Comprehending Japanese Candlesticks The Fundamentals
Japanese Candlesticks are one of the primary analyzing and charting methods in use in financial markets at present.
Here, we will provide a brief introduction to the history and fundamentals of Japanese Candlesticks.
We will also mention some well-known candlestick patterns and what value they have as an investment tool.
We will likewise discuss the benefits and drawbacks of candlestick charts plus provide suggestions to add candlestick analysis to your toolkit.
Japanese Candlesticks origin
In Japan, the Japanese Candlesticks were originally created in the 18th century to track the movements of prices in the rice market.
Japanese rice traders had a basic method of monitoring price trends at that time which wasn’t that effective.
Homma Munehisa, a Japanese trader, is said to have discovered the candlestick charting system which gained in popularity in Japan before spreading elsewhere.
A book was published by Steve Nison with the objective of introducing the technique of Japanese Candlesticks to Western audiences.
The method became quite popular in the 1990s after the publication of this book.
At present, we are using Japanese Candlesticks in technical analysis and investors and traders across the globe have embraced it.
Ways of reading Japanese Candlesticks
You need to comprehend the meaning of all the candlesticks to read Japanese Candlesticks. The primary elements of each candlestick are as follows:
1. Body – The starting and closing prices of the asset are represented by the candlestick’s thick part during a particular period.
2. Color – The closing price of the asset can be higher (white or green) or lower (black or red) during this time, and this will be signified by the body’s color.
3. Wicks – By the terms wicks, tails, or shadows, we indicate the thin lines on top of the body or below it. These are known to showcase the asset’s maximum and minimum prices at that time.
It is feasible for traders to be informed regarding an asset’s price movements over a particular time by evaluating Japanese Candlesticks.
On top of this, it will be possible for traders to identify precious information such as support, trends, and resistance levels by assessing the patterns created by various candlesticks.
One can make some sensible decisions such as how to manage risk and at what time to enter a trade with the aid of candlestick evaluation.
Typical Japanese Candlestick patterns
Below, we have mentioned some typical candlestick patterns. Traders and investors make use of these patterns to identify their opportunities in the market and analyze price movements too.
1. Hammer – This type of pattern signifies a possible reversal to a bullish trend from a bearish trend. It features a long lower shadow and a small body.
2. Doji – It signifies a possible reversal as well as indecision in the market. Here, the opening and closing prices are almost the same.
3. Bearish Engulfing – This pattern signifies a possible reversal of a bearish trend from a bullish trend. In this pattern, the first candle’s body (white or green) is entirely engulfed by the second candle’s body (black or red).
4. Bullish Engulfing – It signifies a possible reversal of a bullish trend from a bearish trend. Here, the first candle’s body (black or red) is engulfed by the second candle’s body (white or green).
5. Shooting star – This candlestick pattern signifies a possible reversal of a bearish trend from a bullish trend. It comes with a long upper shadow and a small body.
6. Morning Star – It signifies a possible reversal to a bullish trend from a bearish trend. Being a 3-candlestick pattern, it comprises a spinning top or Doji, a long bearish candle, as well as a long bullish candle.
7. Evening Star – It indicates a possible reversal to a bearish trend from a bullish trend. Being a 3-candlestick pattern, it comprises a spinning top or Doji, a long bullish candle, and a long bearish candle.
Here, we have mentioned only several candlestick patterns utilized by investors and traders in technical evaluation. It is possible for traders to make better decisions regarding when to enter a trade or exit it by comprehending what is signified by these patterns.
Advantages and drawbacks of Japanese Candlesticks
1. Simple to comprehend – You will find it easy to comprehend and interpret candlestick charts, and even beginner traders will not have any issues.
2. Visual representation – It will be possible to get a visual representation of the movements in price with the help of candlestick charts, and traders will find it easy to analyse and interpret the trends in the market.
3. Extensively used – We make use of candlestick analysis in technical analysis on a wide scale, and for this reason, it has become popular among investors and traders.
4. Offers valuable info – It will be possible to get a proper idea regarding the trends in the market, possible reversals, support, and resistance levels with the help of candlestick patterns.
1. Not a standalone tool – it is a fact that candlestick isn’t a standalone tool to make trading decisions, and therefore, one should use it along with other tools as well for technical analysis.
2. Limited information – Candlestick charts are not going to provide info about other factors influencing the market like volume, and they will only offer information regarding movements in price.
3. Needs practice – One needs to do enough practice and have lots of experience to comprehend Candlestick analysis, and therefore, beginner traders might find it tough to use this tool effectively.
4. Subjectivity – It is feasible for different traders to interpret the identical pattern in a different way, and therefore, Candlestick analysis could be subjective.
Even though Japanese Candlesticks will inform investors and traders regarding price movements, it is vital to use them along with other tools for technical analysis to make sensible trading decisions.
Using Japanese Candlesticks with indicators
We often use indicators and Japanese Candlesticks together in technical evaluation for the purpose of providing possible trading opportunities and a better picture of the trends in the market.
In the following section, we have mentioned some ways in which we can use Japanese Candlesticks with indicators:
1. Recognizing entry and exit points – It is feasible to make use of Japanese Candlesticks to identify possible exit and entry points along with indicators. For instance, the RSI (Relative Strength Index) can be used by certain traders to recognize overbought or oversold conditions in a market, and following this, they will be able to identify possible exit or entry points with the help of Japanese Candlesticks.
2. Approving signals – It is possible to make use of Japanese Candlestick patterns to confirm signals produced by indicators. For instance, in case a possible trend reversal is indicated by a moving average crossover signal, the signal might be confirmed by a bullish reversal pattern such as a Bullish or Hammer Engulfing pattern and it will provide a possible entry point.
3. Confirming the trend’s strength – It will be feasible to make use of Japanese Candlesticks to confirm a trend’s strength specified by an indicator. For instance, a sequence of Bullish Candlestick patterns might confirm the trend’s strength in case a bullish trend is indicated by a moving average, and it will offer additional opportunities for buying as well.
4. Providing additional perceptions – It is possible for Japanese Candlesticks to offer additional perceptions into prospective trading opportunities and market trends beyond what is shown by the indicators. For instance, indecision in the market can be indicated by a Doji pattern recommending a possible reversal of the trend even though no clear signal is shown by the indicators.
It is possible to offer additional perceptions with the help of Japanese Candlesticks in conjunction with indicators, and this will help the traders to make sensible decisions regarding trading. Nevertheless, it’ll be advisable for you to use different types of indicators and tools in combination to make some sensible trading decisions by getting a comprehensive picture of the market.
We would like to conclude this article by asserting that it’ll be possible to monitor price movements in financial markets with the help of Japanese Candlestick charts.
One can use them in conjunction with different types of indicators and they will also offer a simple-to-understand visual representation of the changes of price in the course of time.
Even though they might be beneficial tools, it is vital for traders to consider other aspects like volume while evaluating Japanese Candlestick charts.