not one and the same) for trading. They must be used in content of greater picture- where are the prices in current trend, how far from any past support/resistance, what is the correlation to other technical indicators. An average user might think that creators of this charting style tried to interpret every “picture” being “painted” on the chart, with disregard to other factors. We know that Munehisa Homma (other spellings exist), who is believed to be originator of candlesticks, didn’t use MACD or linear regression in conjunction with charts. So he couldn’t combine candles with what we today understand as technical analysis. What he, and his contemporary traders had, was in depth fundamental understanding of rice market. These people had intimate knowledge of how much rice was in storage at any given time (they often owned the facilities), crop conditions (controlled farming estates), weather records going back decades or even centuries, past prices, etc. In short, they knew markets intimately, on a level that few fundamental traders today are able to much. And virtually no Forex practitioners can hope to grasp currencies fundies to the extent those people new rice. It was this additional information that guided their use of candlesticks. Charts never existed alone, in vacuum, but changing colors and fancy names were always combined with other factors. This is precisely how they should be used today. We have many more tools to our disposal and they should be employed together with candles in order to get more complete picture.
No question candle formations are more important on higher magnitude charts- weekly and daily. Each one of them contains more trading than, say, hourly candle. This in itself makes them more significant. Also, big time traders, institutions, pay more attention to developments of longer term charts, and react to them accordingly. That’s how big money enters markets
In the quote above author stated that candles look differently on every platform and therefore are useless. Weekly charts will be almost identical on all platforms. Only difference would be exact opening and closing price since brokers operate at marginally different times. On a scale of weekly time frame, this difference is negligible and not even worth mentioning. Daily candles will differ slightly, depending on when given platform starts/ends the day. This can be overcome in number of ways. One can compare this period to the same one on another platform. If they are both about the same, all is well. Should there be difference big enough to influence decision making, possible trade should be left alone, until more convincing evidence emerges. But frankly, this is like splitting hair, because all platforms will show the same trend, or lack of, the same support and resistance. The minor differences in general shape of candles  will not change prevailing tone of the chart. For example, if I was waiting for a possible reversal when price is approaching known resistance level, I wouldn’t care if given formation is “Dark cloud cover”or some variation of “Evening star”. Pure semantics as far as I’m concerned.
The biggest difference in candles between trading platforms can be when using 4H charts, or hybrid time frame, like 3H. Here individual candlesticks can have dramatically different look. However, no matter the exact shape, all trends will end on some kind of bullish/bearish candle. After using particular charting software for some time, one will get used to its vagaries.
Candles on all smaller time frames (1h, 15M, 5M) will be universally almost identical, since all start and end at the same time. Here it is even more important to use candlesticks in conjunction with other analysis.
This post is getting so long, I have to divide it into two parts. Next one will show  how the candles fit into some of my recent trades, which were covered in this blog lately.  Happy Valentine day to all you lovers out there!

Mike K.