Understanding Japanese Candlesticks
Japanese Candlestick Anatomy
Traders utilise Japanese Candlesticks trading tool. A technical analysis to chart and examine the price changes of assets. Munehisa Homma, a Japanese rice trader, is credited with creating the idea of candlestick charting. Homma created candlesticks that graphically represented the types of price fluctuations. He did that by designating the differences with various colours. It was made well-known among Western traders in the 1990s by a broker named Steve Nison. Traders can use the candlesticks to spot price movement patterns and judge the prices' short-term trajectory.
A type of price chart known as a Japanese candlestick displays the high, low, opening, and closing prices for each period. The pictorial representation of the price chart resembles a candlestick.
Homma controlled the rice markets as a renowned rice trader of financial instruments. He rose to fame for developing the charting candlestick technique. Local technical analysts adopted Homma's candlestick trading strategy. For the first time when the Japanese stock market opened in the 1870s. Through the publication of his book "Japanese Candlestick Charting Technique," American technical analyst Steve Nison popularised the methodology to Westerners. Today, traders utilise Japanese Candlestick charting as a common technical indicator to study the financial markets.
Japanese Candlestick Popularity
Japanese candlestick charts are currently the most widely used tool for analysing market action. They provide significantly more information visually than conventional line charts. They quickly display a market's high and low points and starting and closing prices.
High-Low Open Close (HLOC) charts show a comparable amount of data to candlestick charts. Although traders prefer the latter since they are quicker to analyse. Testing out both is valuable as determining the most effective for you.
Japanese candlestick patterns are used by technical traders to predict future market direction. They can also be used to follow historical price movements. Candlestick analysis can look at price movement from a second to a year.
Japanese Candlestick Anatomy
You must become familiar with each candle's colour, body, and wick to read the patterns on Japanese candlesticks. Its colour, body, and wick all represent the market's opening and closing levels and the direction of movement throughout the period.
Each candlestick's body, or core, displays the separation between the opening and close of the security being traded. The upper shadow represents the price difference between the body's top and the high during the trading session. The lower shadow represents the price difference between the body's bottom and the period's low.
Whether a candlestick is bullish or bearish depends on the closing price of the security being traded. If the candlestick closes at a higher price than it opened, the real body is typically white or green. In this scenario, the opening price is at the bottom of the real body, and the closing price is at the top.
The body is black or red if the traded security closed at a lower price than it did for the period. The opening price is at the top of the body, while the closing price is at the bottom. Modern candlesticks include extra colours, such as red, green, and blue, to replace the body's white and black hues. When using computerised trading systems, traders can select from the available hues.
On both red and green sticks, the top of the wick (also known as the shadow) represents the market's peak for the period, and the bottom represents its lowest.
How to read Japanese Candlestick
Using these three factors, you may discover a lot about a market's movement over a specific time. For instance, a long body on a green candlestick indicates considerable bullish price activity.
If the wick is even taller than the length of the body, there was a lot of volatility at that time. Bulls may have ultimately prevailed in a power struggle between bears and bulls.
In contrast, a short red body with a high upper wick shows that bears overcame bullish market price pressure before the market closed. Additionally, if there isn't any wick, the open or closing price was likewise high or low.
Technical traders use certain patterns as predictions of likely future movement. The logic behind this is simple. These patterns show particular behaviour. Which has frequently resulted in particular outcomes in the past.
Single, double, and triple candlestick patterns are the three different varieties. This is based on how many sticks are used to create the pattern.
These patterns can help identify opportunities, even though historical success does not guarantee future price movement. Let's look at a few well-known cases.
Single candlestick patterns
These are some of the most simple patterns you can find. As they only require one trading period. They frequently serve as the foundation for larger patterns.
Hammer
Technical traders believe a market may be set to stage a bullish comeback if it forms a hammer after a significant decline. A hammer can be identified by its long wick that is located below a rather small body and has little to no wick above. The lower wick should have a two to the three-times shorter body.
This demonstrates that despite the market hitting a new low throughout the session, it recovered and closed substantially higher. Therefore, despite strong selling pressure, purchasers intervened to fend off the bears before closure.
Inverted hammer
Inverted Hammers are Japanese Candlestick Hammar patterns that are upside down. Therefore, there is a rather short body with a high upper wick. The candlestick with a reversed hammer also shows up following downtrends and is interpreted as a potential sign that a turnaround is coming. An inverted hammer's price movement is slightly different, though.
The upper wick indicates that sellers resisted the purchasers' attempts to control the market during the session. Sellers could not lower the price anymore, indicating that the bearish mood may be waning.
Hanging man
The only difference between a hanging man and a hammer is where it appears. A hanging man will appear following an uptrend, whilst a hammer will do so following a bad market. They are interpreted to show that buyer mood is shifting more in favour of sellers and that a turnaround may be imminent.
Shooting star
Meanwhile, the opposite of an inverted hammer is a shooting star. A shooting star will manifest itself at the peak of an uptrend instead of the bottom of a decline. It is much like the hanging man.
In a shooting star, the bulls are still in charge when the session begins. Bears then seize over and drive the asset's price back down. They have pushed it back to just over the open area in a green shooting star. They've brought it down below the open in a red shooting star.
Double candlestick patterns
A double candlestick pattern is created when a signal comes from two successive periods. These can spot continuations and trend reversals, which they frequently suggest.
Engulfing Candlestick
A larger candlestick quickly follows a smaller one in the opposite direction, forming the engulfing pattern.
A red candle in a bullish engulfing is dwarfed by the green candle that comes after it. Technical traders may see this as evidence that the market is moving in the right direction. They can predict that a large move-up is imminent. Especially if a bullish engulfing pattern develops following a period of consolidation. A bearish one follows a bullish stick. This is known as a bearish engulfing. Thus, a bad opinion might develop.
Tweezers
Tweezers can be seen after a bullish or bearish market. It is two similar candlesticks that move in opposite directions from the tweezers pattern. Tweezers are interpreted as a precursor to an impending reversal.
A tweezer's first candle corresponds to the prior trend. So it would be green during an uptrend. It should have a long wick underneath and a short body at the top. It would be red, have a short body at the bottom and a towering wick above, and show a downtrend. The second candle is identical but in its opposite colour. So the two together like a pair of tweezers.
Triple candlestick patterns
Triple candlestick patterns are created across three successive periods. One of the most reliable indicators of an upcoming move is the triple candlestick.
Morning star
A morning star occurs as a market reaches a moment of uncertainty following a prolonged downward trend and then starts to recover. There are three candlesticks in total:
- A huge red candlestick with a downward-trending body
- A candle with a short body, frequently a spinning top, signalling the start of the session's bull run
- A tall, green stick indicates the start of a reversal
Evening star
It is the opposite of a morning star. An evening star depicts a bull market that reaches a point of uncertainty before starting to retrace. It resembles a morning star but has a green candle at the start, following a long uptrend, and a red candle at the finish.
Three white soldiers
An extended downturn and a brief consolidation are followed by the appearance of the three white soldiers' pattern. Technical traders see it as one of the most obvious signals that the bear market has ended.
The three service members are:
- Green candle after downward movement
- A second green candle appeared, with a larger body and little upper wick.
- A third green candle appeared, its body at least matching the second's, although it had almost no wick.
Three black crows
The three-white soldier's pattern is the polar opposite of the three-black crow's motif. It develops following an advance. It comprises three successively longer red candles. It indicates that the bull market has ended.
The bottom wick of the second candle should be short or absent, and the third candle should have almost no wick at all. The appearance of the three black crows may present a technical trader with the chance to enter a short position to benefit from the next bear run.
Three inside up
Another trend reversal indicator that appears after a downtrend and indicates the start of a probable reversal is the three-inside-up pattern.
The following three candles are arranged inside out:
- A large red one that maintains the downward trend from earlier
- A green candle whose body closes at least halfway up the preceding candle. It indicates that the market has recouped half of its losses from the prior period.
- A green candle that surpasses the first candle's peak and closes
Three inside down
A reversed inside up is the three inside down. It comprises a long green candle and a red candle that overlaps the green candle at least halfway. Next, another red candlestick closes below the first's low.