How to read Japanese candles?
Whether you’re an experienced trader, or you just entered the world of stock markets, you have probably seen a chart of the price of a financial instrument (currency, gold, oil, stocks, etc.). Still, not many people know the differences between each price chart. Such charts are used to show the price movements, and probably the most popular types are the so-called Japanese candle charts.
Origin of the Japanese candles
As the name suggests, the Japanese candlestick charts came from Japan. The Japanese traders uses them a hundred years before their western colleagues developed the bar charts and point & figure charts. It is believed that around 1710 a Japanese rice trader by the name of Munehisa Homma discovered that a crucial part of what moves markets are the emotions of traders, and not just the supply, demand, and prices. The Japanese candles visualize the size of price movements in different colors, which eases the understanding of market sentiment. Traders use Japanese candles to make entry and exit decisions based on specific Japanese candlelight patterns that help predict the future direction of the price.
How to read Japanese candles
There are two types of Japanese candles: black and white. The black candle marks a closing price that is lower than the opening price. This candle is referred as a sword candle. A white candle will be used if the closing price is higher than the opening price. This candle is known as a bull candle.
A Japanese candlestick chart is comprised of different rectangles. These are called candle bodies and are formed by the price movement between the opening and closing prices. The rectangles often have tails (also known as wicks or shadows). They signal the highest and lowest prices for the selected period, which remain below and above the opening and closing prices.
Japanese candle charts put emphasis on the relationship between the opening and the closing price for a certain period. What they show is a detailed image of the price chart. Candles help us navigate through price models more clearly and distinctly than other types of charts. Traders and investors who use different chart models can identify price movements and predict reversal or continuation of specific trends.
Types of Japanese candles
Japanese candles vary in shape, indicating different patterns. Certain patterns are used to predict future movement. The idea behind this is simple – these patterns reveal behavior that has often led to specific outcomes in the past. Each Japanese candle is defined by size (or length), the correlation between opening and closing price, and tails and their connection with the body of the candle.
Doji refers to a specific position where the opening price and the closing price are very close to each other. They show the unpredictability in the price movement within a chosen time period. If a Doji candle appears within an uptrend, it may be a sign of upturn exhaustion, at a time when bulls still need to dominate. And contrarily. If a Doji candle shows up after a long decline, it is a signal that the downward trend is slowing down. In any case, the Doji candle marks a supply and demand balance.
Another popular type of Japanese candlestick is the Marubozu. It is defined by a closeness or concurrence between the opening price and the lowest price, and between the closing price and the highest price for the set period.
Patterns of Japanese candlesticks
Japanese candlestick patterns occur often in the trading market, here is a list of some of the most common ones:
- Dark Cloud
- Hanging Man
- Piercing Line
- Shooting Star
- Bullish/Bearish Engulfing Candles
The Dark Cloud is a sword-turning formation that appears during an uptrend. It consists of two candles. The first is bullish, while the second is a sword. A Dark Cloud forms when the second candle opens above the top of the previous one but follows a drop and closes above the opening price of the first candle.
The Hanging Man is a hammer-like candle but is most common around the top of an uptrend. It may signal that a bearish reversal of the trend may occur.
The Piercing Line is a bullish reversal formation. This pattern appears when a second bullish candle closes over the middle of a previous sword candle. This formation is justifiable even if the bottom of the second candle is equal to the bottom of the first.
The Shooting Star candle appears during an uptrend and is an indicator of a potential trend reversal. The upper tail of the candle is longer. The body can be bullish or bearish, but the pattern is believed to be stronger when it is bearish.
Bullish/Bearish Engulfing Candles
The bullish pattern usually appears at the bottom of a downtrend, while the bearish formation is most often seen at the top of an uptrend.
The Hammer candle has a long tail at the bottom, which is usually twice the size of the body. This bullish reversal formation is usually formed at the bottom of a downtrend. The body can be bullish or bearish, but if it is the former it’s considered stronger.
Trading with Japanese candlesticks
The Japanese candles have some serious advantages over the bar, line point, and figure charts. They give traders a better visual representation of dominating bullish or bearish sentiments.
Oftentimes traders use different Japanese candlestick formations and strategies to achieve better results on the financial markets. It should be mentioned that using the Japanese candle trading technique does not guarantee success, but it can help improve your results.
Japanese candlestick patterns might seem intimidating at first, but after you get familiar with them, you will be able to see beyond simple numbers and charts. Once you feel ready to start trading on the global markets, we could open an ActivTrader account. With ActivTrader you can trade Shares, Commodities, and Forex at any given moment, with access to a wide range of currency pairs!
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