Intermediate 5: Understanding Japanese Candlesticks

　　

What are Japanese Candlesticks?

Candlestick charts are a popular tool used in technical analysis. They are often used to determine possible price movements based on past patterns, during both bull and bear markets.

The concept originated in 1700 when a Japanese man named Honma Munehisa discovered that while supply and demand mainly determined the cost of rice, the market was also influenced by emotion.

(Honma Munehisa)

How to read Japanese Candlesticks?

Japanese candlesticks display the following four types of price levels during a single trading session:

• High price
• Low price
• Opening price
• Closing price

A green candlestick suggests that the opening price on that day was lower than the closing price, which meant that demand exceeded supply.

Meanwhile, a red candle stick reflects that the closing price on that day was lower than the opening price, which reflects that supply was more than demand.

Japanese candlesticks also contain a real body, and two tails.

The real body of a candlestick represents the range between the open and the close price within a single trading session. It is a reflection of the price sentiment during that specific period.

Meanwhile, the tails (upper shadow and lower shadow) represent the highest or lowest price reached during the trading session. 

Examples of Japanese Candlestick patterns

There are many different kinds of candlestick patterns such as bullish patterns, bearish patterns, and continuation patterns.

Bullish patterns indicate that price is likely to rise, while bearish patterns suggest that the price is likely to fall.

Bullish Pattern

Bearish Pattern

However, it is important to remember that candlestick patterns should only be used as a reference. Traders will still have to do their own due diligence whenever they trade the markets.

Learn more about the 15 most popular candlesticks patterns that every trader should know about.