Japanese Candle Trading | What are they, most common patterns and strategies
Candlestick trading uses the interpretation of prices in the financial markets to try to predict what will happen. To do this, there is a wide variety of Japanese candlestick patterns that you can learn to identify.
We have put together in this article everything you need to know about Japanese candlestick charts to take advantage of these trading signals faster than most other indicators.
The best way to become a master of the art of Japanese candlestick trading and to learn how to identify Japanese candlestick patterns is to train like any professional here and execute your strategy on a demo account to be ready when you want to take the next step.
What are Japanese Candles
Japanese candles or candlesticks are a graphical representation of the financial market price in the form of candles. They represent price action over a set period of time. They are made up of a body and 2 wicks.
Furthermore, Japanese candles provide useful information such as market sentiment or possible reversals in the relevant markets by showing a price movement in a particular way.
It was Steve Nison who introduced Japanese candles to the Western world. But the credit for the Japanese candle development goes to a rice trader known as Homma.
Candlestick charts offer more information than a traditional bar or line charts. This is a good starting point to better understand and use candlestick charts during your trading.
The line chart is a straightforward method to demonstrate price movement. Display information with a single line using a series of data points. This is the type of graph that you might be used to seeing in different magazines and newspapers.
The Japanese candlestick charts show that they represent price movement, but they do not consist of a single line; they show more information within each candle. Traders prefer to read Japanese candlestick charts because they include much more information than a line chart, and they can be much more helpful in making prudent trading decisions.
Japanese candlestick patterns show and predict price fluctuations. This analysis can be used for the Forex market, stocks, commodities, indices, or cryptocurrencies.
Japanese candles in trading show us the following data:
- The "what" (price movement) is more significant than the "why" (earnings, news, etc.)
- All the information present and available is reflected in the price.
- Buyers and sellers move markets based on expectations and emotions like fear and greed.
- Markets tend to fluctuate.
- The actual price may not reflect the value of the underlying asset.
- As you can see, Japanese candles provide visual cues that make price action easier to understand.
Components of Japanese Candles
Japanese candles have the following parts:
The body of a Japanese candle is the thickest part, with color, which indicates the variation between the opening and closing price of an asset in question.
Wick the glue
The wick or tail of the Japanese candles is the upper and lower line of the candle's body, which represents the entire course of the price during a specific time frame, indicating the highs and lows.
Depending on the length of the wick, we can determine if the market trend is strong or weakening.
A Japanese candle with a long wick indicates a possible reversal in the market trend.
A Japanese candle with a short wick indicates strength in the trend.
Later we will delve into the interpretation of Japanese candlesticks and the most typical patterns on the charts.
The color of the Japanese candle allows you to identify if it is bullish or bearish, whether the price has increased or decreased. This can be customized according to the preferences of the trader. In our examples, we will use blue for bullish candles and red for bearish ones.
With the ability to be used in various temporalities (H1, D1, etc.), the Japanese candlestick trading chart provides us with four fundamental data in that chosen temporality:
After the previous candle's close, a new one begins to form, the starting point being the closing level of the previous candle. That is the opening price of a Japanese candle.
There may be exceptions if there is a gap in the market.
The closing price is the highest level of the body of the Japanese candle if it is bullish. In the case that it is bearish, it will be the lowest point of the body. From that level, under normal conditions, the next candle begins.
The maximum price of a Japanese candle is the highest level reached by the price in the time interval in question. The price oscillates and marks a maximum at the end of the wick. It is less visible when the closing price is at the high end of the candle.
The minimum price is the lowest level reached by the price in the time interval in question. The price oscillates and marks a low at the end of the wick. It is less visible when the closing price is at the lower end of the candle.
Disclaimer: I am a newbie trader, who loves to share new knowledge.