Japanese candlesticks are the most convenient variant of any asset chart on Forex. The informativeness and clarity of the data on the market state presented by them have long earned popularity among all traders. It is the analysis of Japanese candlesticks that makes it possible to make forecasts of further price movements.

This tool of technical analysis helps a trader to see and understand the mood and psychology of the market.

What are Japanese candlesticks

Technical analysis of candlesticks helps any trader to read asset charts correctly, correctly determine support and resistance levels. They combine a type of price line with a type of interval chart. The chart perfectly shows fluctuations of quotes of all assets for a certain time interval.

For a more complete understanding of the tool, we should consider its components in detail:

body, representing a rectangle;
the shadow – a line departing from the body.

These two components look like a candle. Each of them displays the price change for a certain time interval. Candlestick analysis of charts perfectly helps in making market forecasts. And in this case, they can perfectly do without computer indicators. You can also anticipate the reaction of traders to certain events.

A significant advantage of this chart is that a candlestick represents the equivalent of several indicators: opening and closing times, information about the predominance of sellers or buyers in the market. Each candlestick element corresponds to the timeframe on which it is displayed. On the M1 timeframe one candlestick displays the price change for one minute, on 5M – for 5 minutes, on 15M – for 15 minutes, etc.

In addition, candlestick elements display on the trading terminal screen various graphical figures used by traders to open (close) buy or sell orders. Therefore, the chart of Japanese candlesticks greatly simplifies the complex study of any market. By identifying this or that pattern in time, a trader has the opportunity to prepare a trading plan and, acting according to its points, enter into transactions, making a profit.

Information from Japanese candlesticks on the chart

How to read Japanese candlesticks on the chart? This question is invariably asked by novice traders.

The information provided by candlesticks on all time intervals is similar:

Opening quote for the time period (Open);
closing quote for the same period of time (Close);
price minimum for the period (Low);
price maximum for the period (High).

The figure shows that the opening and closing quotes are the framing of the candlestick element. It is commonly referred to as the body. Thin threads going up and down from the body are the shadow, which is sometimes called the wick.

It is accepted to distinguish between bullish (increasing) and bearish (decreasing) versions of the candle. In the first case, its formation occurs from the bottom to the top. The opening price acts as the lower boundary here, and the closing price is the upper boundary. Usually such candlesticks are colorless or colored green on the chart of MT4 terminal. A bearish candle is the opposite of a bullish candle. It is formed from top to bottom, colored red or black. The opening price is its upper boundary, the closing price is its lower boundary.

In some cases, the body of the Japanese candle is absent. This happens when the opening price is equal to the closing price. Sometimes there is a lack of wicks in the candlestick element. Here all parameters: opening quotes, closing quotes, minimum and maximum are equal to each other.

Reading Japanese candlesticks

Japanese candlesticks, how to read them correctly? The study of such charts is reduced to the identification of graphical patterns in the form of combinations of candlestick elements. Such patterns, represented by several elements, are quite a lot and each of them has a certain name: “hammer”, “hanged man”, “shooting star”, “doji”, “tombstone”, “harami” and others.

Any of these patterns signals the moments of market entry. There are trend continuation patterns and trend reversal patterns. The latter represent the vast majority.

When analyzing Japanese candlesticks in trading should take into account important features:

all research is better to conduct on a daily timeframe. On smaller timeframes, the reliability of signals coming from candlestick patterns decreases. The smaller the timeframe – the lower the reliability is;
forecasting of long-term trends is carried out on monthly and weekly timeframes;
the trend does not always change after reversal patterns appear. Sometimes there is a trend correction or flat. Therefore, the reversal model rather predicts the change of the current market situation.

It is explained by the balance of sellers and buyers. The more orders open in one direction, the higher the probability of reversal. Market makers closely monitor the market and at a certain number of traders “crash” the price, forcing it to turn around, make a correction or go flat.

Patterns that have price breaks are more reliable.
Any combination of candlesticks should be confirmed. For example, if a bullish pattern is formed in the market, the next candle should show the market aspiration.
Displaying market psychology in candlesticks

How to analyze Japanese candlesticks? The answer to this question helps to understand the psychology of the market, in other words, the intentions of most sellers and buyers. Even beginners, with some effort, can learn to analyze candlestick elements to predict further trend movement.

One of the most important parameters of a candlestick is the size of its body. Its length indicates the pressure of bulls or bears on the market. If the body of a large size (relative to the neighboring candlesticks) has white (green) color, it means that the bullish mood prevails, and the buyers have gained the upper hand over the sellers. A large dark (red) body shows a confident victory of sellers. Its insignificant size indicates the approximate equality of sellers’ and buyers’ forces. It means that a pullback (correction) of the main trend or further flat movement is quite probable. In such cases, the trend “freezes” for a while before the next upward or downward spurt.

When a bullish candle formed after a long downtrend appears on the trading terminal screen, there is every reason to assume that an upward trend is emerging. And the closing of a bullish candle above the resistance line indicates that the market has strengthened at a new price level. But such a statement will take place only after the completion of the formation of the candlestick element. To view this process in more detail, you should switch to a smaller timeframe.

The tail (wick, often called pin-bar), moving away from the body reflects the mood of traders, or more precisely – its change in the process of formation of the candlestick itself. Pin-bar is quite often a harbinger of the change of the prevailing trend or its continuation after the corresponding price pullback. Long wicks are usually formed near a strong tested, but not broken level.

When the struggle between sellers and buyers reaches its maximum, “dojis” with long pin bars appear on the screen. This indicates indecision of market participants – there is no result on the background of active trading.

The mood of the candle

This concept was proposed by Lance Beggs, a famous Forex trader and Price Action algorithm specialist.

The mood depends on the position of the closing price relative to the previous candlestick element. It is accepted to distinguish several types of mood:

bullish. The closing price is above the last high;
bearish. Closing of the period below the previous minimum;
neutral. Last candle closing within the range of the previous candle.

In turn, each of the types can be high, low and medium. This is the intensity of the sentiment. It is determined depending on where in the candle’s range the candle closed.

Candlestick chart study

Japanese candlesticks, the technical analysis of which is beyond any competition to other graphical studies of the market, can give the trader a lot of useful information about the upcoming market changes.

Candlestick bodies are of primary importance, while their shadows are of secondary importance. Wicks are considered market noise, although any trading should take it into account as well.

Such chart studies take into account certain fundamentals:

long bodies with short wicks are the foundation for building a new trend. It is a pronounced superiority of buyers over sellers or, on the contrary, sellers over buyers. As a rule, the longest candlestick bodies are located at the beginning of a trend and at its end. If the order was opened on the trend, the appearance of long-bodied elements is a signal to close the deal;

• candlesticks with short bodies and long wicks are often formed during a trend reversal. The best signal of this is an element with one shadow extremely exceeding in length the other shadow and body. This is how the struggle between bulls and bears is displayed, in the process of which at first one of them won, but in the end the superiority went to the other;
  bodies and wicks of small sizes appear when sideways trends appear. At this point, you can open orders with small Stop Losses.

Conclusions

The use of Japanese candlesticks is characterized by both positive aspects and certain difficulties. The reliability of these elements, unlike computer indicators, makes it possible to study the price itself, rather than mathematical calculations. Candlesticks are universal. They are applicable for asset charts of all markets – currency, commodity, stock market, etc.

However, novice traders have some difficulty in mastering them. It is necessary to make certain efforts and spend time to thoroughly understand candlestick analysis. But the results of labor will definitely not be wasted and will help you earn good money.