What is a Japanese Candlestick?
- The candlestick has a body and a wick
- Used for measuring price action
- Each candlestick is a measurement of a chosen time frame
Japanese Candlestick Basics – What Are They Used For?
Most traders prefer to choose the Japanese candlestick for measuring price action. But perhaps you are unsure why traders like to use them? Or maybe you are wondering how to benefit from candles?
The Japanese candlestick is a type of price chart. It can be used for measuring the price of any type of financial instrument.
Candlesticks are used in technical analysis for analyzing and trading decisions. It is claimed that they were developed by a Japanese rice trader called Munehisa Homma in the 18th century.
Each candlestick represents one unit of the chosen time frame. So when analyzing a daily chart, each candlestick is one daily candle. This is valid for all time frames: a 1-hour chart shows 1-hour candles and a 15-minute chart has 15-minute candles.
The candlestick offers 4 points of information on each and every candlestick:
- The candle open
- The candle close
- The candle high
- The candle low
Based on these 4 points, the candle has different names for each segment: the candle body and the candle wick.
The Candle Body
The difference between the candle close and open.
The Wick Or Shadow
The difference between the candle low and high versus the candle open and close. Basically, wicks are all price action outside of the body. Wicks can be on the top of the candle and/or at the bottom of the candle.
Japanese Candlestick Analysis
Each Japanese candlestick offers traders a method for analyzing the battle between bulls and bears. It shows the actual current state of affairs without any delay – contrary to some lagging indicators that have a delay.
It is always key to use Japanese candlestick closes and not open candlesticks. Why? Simply because an open candlestick can still change its character. Price will still move up and/or down. This means that the actual candlestick could close in a very different way than it currently looks like when it was still open.
Let’s review how traders can use Japanese candlesticks. Direction, control, candle size, and selling plus buying pressure are the key aspects.
The first key component of a candlestick is direction. Each candlestick shows whether there was a winner in that time frame: bulls, bears or nobody (indecision – Doji):
- Bullish: a candle close above the candle open. Bulls were able to push the price higher during this candle. Usually bullish candles are green, blue or white.
- Bearish: a candle close below the candle open. Bears were able to push the price lower during this candle. Usually bearish candles are red or black.
- Indecision (Doji): a candle close to the candle open. Both bears and bulls were unable to push price either way.
The second aspect is whether the bulls or bears are actually in control of that candlestick. This can be measured by measuring the distance between the candle close and the candle high or candle low:
- Strong control: bullish candle closes near the candle high.
- Weak control: bullish candle closes further from the candle high.
- Strong control: bearish candle closes near the candle low.
- Weak control: bearish candle closes further from the candle low.
The Japanese candlestick can close bullish or bearish but this does not automatically mean that that side is really winning. A candle can be bullish but if the candle close is not near the high, then the control is weak and the importance of that candle is less.
Selling And Buying Pressure
Lastly, Japanese candlesticks are a key factor for analyzing changes during the candle.
This can be done by reviewing the candlestick wicks. A large wick indicates that the balance of power changed within the candlestick itself:
- This is a wick on the bottom of the candlestick.
- Sellers were winning but the bulls pushed the price back up when the candlestick closed.
- This is a wick on the top of the candlestick.
- Buyers were winning but the bears pushed the price back down when the candlestick closed.
The candle size indicates the importance of the candlestick.
A relatively large size candle is more important than a relatively smaller sized candle.
The reason is that a large candle has a more decisive character. A small candle usually is less relevant because it indicates indecision.
That said, indecision can sometimes play a key role in a reversal. So even smaller Doji candles can offer important information. But in general, larger-sized candles are more valuable for your analysis.
Live Examples Japanese Candlestick Analysis
These four aspects (direction, control, pressure, and size) can be combined to analyze the price chart.
There are about 4 common combinations:
- The dominant candlestick: a large-sized candle with a close very close to the high or low, which is a classical candlestick indicating a dominant bullish or bearish direction.
- The continuation candlestick: a medium-sized candle with a close quite near the high or low, which is a normal candlestick indicating a bullIsh or bearish continuation.
- The reversal candlestick: a medium or large-sized candle with a wick on one of the 2 sides.
- The indecision candlestick: a small or medium-sized candlestick with an open and close near each other and often around the middle of the candle.
There are more combinations possible but these are the most typical candlesticks.
Japanese candlesticks can also be combined to form Japanese candlestick patterns. These patterns are based on a 1 to 4 candlesticks and reveal more important chart information.
Japanese Candlestick Patterns
Japanese candlestick patterns are price patterns based on 1 to 4 candlesticks. They indicate either a trend continuation or reversal:
- Bullish continuation.
- Bullish reversal.
- Bearish continuation.
- Bearish reversal.
The price patterns add an extra layer of information compared to reviewing each candlestick on its own.
There are many candlestick patterns. Reviewing all of them goes beyond the scope of this article. But let’s review a few examples.
Bullish Continuation Patterns
Rising three methods: there is a series of small bearish candles after a long bullish candlestick. The ideal is 3 but even 2 to 5 bearish candles work well. A continuation higher is expected.
Marubozu: one candle with no wicks and strong control of the bulls. Candle open is often at or very close to the candle low. The candle close is right at the candle high, which is indicating full control.
Three green soldiers: 3 candles are showing a sequence of higher highs and higher lows. The candle closes are near the candle highs. The third candle is preferable not the smallest one, as it indicates potential weakness.
Bullish Reversal Patterns
Bullish engulfing twins: the candle on the right (bullish) engulfs the first candle on the left (bearish). This means that the candle low is lower and the candle high is higher. The candlestick close is also often above the open and high of the previous.
Bullish pinbar: a wick appears at the bottom of the candlestick. The wick is a large part of the entire candle size. The candle close is near the high and usually has a small candle body.
Bearish Continuation Patterns
Falling three methods: there is a series of small bullish candles after a long bearish candlestick. Ideal is 3 but even 2 to 5 bullish candles work well. A continuation lower is expected.
Marubozu: opposite of the bullish marubozu. Candle open is often at or very close to the candle high. The candle close is right at the candle low.
Three black crows: 3 candles are showing a sequence of lower lows and lower highs. The candle closes are near the candle lows. The third candle is preferable not the smallest one, as it indicates potential weakness.
Bearish reversal patterns
Bearish engulfing twins: the candle on the right (bearish) engulfs the first candle on the left (bullish). This means that the candle low is lower and the candle high is higher. The candlestick close is also often below the open and high of the previous candle
Bearish pinbar: a wick appears at the top of the candlestick. The wick is a large part of the entire candle size. The candle close is near the low and usually has a small candle body.
What Did We Learn From This Guide On Japanese Candlestick?
That warps our summary of Japanese candlesticks.
This article focused on:
- How to analyze Japanese candlesticks
- The kind of information Japanese candlesticks provide
- How to combine them for seeing larger candlestick patterns