Reading Japanese Candlesticks
A candlestick consists of three elements: body, color, and shadow. The body of the candle determines the opening and closing prices of the session, the color of the candle determines the direction of price movement up or down, while the shadow of the candle, which is above and below the candle, represents the highest and lowest prices recorded during the session.
Different colors can be used in Japanese candlesticks. It is customary to use white for a candle indicating an upward trend and black for a candle indicating a downward trend. Green can also be used for a bullish candle and red for a bearish candle, and so on.
For an uptrend candle, the lower body tip represents the opening price of the session and the upper body tip represents the closing price of the session. The opposite is true for a downtrend candle, as the lower body tip represents the closing price and the upper body tip represents the opening price.
The upper shadow of the candle represents the highest price recorded in the session, whether the candle is bullish or bearish, while the lower shadow of the candle represents the lowest price recorded in the session, regardless of the candle's direction, bullish or bearish.
The body size is important for a price candle because the larger the body, the greater the price action and pressure during trading. Thus, a long bullish candle body indicates strong buying pressure, while a long bearish candle body shows increasing selling pressure.
The size of the candle body can be used to gauge market sentiment and trends, especially when using a candle for a long period of time such as a day, week or month, while candles with periods of less than a day are less important due to the volatility resulting from random cash flows during the trading day, which does not reflect a specific market trend.
The long shadow of the candle relative to the length of the candle body, whether in a bullish or bearish candle, indicates the conflict between sellers and buyers during the trading session, and indicates the possibility of a change in the current trend or its reversal.
A short candle shadow relative to the length of the candle body, whether in a bullish or bearish candle, indicates that the current candle trend is the decisive trend in the market, which increases the likelihood of its continuation.
The balance between the length of the shadow and the size of the candle body indicates that there is a lesser degree of conflict between sellers and buyers. If the candle is bearish, the sellers have settled the matter slightly, and if the candle is bullish, the buyers have settled the matter slightly.