Japanese Candlesticks are a technical analysis tool that traders use to chart and analyze the price movement of securities. Traders can use the candlesticks to identify patterns of price action and make decisions based on the short-term direction of the prices.
Table of contents
- How to read Japanese candlestick charts
- Understanding a Candlestick Chart
- A Japanese candlestick chart shows you more information
- How to read Japanese candlestick patterns
If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day. A short upper shadow on an up day dictates that the close was near the high. The relationship between the days open, high, low, and close determines the look of the daily candlestick. Real bodies can be long or short and black or white. Shadows can be long or short. Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.
The above chart shows the same exchange-traded fund ETF over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts. Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes.
There are many candlestick patterns. Here is a sampling to get you started. Patterns are separated into bullish and bearish.
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Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.
This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher. It is identified by the last candle in the pattern opening below the previous day's small real body. The small real body can be either red or green. The last candle closes deep into the real body of the candle two days prior.
The pattern shows a stalling of the buyers and then the sellers taking control. More selling could develop. This is not so much a pattern to act on, but it could be one to watch.
The pattern shows indecision on the part of the buyers. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.
How to read Japanese candlestick charts
The bullish harami is the opposite of the upside down bearish harami. A downtrend is in play, and a small real body green occurs inside the large real body red of the previous day. This tells the technician that the trend is pausing.
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If it is followed by another up day, more upside could be forthcoming. A bearish harami cross occurs in an uptrend, where an up candle is followed by a doji —the session where the candlestick has a virtually equal open and close. The doji is within the real body of the prior session. The implications are the same as the bearish harami. A bullish harami cross occurs in a downtrend, where a down candle is followed by a doji. The implications are the same as the bullish harami. Let's look at a few more patterns in black and white, which are also common colors for candlestick charts.
This pattern starts out with what is called a "long white day. The fifth and last day of the pattern is another long white day.
Understanding a Candlestick Chart
Even though the pattern shows us that the price is falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up. A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it's called a "bullish mat hold.
The pattern starts out with a strong down day.
This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower. As Japanese rice traders discovered centuries ago, investors' emotions surrounding the trading of an asset have a major impact on that asset's movement.
Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed. Alan Northcott. Atlantic Publishing Group. Technical Analysis Basic Education. Advanced Technical Analysis Concepts.
A Japanese candlestick chart shows you more information
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If the candlestick is bullish, then the opening price is always at the bottom and the closing price is always at the top. If the candlestick is bearish, then the opening price is always at the top and the closing price is always at the bottom. The different colours simply provide a means for you to instantly tell if they are bullish or bearish. The candlestick in this illustration is a period of 1 day, which means that the candle took an entire day to form. This, however, only shows the OHLC for that day. If you wanted to see the price movement in more detail, you would go to a lower time frame.
Using the example above, to find out more specifically what happened during the course of that day — that day being the single candlestick shown — you could go to a 1 hour time frame chart. This chart would show candlesticks that more accurately depict the price movement throughout the day. Similarly, you could go to an even lower time frame — say, a 15 minute or a 5 minute time frame — and find out how the price behaved in even more detail.
You will explore the methods of choosing which time frame best suits your trading style in further lessons. The candlestick in this illustration is a one hour period, which means that the candle took an hour to form. The time frames that are available for your use will depend on the trading platform you choose to use. Tradimo helps people to actively take control of their financial future by teaching them how to trade, invest and manage their personal finance.
How to read Japanese candlestick patterns
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The educational content on Tradimo is presented for educational purposes only and does not constitute financial advice. All rights reserved. How to read Japanese candlestick charts Japanese candlesticks are a way of presenting the price action over a set period of time. A Japanese candlestick chart shows you more information When you trade something, whether it is forex, stocks or commodities, you will use price charts to see the price movement in the markets. Consider the following two charts: The line chart is a very simple way of showing the price movement.