In forex trading, Japanese candlestick charts are considered one of the simplest and most effective technical analysis tools. Do you know how to read Japanese candlesticks correctly? Join Forex Trading to learn how to apply for more effective transactions.
What is a Japanese candlestick chart? How to read Japanese candlesticks and what traders need to know
A Japanese candlestick chart is a type of price chart that shows price changes in each trading session. It originates from Japan, founded by trader Munehisa Homma.
The first time Japanese candles appeared on the market was in the 18th century. Up to now, it has a history of nearly 300 years. Japanese candles are not only famous in Japan but also thrive in the West. Currently, Japanese candlesticks are used a lot in forex trading. It is considered one of the most optimal technical analysis tools and is trusted by millions of traders.
The most basic way to read Japanese candlesticks is to read whether the market price is increasing or decreasing through the candlestick pattern structure.
Japanese candlestick patterns include 2 types: Green candles and red candles. The specific structure is as follows:
- Candle body: Represented with a vertical rectangle. The longer the candle body shows the clearer the market trend. The candle body represents the closing price and opening price in a specific trading session.
- Candle shadow (candle whisker): Includes upper candle shadow and lower candle shadow, represented by a straight line. Candle shadows represent the highest and lowest prices during the trading session.
- Green candle body: Market trending up
- Red candle body: The market is in a downtrend.
The basic structure of a Japanese candlestick includes the candle body, upper and lower candle shadows
How to read Japanese candlesticks is easiest to understand with popular models
Japanese candles have 12 basic types. There are also many other variations. Therefore, the way to read Japanese candles is not the same. Below are common patterns that new traders can most easily apply when trading forex:
How to read Japanese candlesticks Doji
The word Doji in Japanese carries the meaning of fixedness and unchangeability. Therefore, Doji candles are also called Indecision candles. This candlestick pattern has a very small or almost non-existent candle body. The candle’s wick is 2-3 times longer than the candle body. The upper candle shadow is almost equal to the lower candle shadow, indicating that the closing and opening prices are similar.
Because of this characteristic, the Doji candlestick represents a struggling market state. Whether the candle body is green or red, traders should be careful to avoid trading. In any case, trading during times when the market has a clear trend is still the most effective.
See more: Read candlestick charts: Basic & advanced material
How to read the Japanese candlestick pattern Forex Spinning Tops
This is also a neutral Japanese candlestick pattern, not giving good trading signals. It is also known as the spinner model. Its structure includes a very small (but still visible) candle body. The candle shadow is long so it looks like a spinning top.
Because the candle body is small, it shows that the opening and closing prices are not much different. On the contrary, long candle shadows show that during that trading session, the price fluctuated quite strongly. This means that both buyers and sellers are struggling, trying to dominate the market.
If the market is in an uptrend and a Spinning Tops candle appears, it may be a bearish reversal signal. The opposite is also the case. Traders can rely on this signal to make appropriate transactions later.
How to read Marubozu candles
Marubozu candles are called strong candles. This type of candle gives a strong reversal signal. This type has a clear candle body but has almost no candle shadow or very short candle shadow. It shows the closing and opening prices as well as the highest and lowest prices in the trading session.
If it is a green Marubozu candle, the buyers have the upper hand. The purchase price may be pushed up. On the contrary, if the candle is red, the sellers are overwhelming and pulling the price down. Both can lead to reversal signals.
In addition to Marubozu candles, Japanese candles that carry strong reversal signals also include Bullish Engulfing candles. This model provides a reversal signal from decreasing to increasing. Traders should consult more to get more accurate trading signals.
How to read Japanese candlesticks Hammer và Hanging Man
This is a type of candle with a long shadow. How to read this forex candlestick chart is also quite simple:
- Structure: Short candle body. The candle shadow is below the candle body and is 2 – 3 times longer than the candle body.
- Hammer candle: This candlestick pattern appears after a downtrend. It indicates that the price has fallen to the bottom and is unlikely to fall further. If it is a green Hammer candle, the price will increase sharply. If it is a red Hammer candle, the price will increase slightly. Both cases show that the sellers are dominating but the buyers are still trying to keep the price from falling further.
- Hanging Man candlestick: This Japanese candlestick pattern appears after an uptrend. It gives a reversal signal from bullish to bearish. If the Hanging Man candlestick is green, the closing price will be equivalent to the highest price. Prices will decrease slightly. If the Hanging Man candlestick is red, the opening price is equal to the highest price and there will be a very strong decline. This shows that the sellers are dominant and pushing the price down. Therefore, traders should enter a Sell order to take profits and avoid a deep price reversal.
Read the Inverted Hammer candlestick chart and the Shooting Star chart
This is also a Japanese candlestick chart pattern used by many traders. These two types of candles have short candle bodies. The candle shadow is located above and is 2 – 3 times longer than the candle body. The meaning of the candlestick is that the price is being pushed up by the buyers. However, the sellers are struggling to pull the price down. This pattern includes 2 candlesticks:
- Inverted Hammer candlestick (inverted hammer): This pattern often appears with the Hammer candlestick but has an inverted shape. The candlestick represents that the market continues to decline because sellers dominate.
- Shooting Star candle (shooting star): This pattern shows that the market is increasing. This candle appears with the Hanging Man candle but the shape is reversed.
Both of these models signal a market reversal trend. However, their signals are not as strong as the Hammer and Hanging Man candlestick patterns. Therefore, traders need to continue monitoring before taking action.
See more: Broker IC Markets and interesting revelations
Which Japanese candlestick chart to use and how to trade forex most effectively?
Traders can use How to read Japanese candlesticks independently to analyze forex price fluctuations. In addition, it can also be combined with other tools to increase accuracy. For example, RSI line, MA line, support, and resistance levels. However, you should not use too many indicators at the same time. It’s best to just use Japanese candles combined with one other tool and that’s enough.
In addition, Japanese candlesticks can be combined to create other indicators:
- Inside bar candle: Consists of 1 or more candles, signaling a trend reversal or continuation.
- Three Black Crow candlesticks: A pattern of 3 red candlesticks appearing in an uptrend.
- Dark Cloud Cover candle: 2-candle pattern, with a red candle appearing after an up candle, signaling a bearish reversal trend.
Conclude
It can be seen that How to read Japanese candlesticks is not difficult. It is important for traders to accurately identify the candlestick pattern to be able to understand what market state it is representing. In addition, please refer to other content about Japanese Candles at Forex Trading to gain more effective trading experience!
FAQs
What meaning do Japanese candles represent?
Japanese candlesticks represent the psychology and behavior of investors in the market, specifically the struggle between buyers and sellers.
Besides blue and red, do Japanese candles have any other colors?
Depending on each trading platform, the color of Japanese candlesticks will be specified. The most popular are green and red candles. On some platforms, green candles will be replaced with white candles.
Are Japanese candlesticks 100% accurate?
Are not. Japanese candlestick charts are highly accurate, but nothing is absolute because the forex market can fluctuate in many unpredictable scenarios.
