Japanese candlesticks are the foundation for modern technical analysis. Whether you are thinking of purchasing a stock or want to scalp the Forex market, candlesticks should play a major part in your on-chart analysis.
Professional traders have used Japanese candlesticks for decades, but in truth, candlesticks have been around for over 200 years. Candlesticks were initially used in 17th century Japan by rice traders who wanted a more precise way to determine the ever-changing prices of rice. Candlesticks are said to have been the product of a legendary rice trader known as Homma from the small town of Sakata.
Even though the way we see candlesticks today is different from two hundred years ago, thanks in large part to market pioneers like Charles Dow and Steve Nisson, the underlying principles of candles remain virtually the same.
A few of the key benefits that come with using candlesticks in technical analysis are:
- You get an immediate understanding of “what” price is doing rather than “why”, (i.e. news reports, economic events, etc.)
- Every technical piece of information about price action is reflected in Japanese candlesticks
- Markets can change at a moments notice, and by staying on top of price through candlestick analysis, you can be more confident in your decision making
Japanese candlesticks differ from other forms of price reflection in that candlesticks show more information and provide more value. Regular line charts, for example, only show the closing price for each time period on a chart. And while bar charts show what candlesticks show, which is the open, close, high and low, bar charts are not nearly as easy to decipher as candlesticks.
As we just mentioned, candlesticks are composed of four sets of data to create each candle. There is the opening price, the closing price, candle highs and candle lows (wicks.) The piece of a candlestick that is filled is referred to as the candle’s body, which displays the open and closing price points. Above and below each candle you can find wicks. Candle wicks are the thin lines that extend above and below the candle’s body, and they signify the highs and lows for that candle’s session.
The larger a candle’s body and size, the more buying or selling pressure that is currently being placed on that specific asset. Full bodied candles show if it’s the bears who are in control or the bulls. On the opposite end of the candlestick spectrum are candles with small to no visible bodies. These candlestick types are also important for price action analysis, as they signify that price movement is little to none, and that consolidation is present. Consolidation refers to price charts with very little movement.
Japanese candlesticks, whether small with long upper and lower wicks or large with no wicks, come in all shapes and sizes, and so it’s imperative to know what each candle and candle formation represents before placing trades based on your analysis.
First, get yourself familiar with the single candles. These are standalone candlesticks that indicate buying or selling pressure. If you combine multiple candles together you have candlestick patterns, or formations, that indicate whether price may soon reverse or continue trending in its original direction.
Please note that there is a significant difference between candlestick patterns and price action patterns, although both are used interchangeably by mistake by many websites.
Get yourself familiar with all the important candles and candlestick formations to take your trading game to the next level.