Why have Japanese candlestick chart become so popular in the world of trading and investing? Join Forex Trading to learn and discover how to apply and read candlestick charts in technical analysis in the article below!
Overview: Japanese candlestick chart
What makes this chart so special and important? Read the information below now for more details about the chart.
What is a Japanese candlestick chart?
The Japanese candlestick chart was created in the 18th century by Mr. Munehisa Homma. He was a trader and used candlestick chart analysis to represent rice prices in Japan. From analyzing economic factors, weather, and state policies, he therefore found the rules of rice price fluctuations in the Japanese market. Thanks to the resounding success, his candlestick charts became popular and widely applied in many Western countries.
Structure of candlestick chart
- Total candle length
The length of a Japanese candle is calculated from the bottom to the top of the candle, including the body and shadow. This length shows price fluctuations during the trading session. Short candles usually show a quiet market, while long candles show a highly volatile market.
- Candle body
The candle body is the rectangular part on the chart (blue/white or red/black). The length is calculated as the difference between the opening price and the closing price.
Green (or white) candles usually appear when the closing price is higher than the opening price. It represents high buying power and selling power, and prices tend to increase.
Red (or black) candles often appear when the closing price is lower than the opening price, indicating that selling power is greater than buying power, and prices tend to decrease.
- Candle shadow
The candle shadow, also known as the candle’s wick, is a small straight line protruding above or below the candle’s body. It shows the lowest and highest prices during the trading session.
The candle shadow above shows that the market is increasing in price, with a lot of purchasing power pushing the price up, but due to large sales volume, the price is low again. The long upper candle shadow indicates strong selling pressure.
The lower candlestick’s wick shows that the market is bearish due to the strong selling force causing the price to drop quickly but the increased buying force causes the price to push up again. Long candlestick wicks indicate stronger buying power.
Japanese candlestick charts are popular today
There are 5 basic types of candles including:
- Standard candlestick: has a long body, upper and lower shadows are shorter than the body. Green candles indicate a consecutive upward price trend and red candles indicate a continuation of a downward price trend.
- Intense candlestick: does not have a candle shadow but has a body. It represents a lot of buying or selling power in the market. At the same time, upcoming warnings for trend continuation or reversal.
- Candles with long wicks at the bottom: have a small body at the top and a shadow 2-3 times longer than the body of the candle below. It shows that the price was pushed down deeply by the sellers and then pulled back up by the buyers.
- Candles with long wicks at the top: the shadow is 2-3 times longer than the candle body above, with a small body below. This shows that the price is pushed up by the buyer, and then pushed down by the seller. The candle with long wicks above signals a trend reversal. If a green candle appears in a downtrend, it signals a market reversal to increase.
- Indecision candle: The body is small or almost absent, and the candle shadow is long because the closing and opening prices are almost the same. Shows a struggle between buyers and sellers without clear results.
See more: Read candlestick charts: Basic & advanced materials
Meaning of candlestick chart in technical analysis
Each type of candlestick chart tells a story about the struggle between bull markets and bear markets. At the same time, it is a struggle between demand and supply, between fear and greed. Therefore, candlestick charts are used by traders to update, listen to the market, and find suitable trading points.
However, to make the correct decision, it is necessary to consider the context of the previous and subsequent candles. Most importantly, traders need to combine reading Japanese candlesticks with analyzing other patterns and indicators to achieve good results.
Instructions on how to read candlestick charts
We will open the door to understanding and discovering the secret behind reading candlestick chart. Discover smart and effective trading strategies now through the instructions below.
Components in the Japanese candlestick chart
- The horizontal X-axis represents time. The time displayed on the X-axis completely depends on the time the investor chooses. For example, if the time frame is 1D, each candle will display the price fluctuations in 1 day.
- Vertical Y axis: shows fluctuating price levels over a specific period.
- The chart includes many green candles and red candles, showing price increases and decreases. Each candle represents a trading session and provides important information to traders.
- Additionally, there are analysis aids such as drawing tools, technical indicators, and price notes.
How to recognize special candlestick charts
Special candles or candle shapes such as Hammer candles, shooting star candles, morning star candles, and pin bar candles… will bring many important signals to traders about the market. Based on these signals, traders can predict the next trend and find entry or exit points more effectively.
Recognizing price patterns in technical analysis
In addition to special candlestick patterns, when observing the chart, traders also need to choose price models such as double top model, double bottom model, head and shoulders, and rectangle, … These price patterns provide signals about trend reversal or continuation. From that information, traders can easily find better entry and exit points.
Applications and notes in Japanese candlestick charts
There are many typical and special used candlestick charts such as Marubozu candle, Hammer candlestick,… From recognizing basic charts or special charts to using them to predict predict market trends. We will learn together how to apply and note below for details.
Applying Japanese candlestick charts in technical analysis
Charts have many applications because they are immediate, intuitive, and easy to use. Charts have many applications such as:
- It is the most popular technical indicator in trading.
- Supports drawing support and resistance lines accurately.
- Provides the most accurate psychological information about the market.
- Allows investors to recognize price reversal signals, accumulation zones as well as signs of buying or selling.
See more: Broker XM: Explore the world of Forex fingertips
Important notes when using candlestick charts
- Do not rely solely on a single candlestick, because there may be many noisy signals that make determining the trend inaccurate. Instead, it is necessary to combine them with trend lines, support resistance, or other indicators.
- You need to wait patiently until the candle closes or until the candle confirms.
Conclude
So, through Forex Trading article, traders already know what a Japanese candlestick chart is. Besides, you also have a better understanding of how to read charts as well as apply it to technical analysis. That information is an important part of bringing efficiency in trading to investors. So stay tuned for more information to learn more useful knowledge in the financial world!
FAQs
What are the four main information of an investor‘s candle before switching to another candle?
- Opening price
- Closing price
- The highest price in the session
- The lowest price of the session
What is the difference between candlestick charts and line charts?
Candlestick charts provide much more information about price movements than line charts.
What does the standard Japanese candlestick mean?
The candlestick’s meaning represents the price trend at the current time. Green candles represent an upward price trend, while red candles indicate a bearish price trend.
