Japanese Candlesticks Patterns
A Japanese Candlesticks Chart shows the price movement of the financial asset over a period. Learn about its concept and how to read it with popular types.
In the trading world, you may have come up with a person obsessed or addicted to the charts. However, that is not rare; traders love candlesticks as these technical analysis tools provide valuable market insights. This article will teach you the concept of the most popular Japanese Candlestick patterns and how to read them with their types. So stay tuned.
Introduction to Japanese Candlesticks charts
Charts are the medium to understand the price pattern of a particular asset over a period. These help traders in making trade decisions based on technical analysis.
There are three major types of charts: line, bar, and candlestick. Line and bar are the oldest forms of charts. Meanwhile, candlestick patterns are a new age chart quite suitable for trading.
A Japanese Candlesticks chart is made up of candles that are used to show the asset’s price movement. It shows the high, lows, opening and closing prices over a period.
As the name suggests, Japanese candlestick charting originated in Japan around the 17th century. The technique was developed by Muneshiaa Homma, a rice trader, to analyze the price movements of rice.
Due to their simplicity and effectiveness, these candlesticks became popular in the Western world in a short time. Also, Steve Nilson’s Book on Japanese Candlestick trading has further contributed to its popularity amongst traders.
At present, the charting technique is used in different markets to analyze price movements. However, its utility in the trading world, especially for trading forex, cryptocurrencies, commodities, or stocks, is unmeasurable.
How to read Japanese Candlestick Patterns
Reading candlestick is an art that requires a basic understanding of these price patterns. Beginners may find difficulty in interpreting candlesticks. However, these are the simplest charting tools. Let us understand its components for a better understanding:
Body
A body represents the thickest part or rectangular area of the candlestick that shows the opening and closing price over a specific period, depending on the chart’s time frame.
The candle form can be long, short or medium, depending on the difference between opening and closing price. The higher the difference, the bigger the candle; the lower the difference, the smaller the candle.
Colour
Another crucial component to understanding the price pattern and the overall trend is the candle’s colour.
Generally, white and green colours are used to indicate the rise in the asset’s price. Meanwhile, a red and black candle indicates the fall in the asset’s price.
In the bullish candle, the top of the body represents the closing price, and the bottom is the opening price. Meanwhile, in the bearish candle, the top represents the opening, and the bottom represents the closing price.
Shadow
A shadow is also known as a wick or tail. It is an extended line above and below the Japanese candle used to denote the highest and lowest prices.
Upper shadow
The top wick represents the highest price traders are willing to buy the asset during the period.
Lower Shadow
The low wick or candle’s tail represents the lowest price traders are willing to sell during the period.
Top Japanese Candlesticks patterns.
Top Japanese Candlesticks patterns
Different types of powerful candlesticks are formed in a chart to show the prevailing price movement. Each candle gives valuable insight to the traders. So here are some top Japanese Candlestick that helps you in taking your financial trading journey to the next level.
Doji: Neutral
Doji is a small candle formed when there is a very small difference between the opening and closing price over a period. It indicates indecision among buyers and sellers. Here are its types:
Classic or Standard Doji
A small body candle with a small wick and tail indicates indecision.
Long-Legged Doji
A small body candle with a long wick and tail indicates strong indecision.
Dragonfly
A small body with a long lower wick and with little or no upper wick indicates a bullish reversal.
Gravestone
A small body with a long upper wick and little or no lower wick indicates a bearish reversal.
Four Piece Doji
A small body with no wick occurs when opening, closing, high and close prices are the same.
Spinning Top: Neutral
The spinning top is another neutral Japanese candlesticks charting pattern that is simple to identify and interpret. It has a small candle with a long upper wick and lower tail. It indicates indecision, price consolidation or potential for reversals.
Hammer: Bullish
As the name suggests, the hammer is a candlestick pattern that looks exactly similar to a hammer. The candle has a small body and a long lower wick. Usually, it shows that the price reached new lows; however, the buyers managed to reverse the bearish trend.
Inverted Hammer: Bullish
An inverted hammer is quite similar to a hammer. However, the wick makes the difference. The candle has a small body and a long upper wick. It occurs during the downtrend and indicates trend reversal or bullish sentiment. It suggests that the bears pushed the price; however, buyers managed to reverse the trend.
Shooting Star: Bearish
Shooting Star looks quite similar to an inverted hammer with a small body and a long upper wick. However, the trend makes the whole difference; it occurs during the upper trends and indicates a trend reversal from bullish to bearish.
Hanging Man: Bearish
Hanging Man is also regarded as an inverted shooting star. It has a small body, and a long lower wick occurs during an uptrend, signalling a bearish reversal. It shows that despite the pressure from the bulls, bears have entered the market and pushed the price back.
Marubozu: Bullish/Bearish
Marubozu is also known as a shaved or bald Japanese candlesticks trading pattern. It is a long candle with a big body and no upper or lower wick. It signals a strong continuation of the ongoing trend. It occurs when the highs and lows are similar to the opening or closing price.
Bullish marubozu
It occurs when the opening price equals the low cost, and the closing price equals the high price. When it forms during an uptrend, it indicates a continuation of the trend, while when it forms during a downtrend, it suggests a trend reversal.
Bearish marubozu
It occurs when the opening price equals the high price, and the closing price equals the low price. When it forms during a downtrend, it suggests trend continuation; when it forms during an uptrend, it indicates trend reversal.
Engulfing: Bullish/Bearish
Engulfing is a two-candle pattern where one candle engulfs the body of another candle. It generally signals trend reversals. There are two types of engulfing:
Bullish Engulfing
It occurs when a second large green candle engulfs a first small red candle. The candle indicates a trend reversal from bearish to bullish.
Bearish Engulfing
It occurs when a second large red candle engulfs a first small green candle. The candle indicates a trend reversal from bullish to bearish.
Morning Star: Bullish
A morning star is a three-candle pattern, where the first candle is a long bearish candle, followed by a short spinning top or doji candle, and the third one is a long bullish candle.
The first indicates a continuation of the downtrend; the second denotes indecision, and the third marks the end of the downtrend and the start of the uptrend.
Evening Star: Bearish
The evening star is quite similar to the morning star. However, it indicates exactly the opposite situation. It occurs when the first candle is a long bullish candle, followed by a short spinning top or doji candle, and the third one is a long bearish candle.
The pattern indicates the shift from bullish market sentiment to bearish. It shows that buyers have lost control over the market, and sellers have managed to push the price.
Wrapping Up
Japanese Candlesticks trading is amongst the best way to identify the right opportunities and time for trading. The patterns are simple and easy to understand and interpret.
However, making your decision solely based on these patterns is not a good idea. Also, these charts may result in subjective or false interpretations.
Therefore, combining it with technical analysis indicators is t / he best way to use it. Also, consider fundamental analysis conditions like news, economic events, announcements or speeches before making the trade decision.
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