Discussion Topic: Japanese Candlestick
In this tutorial, we will discuss the Japanese Candlestick in details. Here, you will learn the history of Japanese candlestick, how to properly read them, and how to identify bullish and bearish signals generated by these Japanese candlesticks.
We will also give you a list of candlestick patterns that you can use to identify the trend or possible trend reversals, though we will discuss their details in later articles.
How Was The Japanese Candlestick Introduced in Trading?
Before it was introduced to stocks or forex trading, Candlestick charting was first developed in Japan. As per last known information, it was developed in the 18th century by Munehisa Homma, a Japanese rice trader for trading rice.
After a few decades (in the 80’s), the technique was introduced to the western world by Steve Nison for trading financial instruments. He had written an entire book on this, named as: "Japanese Candlestick Charting Techniques" (click on the link if you want to buy this book at a discounted price).
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What are Japanese Candlesticks?
If you have read our previous tutorial on how to read technical charts, you may have already got some idea about the Japanese candlestick. Here we will further extend that knowledge to next level...
Simply, Japanese Candlesticks are the pictorial representation of a price action that happened within a specific timeframe. You can use candlestick to represent multiple timeframes, it may be 1-min, 5-min, 15-min, 1-hour, 1-day, and even 1-year.
The representations of Japanese candlesticks are formed using the following information: open, high, low, and close of the chosen time period.
Below are the pictures of candlesticks that are usually displayed (showing both traditional and colored):
Now let us understand some basic attributes of a Japanese candlestick:
- If the close price is above the open price, then a hollow/white/green/blue candlestick is drawn.
- If the close price is below the open price, then a black/red candlestick is drawn.
- The hollow or filled section of the candlestick is called the “real body” or body of that candle.
- The thin lines poking above or below the body displaying the high/low range are called shadows.
- Sometimes the upper shadow is called the “Wig” and Lower shadow is called as the “Tail”
- The top of the upper shadow is the “high” price.
- The bottom of the lower shadow is the “low” price.
What Does a Candlestick Tell You About the Trend?
Although you will learn various candlesticks patterns in later chapters, currently we will discuss what a single candlestick tells you about market’s general trend.
What Does a Candlestick’s Body Tell You?
In general, candles with long bodies imply strong buying or selling. The longer the body is, the heavier the buying or selling pressure is. This means that either buyers or sellers were in control of that session and was much stronger than the other one. Whereas, short bodies indicate much lower buying or selling activity.
Refer to the image above:
Long Green Japanese candlesticks show strong buying pressure. The longer the green candlestick, the further the close price is above the open price. This implies that the price increased substantially from open to close and buyers were aggressive. In the trader's language, the bulls are much more active in the market than the bears.
Short green candlestick means that there is low buying pressure, and the bulls are somewhat active compared to bears.
Similarly, long red candlesticks indicate strong selling pressure. The longer the Red Japanese candlestick, the further the close price is pushed below the open price. This means that prices fell considerably from the open and sellers were more aggressive. In trader's language, the bears were much more active in the market than the bulls.
Short red candlestick means that there is low selling pressure, and the bears are somewhat active compared to bulls.
What Does a Candlestick’s Shadow Tell You?
Being optimistic, the upper and lower shadows of Japanese candlesticks provide important hints about the trading session. The top of upper shadows (or Wig) signify the session's high, whereas the bottom of lower shadows signifies the session's low.
Candlesticks with short shadows indicate that the entire trading action was bounded near the open and close. A long shadow implies that trading activity occurred in that particular session well past the open and close price.
Now we will discuss the significance of one side long shadow.
Refer to the above image, a Japanese candlestick having a long upper shadow and short/no lower shadow means that buyers tried to bid higher prices. But for any reason, sellers get active and drove prices back down near the open price.
In case the Japanese candlestick has a long lower shadow and short/no upper shadow, this means sellers tried hard to lower the price but buyers came in and drove the price back up near to the open price.
List of All Japanese Candlestick Patterns That We Will Discuss:
The candlesticks patterns help to do the technical analysis in the time of trading. Some of the patterns are formed by a single candle while others are formed by grouping two or three candles.
Usually, candlesticks patterns are broken down into single candlestick pattern, double candlestick pattern, and Triple candlestick patterns.
Moreover, there are multiple chart patterns formed by multiple (more than three candlesticks) that can be considered while trading to identify the trend continuation and reversal.
Under the single candlestick pattern, we will be learning the following…
- Spinning Tops
- Hanging man
- Inverted Hammer
- Shooting star
- Takuri Line
Double candlesticks patterns are a combination of two candles. Under the Double candlestick patterns we will learn the following:
- Bullish Engulfing
- Bearish Engulfing
- Bullish Harami
- Bearish Harami
- Tweezer Tops
- Tweezer Bottoms
- Piercing Pattern
- Dark cloud cover
- Bullish Kicker
- Bearish Kicker
- On Neck
- In Neck
Triple candlesticks patterns are a combination of three candles. Under the triple candlestick patterns we will learn the following:
- Morning Star
- Evening Star
- Three White Soldiers
- Three Black Crows
- Three Inside Up
- Three Inside Down
- Three Outside Up
- Three Outside Down
Four or more candlestick patterns are a combination of four or more candles. Under this category we will learn the following:
- Rising Three Methods
- Falling Three Methods
- Three Line Strike Bullish
- Three Line Strike Bearish
Candlesticks Chart Patterns:
- Flag Pattern
- Head and shoulder pattern
- Double Top Pattern
- Double Bottom Pattern
I know you may be wondering what these names mean. As I had mentioned earlier in this chapter, we will discuss all of them one by one.
We hope that you have enjoyed the above article explaining the Japanese Candlestick and how to read them to identify the general price action trend of a session. Be with us to explore forex trading, stocks trading, and other money-making opportunities.
Leave us some comments if you have any questions or doubts about any of the topic discussed above, we will be happy to help you. Also, let us know if we have missed any other candlestick pattern(s).