Traders use a variety of analysis aids in order to predict how things will develop so that they can make educated choices regarding which products to trade on, when to begin a trade and when to end it. The Japanese Candlesticks are a way to display a lot of data regarding a certain type of trade (forex trading of a certain pair of currencies for instance). Many traders value this display fashion since it allows for easily getting a feel of goings on.
What Japanese Candlesticks Can Do For You
It is worthwhile to learn about Japanese Candlesticks so that you too can utilize them in making trade related decisions. Japanese candlesticks are used for delivering information about the trading patterns of all types of products, such as stocks, commodities and currencies.
Among the many advantages of using Japanese candlesticks:
- They are easy to use and provide a lot of information in a simple, straightforward way.
- They allow for identifying turning points quickly.
- They provide market insights and not just describe what had transpired during a given time period.
- Not everyone uses Japanese candlesticks so adding them to your analysis tools arsenal may give you an edge over other traders.
Body and Shadow
Japanese candlesticks began being used in Japan in the 17th century for analyzing the rice trade. Basically a Japanese candlestick has a body from which lines stick out at the bottom and the top. The body shows the opening and closing prices (in forex the exchange rates for the currency pair traded). The color of the body will show if the spreads are positive or negative i.e. If, ultimately, the price rose or dropped.
The lines are called shadows, the upper shadow shows the highest price reached during the period the Japanese candlestick is describing. The lower shadow shows the lowest price.
A candlestick with a white body shows that the closing price was higher than the opening, whoever traded on the products the candlestick has to do with, in the period it is showing, has made a profit. A candlestick with a black body means that the closing price was lower than the opening one.
Being able to read Japanese candlestick patterns quickly allows you to tell what trading is like, how volatile a particular market is, what the volume of trade was, if profits were made or losses suffered.
The Basics of Interpreting a Candlestick Chart
The first thing you need to take a look at is how long the body of the candlestick is. This will give you an idea of how strong the market pressures are:
A long white candlestick indicates that there is a great deal of buying pressure, and a long black candlestick indicates that there is a great deal of selling pressure.
Short candlesticks indicate that there isn't a great deal of market pressure.
You'll also want to take note of the length of the candlestick's shadows. If you notice that one shadow is much longer than the other, you'll know whether buyers or sellers dominated the period of time. Long upper shadows indicate that buyers were dominant, while long lower shadows indicate sellers were dominant. This trend stays consistent whether the candle is black or white.
Length of Japanese Candlesticks' Bodies and Shadows
A long white body in a Japanese candlestick means that there were high demands, a long black body shows that there was a lot of pressure to sell.
A long top shadow shows that prices rose high, much higher than the closing price. A short bottom shadow shows that the lowest price during the period the Japanese candlestick describes was not much lower than the closing price.
The shorter a Japanese candlestick's body is the lower the trading volume was, i.e. there was not much trading activity.
Japanese Candlesticks may show special patterns when trading values were unique. Among these patterns are:
- A Japanese candlestick with only a body and no shadows. This means that the opening and closing prices were also the highest and lowest experienced. Such a pattern is known as a "Marubozu".
- "Spinning top" candlesticks are ones with short bodies and long shadows. This means that the highest price reached was much higher than the lowest but opening and closing prices were not so far apart.
- A "Doji" is a candlestick with no body. This means that although some fluctuation did occur (this fluctuation is shown by the shadows) the opening and closing price was the same.
It is a good idea to include Japanese candlesticks among the various analysis tools you use, with some experience you'll see that they provide a clear image of what trading was like in the period of time the candlestick is describing.