Types of Japanese Candlesticks in Forex serve as a technical analysis tool, predicting price trends. Each type of candle has its characteristics. Depending on trading purposes, investors can combine many different types of candlestick charts. The article below will help traders understand the structure and strategies for using popular Japanese candlestick patterns. find out with Forex Trading.
Learn about Types of Japanese Candlesticks in the Forex market
Before delving into the characteristics of each basic type of Japanese candlestick chart, you need to understand what Japanese candlesticks are and the meaning of candlestick patterns in Forex.
What is a Japanese candlestick chart and what does it mean?
Japanese candlesticks are a type of chart that represents price fluctuations of any asset on the market. Candlestick patterns are used in many different time frames, be it a week, a month, or a year… By observing and evaluating the candlestick chart, investors can understand the opening price. , closing, high, and low of the trading session.
Along with Japanese candlesticks, Heiken Ashi candlesticks are also a commonly used tool in trading. However, Heiken Ashi often gives price reversal signals later than other types of Japanese candlestick reversal patterns.
The General Structure of Types of Japanese Candlesticks
The structure of the Japanese candlestick chart includes 3 parts:
- Candle body: Represents the range of market price fluctuations in a fixed period, from opening to closing. The candle’s body is red or green.
- Upper whisker (upper shadow): This represents the highest price in the trading session.
- Lower whisker (lower shadow): This represents the lowest price in the trading session.
See more: Read candlestick charts: Basic & advanced material
Analyze the characteristics Types of Japanese Candlesticks for new traders
Popular Types of Japanese Candlesticks in technical analysis include basic (standard) Japanese candles, indecision candles, strong candles, and candles with long upper and lower shadows. The following are the characteristics of each different type of candle.
Basic Japanese candlestick analysis – Standard
This pattern has a long body, the upper and lower wicks are both shorter than the candle body. By observing the color of the standard candle body, investors can identify the market trend at the current time. If the candle is green, this is a bullish candle, with a closing price higher than the opening price. On the contrary, a red candle is a bearish candle, the closing price is lower than the initial opening price.
Marubozu candlestick pattern (strong)
The Marubozu candlestick pattern is also known as the strong candlestick pattern. The characteristic of this type of candle is that it does not have candle whiskers. The relatively long body indicates that the distance between the opening and closing prices is very large. The appearance of a strong candle is a sign that the selling and buying forces in the market are very strong. This can lead to trend continuation or reversal in price.
If a red candle appears at the end of an uptrend, it means the price is about to change from increasing to decreasing. On the contrary, if a green candle appears at the end of a downtrend, this is a signal of reversal from down to up. In case a green candle forms during an uptrend, the price will continue to increase. Similarly, red candles formed during a downtrend signal that the price continues in a downtrend.
Japanese candlestick pattern in Forex – Indecision candle
Among Types of Japanese Candlesticks, indecision candlestick charts have very small bodies, indicating that the opening and closing prices are approximately equal. Meanwhile, the upper and lower beards are very long.
The appearance of an indecision candlestick pattern is a signal that both sellers and buyers are struggling with each other, with no one party controlling the market. Investors should not only rely on this chart to place trading orders. Instead, you need to patiently wait for the confirmation signal of the next candle.
Japanese candlestick chart with long whiskers above
The characteristic of this type of candlestick is that it has a small body located at the bottom of the pattern and a very long upper wick. If this chart forms during a downtrend, it is called a Hammer reversal candle. If formed during an uptrend, it is called a shooting star candle.
The candlestick pattern with long wicks above shows that buyers are trying to push the price up but are unsuccessful. The sellers gradually regained their advantage and pushed prices down. This is a signal of a price reversal trend in Forex. When a red candlestick appears in an uptrend, it means the price will change from increasing to decreasing. If a green candle appears in a downtrend, it means the price reverses from decreasing to increasing.
Types of Japanese Candlesticks have long whiskers at the bottom
This pattern has a small body located at the top of the candle. The lower wick is twice or three times longer than the candle body. If formed during a downtrend, this type of candle is called a Hammer candle. If formed during an uptrend, it is called a Hanging Man candlestick chart.
The candlestick with long wicks below shows that the sellers are trying to push the price down to the lowest possible level, but the buyers have pushed the price up. If a red candle forms at the end of an uptrend, the market is likely to reverse and decrease in price. In case a green candlestick forms in a downtrend, it means the price tends to reverse and increase
How to apply trading strategies with popular Japanese candlesticks
In this article, we will share trading strategies for Hammer candles and spinning top candles, also known as Spinning Top Candle. These are popular Types of Japanese Candlesticks types in the Forex market.
Technical analysis and trading with Hammer candles
Traders need to determine the market trend and identify the candle shape, then place an order to avoid risks. When entering a buy order, you can apply one of the following methods:
- Wait for the price to be half the length of the candle and place a buy order. If the price trend happens as predicted, investors will earn the highest profit.
- Enter a buy order at the opening price of the confirmation candle, right after the Hammer candle. If the price does not increase too much, you can still take profits and avoid risks. This method is relatively safe and suitable for people who do not have much experience and little investment capital.
- Wait for the Hammer candlestick formation trading session to end and place an order. Although this method does not take as much profit as the two methods mentioned above, it is very safe and secure.
To take profits when trading with Hammer candlesticks, you apply the ratio 1:1 and 1:2. Stop loss point should be placed 2 – 3 pips below the candle’s wick.
See more: Optimize trading with IC Markets Exchange
How to apply the Spinning Top candlestick pattern
To determine the entry point, traders can refer to the following way:
- If the Spinning Top candlestick forms at the end of a downtrend, it means the market will reverse from down to up. Traders should consider placing buy orders at this time.
- If the Spinning Top candlestick appears at the top of an uptrend, this is a sign that the price is about to change from increasing to decreasing. Traders need to execute sell orders to make more profits.
If you only rely on the spinning top candlestick pattern to determine reversal signals, this is relatively risky. Therefore, you should combine indicators such as MACD and RSI. How to analyze these indicators is as follows:
- If the candlestick chart is above the MA 99 line, the MACD indicator diverges, creating a higher bottom than the previous bottom, and the confirmation candles are all above the MA, then the market will continue in an uptrend. If the Spinning Top is below MA 99, MACD diverges to create the next peak lower than the previous peak and the confirmation candles are all below the MA, the price will continue to decrease.
- The uptrend reversal is confirmed when the candlestick chart is above or below MA 99. At the same time, MACD divergence reverses the trend at two bottoms, the confirmed candles are all above the MA. When MACD reverses at two peaks and the confirmation candles are below the MA, the market has a downward trend.
How to trade with the Spinning Top candlestick pattern
Conclude
The above article has provided readers with information about the most popular types of Japanese Candlesticks. Traders can refer to and apply the above trading methods to the Forex market. To update the latest articles on investment trends and foreign exchange trading, don’t forget to visit Forex Trading!
FAQs
Below are some frequently asked questions when traders apply Japanese candlestick charts.
What time frame should you trade with Hammer candlesticks?
The Hammer candlestick pattern is often used for day trading. Traders should choose the D1 or H4 time frames to achieve the highest efficiency.
How to trade with Marubozu candles when the market is sideways?
In this case, you should wait for the price chart to break out of the sideway. Identify sideway zones using resistance and support lines. Then, observe the fluctuations of the Marubozu candle after the breakout. Depending on whether the candlestick is bullish or bearish, traders place orders to catch the trend. Besides, investors should also use technical indicators. Thus, you will avoid some potential risks when trading.
What are the limitations of Hanging Man candles?
Using Hanging Man candlesticks can cause traders to delay the process of placing orders. In addition, this model also does not provide target profits. Therefore, traders will have difficulty determining the level of profitability and the time to exit the trade. If the price goes sideways, you cannot use the Hanging Man candlestick.
