Education

Introduction to Japanese Candlestick

Candlestick chart is one of the most popular types of chart used in market analysis. The history of this highly popular charting technique goes way back to the 17th century when Japanese man named Homma, who reportedly was involved in futures market which was still in its infancy at that time, discovered that market prices were to a great extent driven by the emotional factor. He realized that when emotion came into the equation, the price was subject to high volatility barely controlled by forces of supply and demand. He also came to understanding that emotions could make a difference between the price and the real value of an asset and that prices could be easily inflated by forces of speculative origin.

The principles established by Homma are the basis for the Japanese candlestick analysis, which is used to measure market emotions surrounding a price of particular instrument, be it a currency, commodity or stock. In this section of our educational course we have collected all you need to be well-versed in the field and be skilled Japanese candlestick charting techniques, patterns and models. Also, we will go further to explain how to use candlesticks with support and resistance and how to read different types of candles as information stored there may be useful for identifying entry points and foreshadowing price reversals.

candlestick chart

How to read Japanese candlestick

Candlestick chart is much different from traditional bar or line charts and is getting more and more popular as more traders are being drawn to the global market. Candlestick chart derives its name from the apparent reminiscence to the candle. The colored portion of the candlestick is called “the body” (also referred to as “the real body”). The long thin lines above and below the body represent the high/low range and are called “shadows” (also referred to as “wicks” and “tails”).

In order for the candlestick chart to be formed, you must have a data set which contains price points for a period you would like to see displayed.

These price data points are:

  • Open
  • High
  • Low
  • Close

1. Open is the opening price of the candle for a particular tie period. Opening price is recorded immediately once the new candle is being formed and remains unchanged until the selected time period expires. Most of the charting software available online allows selection of multiple time periods to be displayed.

2 High is the highest price reached within particular period. The highest price is usually marked by the upper shadow of the candle

3. Low is the lowest price reached within the given period – it is usually market by the bottom of the lower shadow of the candle.

4. Close – the closing price for a selected period.

  • If the price of the financial instrument is closing higher than the opening price – a blue candles is being formed with the edge of the colored (blue) body representing the closing price. Note, that upper shadow is still extending above the body an price has been fluctuating over the given period but declined before closing.
  • If the price closes lower than the opening price – a red candle is being formed. The lower edge of the red candle is representing the closing price. But have a look at the lower shadow – the price has reached even lower price over the give period but retraced to the higher level.

candlestick anatomy

As such, candlestick chart is one of the most useful types of chart as it not only shows general direction of the price, but also shows the range of price fluctuations for a given period of time.

Candlestick shows easy-to-interpret picture of price action.  By looking at each particular candle the trader can immediately see the relation between open and close as well as high and low.

  • For example, longer upper shadows usually indicate strong pressure to the downside, meaning that upward movement is meeting resistance.
  • On the other hand, long lower shadows indicate that there is strong pressure to the upside, meaning that downward movement is being suppressed.

Also, candlesticks are very important in determining Support and Resistance Levels which are usually measured by candlestick’s shadows.

candlestick example usage

As such, there are numerous ways how candlestick chart can be used to the advantage of the trader and is much superior to other types of charts including bar and line charts. For detailed information on the anatomy of candlestick chart read click here.