What are Japanese Candlesticks?
Before starting to talk about Japanese candlesticks it is worth making a brief introduction on the major trading chart types. A trading chart is a graphical structure that shows the movement of the price of a trade for a selected time. There are various types of charts, and these various types can be grouped into three parts namely:
- The basic trading charts.
- The intermediate trading charts
- The expert trading charts.
The basic trading charts
These categories of the forex charts are the simple ones that aren’t complex, they are made up of the line, bar, and tick charts.
The Intermediate trading charts.
This category of Forex chart is the chart that is incorporated with technical analysis, and that is the Japanese candlestick chart.
The Expert trading charts
These types of charts are used to indicate the market false moves, they are for traders who want to go into advanced trading. These chart types include the Renko, Points and Figures, and the Heiken Ashi.
Origins of the Japanese Candlesticks?
The Japanese candlesticks are technical analysis that are used by traders to analyze the price trends of trade in form of charts. The idea of the candlestick charting was created by a Japanese rice trader by the name Munehisa Homma. During regular trading, Munehisa found out that the rice market was affected by the sentiments of traders, not disputing that the price of rice is also affected by demand and supply. The Japanese candlestick is now a popular charting system used by various traders across the globe.
How Japanese candlesticks work
The Japanese candlesticks deliver more comprehensive and authentic data about price trends, unlike that of bar charts. They give a graphical illustration of the supply and demand of price action in different periods.
Every candlestick contains the main part that indicates the extent between the open and the close of the currency or security being traded, the area is known as the body. The upper shadow is known as the distance in price between the highest point of the trading period and the top of the candle body. The lower shadow is known as the distance in price between the lowest point of the trading period and the lowest part of the candle body.
The bullish and bearish candlestick is determined by the closing price of the trade. When the body closes at a price higher than its opening price, the body is said to be white (or green), in this case, the closing price will be at the high of the body while the closing price will be at the bottom of the body. But if the reverse is the case the body of the candle will be black (or red). The closing price will be fixed underneath the body, while the opening price will be at the top of the body. These days the recent candlesticks have replaced the black and white colors with several other colors such a green, red, and blue. Traders are now able to personalize their charting system by choosing any color of their choice when using the electronic trading platforms.
The image above illustrates the structure of a normal candlestick. A candlestick has three particular points, the open, the close, and the wick (or shadow). These points are used in the formation of a price candle. The first point to analyze is the open and close prices of a candle. The opening and close of a candle indicate the beginning and end of the price of a trade within a selected period.
Japanese Candlesticks Structure
Candlesticks Open price
The open price represents the initial price the security was traded for upon the formation of the new candle. If the price starts an upward trend the candle will indicate a blue for green light depending on the chart settings of the trader. But if the price starts a downtrend it will indicate a red light.
Candlesticks High Price
The highest part of the upper wick /shadow shows the highest price a security was traded for at a particular time. If the upper wick or shadow is absent, it indicates that the highest price traded was either the open price or the close price.
Candlesticks Low Price
The price located at the bottom of the lower wick/shadow is known as the lowest price. But in the absence of a lower wick/shadow, it means that the opening price and the lowest price traded are the same.
Candlesticks Close Price
The close price is referred to as the last price trade at a particular time within the formation of a candle.
The next crucial part of the candlestick is the wick, which is also known as the shadow. This part of the candle is very important because it indicates the peaks in prices for a particular timeframe. The wicks are easy to spot because they are smaller than the body of the candlestick. This is where the power of the candlesticks is visible. Candlesticks can assist traders to monitor the momentum of the market.
The price direction is represented by the color of the candlestick. When the price moves to close above the opening price of the candle, the color will be green (which depends on the chart settings), but when the price moves to close below the open, it will indicate a red light.
The range is the difference between the highest price of the candle and the lowest price. This can be easily calculated by subtracting the price at the lowest shadow from the price at the highest part of the upper shadow.
Japanese Candlesticks Formula
Range= highest point- lowest point.
Acquiring this in-depth knowledge of a candle and the meaning of its vital components suggests that traders utilizing the candlestick chart have a good advantage when it comes to differentiating trendlines, price trends, and Eliot waves.
The difference between the Japanese candlesticks pattern and other chart patterns
The Bar charts
The candlestick patterns offer various advantages over bar charts. The Bar charts are not very visible compared to the candle charts, the bars on the bar chart make it hard to tell which path the price moved.
Candlestick patterns are indicated in a short time, but the bar charts appear for a long-time span.
The Heiken-Ashi charts
The Heiken-Ashi chart doesn’t always illustrate the basic open/close price. Unlike that of the Japanese candlesticks that represent the open and close price.
Point and Figure charts
These charts are non-time based, which means that time is eliminated from the charts. Unlike the Candlestick patterns that are time-based. Point and figure charts concentrate solely on the movement of price and momentum. For instance, when there is no momentum and the price moves sideways, a point and figure chart will not reveal new chart data, this charting system is identical to that of Renko charts.