Japanese candlesticks have been around for decades. As the name implies, the term is Japanese and was initially created to perform technical analysis for rice trading. There was no name given to this secret technique at the beginning, however, once it started to gain popularity, a Westerner named Steven Nison found this secret by learning it from an experienced Japanese broker. Once he got the gist of the technique, Steve thoroughly studied and researched it, eventually beginning to write about it for other traders to read.
As time passed, this technique grew increasingly popular and burst into the trading scene during the 90s.
At their core, Japanese Candlesticks are an efficient tool to perform technical analysis and determine price movements and charts of various trading securities.
A Japanese rice trader named Munehisa Homma introduced the Japanese Candlestick charting concept. What makes this technique so unique from other patterns is that its creator, Homma, found out that the emotions of traders play a crucial role in impacting the rice market’s supply and demand.
The candlesticks display the nature of various price movements in different colours to highlight the differences. These graphical candlesticks help traders identify multiple patterns in price action, allowing them to make well-informed decisions according to short-term price directions.
People new to Japanese candlestick trading often wonder what makes its charts different from the graphical formats in other types of trading. The distinction is that Japanese candlestick charting is more visual and offers you more clarity about the price action.
The graphics also display the demand and supply that contributes towards the price movement for each period. On candlestick charts, the area below and above the body is known as a shadow; The size of the shadows and candlestick body are essential indicators of price action.
While there are several variables that you must consider to have a complete understanding of candlestick trading charts, you can start reading these patterns by learning some fundamental elements. Firstly, there are two candle types; Bullish and Bearish. You will see bullish candles when closing prices are higher than opening prices, meaning that there was an increase in asset value.
On the other hand, bearish candles appear when an asset’s value goes down. Commonly, bearish candles are black or red, while bullish candles are white or green, although the colour scheme is usually customisable within your platform. You will also notice vertical lines on the top and bottom of candlesticks. They represent the lowest price points and the highest price points. These lines play an essential role in helping traders to analyse candlestick patterns in charts.
Traders can utilise various Japanese candlestick patterns to make predictions. Here are some examples:
- Bullish Engulfing Pattern
- Bearish Engulfing Pattern
- Piercing Pattern
- Dark Cloud Cover
- Shooting Star
- Evening Star
- Morning Star
Using Japanese Candlesticks for forex trading is a very popular charting method. As we discussed earlier, Candlesticks offer you specific visual cues to convey various price movements. Once you start learning about the various patterns, you will find a plethora of information regarding Candlestick trading, particularly about the relationship between the open price and close price in forex.
People who utilize this technique are likely to identify price actions that predict reversal patterns and trend continuations. You can make the most out of your trading efforts by using technical analysis tools to determine exit and entry points.