Japanese candlesticks – are the representative bars on the charts that represent the price movements for certain periods from the opening price, the high price, the low price, to the closing price. They were used by traders in the East in the Middle Ages to determine and follow the prices of rice and food commodities at first.
Candlesticks should provide different visual cues that make understanding price action easier. Trading candlestick patterns on timeframe charts allows you to better understand market sentiment. Candlestick charts provide more depth of information than traditional price bar charts.
In this article, we will provide an explanation of the types of Japanese candlesticks and an understanding of their components, the most famous Japanese candlestick patterns, and strategies for trading different Japanese candlestick patterns and predicting their future trends.
Note: We will use some terms in this article based on their internationally recognized names in the English language, to facilitate understanding and avoid conflicting terms.
Explaining the components of Japanese candles in detail
Japanese candlesticks focus on the relationship between the opening and closing prices. A candlestick chart provides traders with a detailed description of the price chart, with an almost three-dimensional representation. Unlike Japanese candlesticks, bar charts focus more on the highs and lows than anything else.
The great thing about candlestick charts is that they allow you to see more distinct and distinct patterns than other types of charts. A trader who uses different candlestick patterns should also identify the different types of accompanying price action that tend to predict reversals or continuations of a trend. Additionally, when combined with other technical analysis tools, we should get a more accurate estimate of potential price movements.
As we can see from the image above, closing candles at a higher price than they opened will form white candles (bullish). Conversely, closing candles at a lower price than they opened will form black candles (bearish). The boxes formed by the price action are called the "Body". The extremes of the daily price action represented by lines extending from the body are called the "Tail" (wick or shadow). The small part left behind the candle is called the "Nose".
To sum it up better - Japanese candlesticks have the following components:
Body: The thickest part of the candle that indicates the discrepancy between the opening and closing prices.
Wick or tail: It can be called (candle shadow). The names differ, but they all refer to the upper and lower line of the candle body, which represents the entire price path during a specific time frame, indicating the maximum and minimum of the candle body on the price chart.
Color: This will allow us to determine whether the candle is bullish or bearish, i.e. if the price is rising or falling. These colors can be customized according to the trader’s own preferences.
With the ability to be used in different time frames (H1, D1, etc.), the Japanese candlestick trading chart provides us with four basic data in that chosen time period:
Opening price
After the previous candle closes, a new one starts to form, and the starting point is the closing level of the previous candle. There may be exceptions if there is a gap in the market.
Closing price
It is the highest level of the candle body if it is bullish. In case of a decline, it will be the lowest point of the body. From this level, under normal circumstances, the next candle begins.
Highest price
It is the highest level reached by the price in the given time period. The price fluctuates and reaches its maximum at the end of the wick. It is less obvious when the closing price is at the upper end of the candle.
Lowest price
This is the lowest level the price has reached in the given time period. The price fluctuates and reaches its minimum at the end of the wick. It is less obvious when the closing price is at the lower end of the candle.
How to measure the length of Japanese candles
The candle is measured from its highest level to its lowest level in pips. The highest level of the candle represents the resistance point, while the lowest level of the candle represents the support point. The larger the size of the candle, the larger the support and resistance levels, especially when trading with a Master Candle.
Note: The topic of Master Candle will be covered later in the article.
I will give an example: Demo Account - MetaTrader Demo Account - MetaTrader Supreme Edition - EUR/USD - Daily Chart - Data Range: November 8, 2018 to January 14, 2020. Accessed January 14, 2020 - Please note that past performance is not a reliable indicator of future results.
The window on your left - the Data window - will show you the basic candlestick data you need to know, including the high and low, as well as the open and close price. This is the main data provided in the MetaTrader 4 and MetaTrader 5 platforms.
If you place the mouse cursor on the Japanese candle you want to measure, all the necessary information will appear at the bottom right of the trading platform:
Date of the candle in question
O: Candle opening price
H: Maximum price reached
L: Minimum price reached
C: Candle closing price
Simply measure the candle in points by taking the highest price and the lowest price.
In the previous example:
H = 111167
L = 1.11123
H - L = 1.11467 - 1.11123 = 0.00344
So, candle size = 34.4 pips.Supreme Edition - EUR/USD - Daily Chart - Data range: November 8, 2018 - January 14, 2020. Accessed on January 14, 2020 - Please note that past performance is not a reliable indicator of future results.
The window on your left - the Data window - will show you the basic candlestick data you need to know, including the high and low, as well as the open and close price. This is the main data provided in the MetaTrader 4 and MetaTrader 5 platforms.
If you place the mouse cursor on the Japanese candle you want to measure, all the necessary information will appear at the bottom right of the trading platform:
Date of the candle in question
O: Candle opening price
H: Maximum price reached
L: Minimum price reached
C: Candle closing price
Simply measure the candle in points by taking the highest price and the lowest price.
In the previous example:
H = 111167
L = 1.11123
H - L = 1.11467 - 1.11123 = 0.00344
So, candle size = 34.4 pips.
3 Main Components of Japanese Candlestick Charts
1. Size/length of the whole candle
2. Correlation between opening and closing levels
3. Shadows and their relationship with the candle body
Let us now explain a little about these three points in more detail:
Size/length of whole candle
Candles that open at a low and close at a high, or very long candles are also common. If there is a long downtrend, such a candle indicates a major reversal in the trend. Conversely, after a long uptrend, if an unusually long candle closes, it would show a long “wick” to the upside, or a strong bearish candle right from the top, we are talking about exhaustion or a “blow-out-of-the-top” situation. In the example below, reversal candles are highlighted in blue:
Example: Demo Account - MetaTrader 5 Supreme Edition - EURUSD - H4 Chart - Data Range: August 26, 2019 - October 09, 2019. Created on January 14, 2020 - Please note that past performance is not a reliable indicator of future results.
Correlation between the opening and closing levels of the candle
Since the colored body of the candle represents either a positive or negative reading during an uptrend, or bullish market condition, buying usually occurs at the open. The price should rise, and a hollow white candle (white as per the example above) should form. The bulls or “bullish traders” are in control of the price action of the market, the length or distance between the open and close reflects their dominance of the market movements.
In bearish market conditions, or during strong downtrends, dark-bodied black candles are formed (as in the example). This represents sellers entering the market at the open, and dominating that particular time. Candlestick charts allow for great analysis from the shape and color of the candle body, compared to bar charts.
EUR/USD example, 4-hour chart - MT5 Admirals. Created on January 14, 2020. Please note that past performance is not a reliable indicator of future results.
Shadows and their relationship with the candle body
The length of the wick represents the highs and/or lows of the candle, when compared to the opening and closing prices shown in the real body of the candle, which can also indicate the market’s denial of a support or resistance level. If we see long tails, shadows or wicks, an important factor to consider is whether they are forming after a long downtrend, as this indicates that the trend may be exhausting itself, and that demand is increasing or supply is decreasing.
If we have tails, shadows, or wicks forming on the tops of the candlestick bodies, especially after a long price rise, this indicates that demand is decreasing and supply is increasing. The larger the shadow, the more important it is to analyze it in relation to the candle body, as this may indicate the strength of the reversal. The strongest of these candles are the "pin bars" or pins. As in the figure below:
In the image above, the tail of the bullish pin bar is hanging down, rejecting support. We refer to this type of Japanese candlestick as a “bullish pin bar.” After a bullish pin bar is formed, we usually see a surge of “buyers in the moment,” and therefore, the price will rise. Conversely, when the tail of the bearish pin bar is extended upward, and rejects resistance, we will see a surge of “sellers in the moment,” and the price will usually fall in this case. The strongest reversal candlesticks are those with wicks that are much longer than their bodies, and a very small nose, or sometimes no nose at all.
Source: GBP/JPY H4 Chart - Disclaimer: Charts for financial instruments in this article are for illustrative purposes and does not constitute trading advice or a solicitation to buy or sell any financial instrument provided by Admirals (CFDs, ETFs, Shares). Past performance is not necessarily an indication of future performance.
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