In the trading world, charts are considered one of the main tools used by traders to view and track all asset price changes. When we compare the main three types of charts, the bar, the line and the candlestick charts, Japanese candlesticks are favored among traders because of the ability to quickly show in which direction and how far the price of an asset moved during a specific timeframe. Each candle is representing a certain amount of time passed or the number of completed trades.
These candles have earned the title of the most popular among charts for a reason – the technical analysis of Japanese candles makes it possible to predict any further price movements of various assets. The mood and psychology of the market can easily be spotted with this technical analysis tool. But what are Japanese candles exactly?
The correct reading of asset charts and the determination of support and resistance levels done through the technical analysis of candles can help any trader tremendously. The method is a combination of the appearance of a price line with different interval graphs. The graph represents fluctuation in quotes of assets for a certain timeframe. In order to gain a more complete understanding of this tool, you need to look at its components in more detail:
- The candle body is depicted as a rectangle
- The shadow is a line which extends from the body
These two components combined comprise the candle and each of them represent any price change for a precise time interval. Knowing how to read these charts makes it easier to forecast any possible market movement without the help of computer indicators. The reaction of the market to certain events and the overall “mood” can also be anticipated.
The main advantages of candlestick charts is their comprehensiveness – the candle is an equivalent of several indicators; the opening and the closing times and the information of the overall presence of buyers and sellers on the market. Various graphical figures can be seen on the trading terminal screen and these figures are used by traders to observe open/close or buy/sell orders. When a trader defines patterns on these charts, it’s easier to prepare a trading strategy and act accordingly, thus entering transactions that make sense and ultimately making a profit. But how to read a candlestick chart?
The information that’s provided by candles is almost identical at all times:
- Open – an opening quotation for a certain period of time
- Close – a closing quotation for that same period of time
- Low – the minimum price for the timeframe
- High – the maximum price for the timeframe
The opening and the closing quotes represent the frames of the candle and are commonly called the body. Thin extended strands that go up and down from the body are shadows, also called wicks. When reading candlesticks it’s important to distinguish bullish from bearish candles or increasing from lowering candle options. When the candles are bullish, the formation occurs from the bottom up. In this case, the opening price acts as the lower limit and the closing, the upper limit. Usually, on the MetaTrader 4 terminal chart, these types of candles are colorless or green. A bearish candle represents the exact opposite; it’s formed from top to bottom and painted in black or red, with the opening price being its upper limit and the closing price its lower limit. There is also another case, where the body of the candle is absent and this happens when the opening and the closing price are equal. The final case is when there is a lack of wicks in the candle and this means that all the parameters are equal: opening, closing quotes, minimum and maximum.
The study of candlestick charts comes down to the identification of graphic patterns that are formed due to various combinations of candle elements. There are numerous models that are represented by several elements and each of them have a name: hammer, hanged, shooting star, tombstone, hara, doji etc. All of these patterns signal the moment of entering the market. Also, there are the continuation trend models and trend reversal patterns that might occur.
Now, one of the most important parameters to consider when analyzing candlesticks is the body size. The length indicates the pressure on the bull or bear market. If a body of a large size candle is colored white (green), that suggests a prevailing bullish mood and that the buyers prevailed over sellers. Seller’s victory is displayed by a large dark, usually black or red body. The insignificant size of its body points to the equality of forces between buyers and sellers. This shows a possible rollback of the dominant trend or the continuation of the flat movement. In such cases, the trend freezes and after that resumes its movement, up or down.
Lastly, the candle mood is a concept proposed by Lance Beggs which suggests that the mood depends on the closing price relative to the previous candle element. There’s several types of the aforementioned mood: bullish, where the closing price is above the last high; bearish, the closing period is above the previous minimum; lastly, neutral, where the last candle close is in range of the previous candle. Each of these can be high, low or medium, which signifies the intensity of the mood.
In conclusion, the use of Japanese candlesticks has multiple positive aspects in addition to certain difficulties. One of the main advantages is that these elements are much more reliable compared to computer indicators; this gives us a possibility to examine the price itself and not just mathematical calculations. A big advantage of candles is that they are universal and applicable for asset graphs of almost every market – currency, stock, commodity etc. However, if you are new to the trading world, you should make the effort to spend a good portion of time studying and analyzing candlestick charts to better comprehend this tool. If you put in the work and patience, the results will take your trading to the next level and ensure bigger profits.