Japanese candlesticks are a popular method of chart analysis in financial markets, used to interpret price movements and trends over different time periods. This method originated in Japan and was originally used to track rice prices, and has since become an important technique in technical analysis of financial markets, including stocks and cryptocurrencies.
How to read Japanese candlesticks?
Each Japanese candle represents a period of time (such as a day or an hour) and shows the price movement during that period. A candle consists of:
1. Body: It represents the difference between the opening price and the closing price during the time period.
• If the body is green (or white), it means that the price went up, and the closing price is higher than the opening price.
• If the body is red (or black), it means that the price has decreased, and the closing price is lower than the opening price.
2. Upper Shadow: Represents the highest price reached by the market during the period.
3. Lower Shadow: Represents the lowest price reached by the market during the period.
Types of Japanese Candlesticks
There are many shapes that Japanese candlesticks can take, and each shape has a specific meaning for price movement:
1. Long Candles: Indicate a strong movement in the price, whether up or down.
2. Hammer candle: It has a small body and a long lower shadow, and often indicates an upward reversal at the end of a downtrend.
3. Doji candle: It has no body or a very small body, which indicates the equality of supply and demand forces and market indecision, and may indicate a possible reversal in the trend.
4. Engulfing candle: It appears when the trend changes, as a large candle (bullish or bearish) completely covers the body of the candle before it.
5. Three Consecutive Candles: A group of three candles in the same direction may be a strong signal of trend continuation.
The importance of Japanese candles
• Predicting trends: By studying recurring candlestick patterns, traders can anticipate potential changes in trends.
• Technical Analysis: Japanese candlesticks can be used as a powerful tool for technical analysis, either in conjunction with other technical indicators or on their own.
Using Japanese Candlesticks in Technical Analysis
Traders use candlestick patterns as part of their strategies. For example, a “hammer” candlestick after a series of bearish candlesticks could be considered a buy signal, while a “bearish engulfing” candlestick after a strong uptrend could be a sell signal.
In short, Japanese candlesticks provide a quick and visual reading of price action and allow traders to quickly analyze the market and make decisions based on the patterns that appear.