To read Japanese candlestick charts and patterns, you will need to recognize three elements of each candle: its color, its body, and its wick. The color of the candle tells you the direction of movement over a given period, the body of the candle shows the open and close levels of the market, and its wick shows the upper and lower range.
Let's study the parts of each Japanese candlestick, as shown in the figure below.
In most charts today, green candles indicate an uptrend, while red candles indicate a downtrend. However, sometimes white (for up) and black (for down) are used instead.
In a green candle, the upper peak of the body is the "closing price" and the lower trough is the "opening price". In a red candle, the opposite is true.
In both candles, the top of the wick (sometimes called the shadow or tail) is the highest point the market reached during that period - and the bottom is the lowest point the market reached.
The length of the candle body and the length of the wicks can tell us about the absolute and relative value of the price. The candlestick's body can provide information about the market sentiment during the candle's formation. This can be important for candles that cover longer periods such as a day, a week, or an entire month. As with any technical indicator, candlesticks and their shorter period patterns are less important because price movements on a given day or less can be caused by random flows of money that have no relation to any real market sentiment.
Here's the key to understanding the relationship between wick length, body length, and the meaning of an individual candle:
The longer the wick is relative to the length of the body, the greater the hesitation and the greater the back-and-forth between buyers and sellers, and the greater the likelihood that the current trend will stop or reverse.
The shorter the wicks are relative to the length of the body, the more decisive the upward or downward movement is, and the more likely the movement is to continue in the same direction.
A long, high closed candle body with little or no tail shows that buyers outnumbered sellers and were in control throughout the entire period covered by the candle, pushing the price steadily higher. The longer the candle body, the stronger the buying power.
A long, bearish closed candle body with little or no tail shows that sellers outnumbered buyers and were in control throughout the entire period covered by the candle, causing the price to steadily decline. The longer the candle body, the stronger the selling force.
A small candle body relative to the tail indicates the same frequency to a lesser degree. If the candle body is red, sellers are slightly stronger, if the candle body is green, the opposite is true.
Upper wicks
A relatively long upper wick indicates initial optimism or buying pressure that has reversed as sellers step in and buyers take gains. In other words, a high price level has been tested, which has led to a pullback in attempts to push the price higher.
A short upper wick shows less hesitation, less testing of high prices, and less conflict between buyers and sellers. If the closing price is the highest price for the period covered, the candle will not have an upper wick.
Bottom wicks
A relatively long lower wick indicates strong initial pessimism and selling that was reversed as buying increased, and short sellers made profits. In other words, a low price level was tested, buyers regained control, and attempts to push the price lower were reduced.
A short lower wick indicates less hesitation, less testing of low prices, and less selling pressure that requires fewer buyers to reverse. If the price of an asset closes at its lowest level during the period covered, the candle will not have a lower wick.
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