What is a Japanese Candlestick Chart? Technical Analysis

Forex Educational Video Series

What is a Japanese Candlestick Chart?

The Japanese version of price charting uses a shape similar to a candlestick as a visual representation. The Japanese Candlestick method of visualising charts is one of, if not the, most popular methods of looking at charts for the modern trader.

The way it works is that one candlestick shows the open, high, close and low point of the price at a given timeframe. The shadow or wick shows the distance between the high and the low. The body of the candle, or “real body”, measures the distance between the open and the close. When the close is greater than the open price, then the body of the candlestick is white. This reflects a positive sentiment in the market. When the close is less than the open price, then the body of the candlestick is black. This reflects a negative sentiment in the market.

There are many different shapes and sizes to the candlesticks and the patterns they form, all of which come with their own special names. For example, one of the simplest and most popular candlestick patterns is called The Hammer. This is when the candle has a long lower shadow and a short body, with a tiny or no shadow on top. The Hammer is made up of just one candle and is a type of bullish reversal candlestick. We will be covering trend reversals in an upcoming video. Until then, traders!

Q & A

What are Japanese Candlesticks?

These use a shape similar to a candlestick as a visual guide to an instrument's price. Japanese Candlesticks are popular because they are simple to understand and contain a lot of information. The colours of the body of the candle provide an easy and accurate way of showing price movements. They also indicate the supply and demand behind each period's price action.

A candlestick displays the open, high, close, and low point of the price at a certain timeframe. The shadow (or wick) shows the distance between the high prices and the low price. The body of the candle (known as the "real body") measures the distance between the open and close. If the body of the candlestick is white, it means that the close is greater than the open price. This reflects a positive market sentiment. If the body of the candlestick is black, it means that the close is less than the open price. This denotes a negative market sentiment.

Why use Japanese Candlesticks?

Traders use candlesticks patters to look for future market direction. Using some of the well-known patterns can potentially lead to better trading decisions, as you learn a lot about the market's movement. This is because they show particular behaviour that has often led to certain outcomes in the past.

How many candlestick patterns are there?

There are hundreds of different Japanese Candlestick patterns. They can be used for any time frame, from one minute to one day and longer. It is down to your individual trading strategy to decide which candle pattern suits you.

A common pattern to note is a 'doji'. This candlestick is formed when the opening and closing prices are the same, or very close to each other. The shadow lengths may vary, but the candle is telling us that buyers and sellers have cancelled each other out and there is indecision in the market.

There are several variations of a doji, including a long-legged doji and a gravestone doji, which have varying lengths of shadow or wick.

We will be covering trend reversals in an upcoming video. Until then, traders!

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