What Are Japanese Candlesticks in Forex
One of the many tools used to analyze the financial markets is the Japanese Candlestick. Candlesticks were created by the Japanese during the 17th century to help them with the trading of rice. Candlesticks became popular among the financial traders of today largely due to the efforts of Steve Nison, who brought this technique of charting to the western world. Because of their form, candlesticks facilitate the reading of prices plotted on charts.
Today, candlesticks are primarily used by technical analysts as visual cues about the sentiment of the market. Using candlesticks, traders are also able to quickly identify and react to changes in the trend.
What Are Candlesticks?
Candlesticks are a type of bar chart that includes a graphical display of a financial asset’s opening and closing prices, its highs and lows. In addition, candlesticks also display whether or not an asset closed below or above its opening price. The diagram below illustrates what a basic candlestick looks like.
From this diagram, we can see that candlesticks actually look like a candle which has been burnt at both ends. The area between both “wicks” is known as the “Real Body”; it is normally displayed as black/white or blue/red. With just a glance, analysts can tell from the colors of the real body if the asset closed higher (white or blue) or lower (black or red) than its opening price.
The areas that are above and below the anareal body (the ‘wick’) are known as the upper shadow and lower shadow, respectively. The shadows indicate the highest (upper shadow) and lowest (lower shadow) traded prices of the asset.
From the diagram above, we can tell that the candlestick on the left side (black candlestick) closed lower than its opening price. The candlestick on the right side (white candlestick) shows that the closing price is higher than the opening price.
Basic Candlestick Patterns
Candlestick patterns can be further classified into several categories:
Spinning Tops
Spinning tops are characterized by long shadows at both ends and by a short real body. Regardless of their color, the short real body indicates very little price variation between the opening and closing prices. Spinning tops indicate an indecisive market.
Marubozu Patterns
Marubozu patterns can be either white or black.
The typical Marubozu pattern has no shadows. The black Marubozu represents a situation in which an asset’s opening price is equal to its high and its closing price is equal to its low. This situation is indicative of a bearish market. It also explains why the candlestick has no shadows. A white Marubozu, on the other hand, indicates a situation in which an asset’s opening price is equal to its low and its closing price is equal to its high (a bullish market).
Doji Patterns
A Doji pattern occurs when an asset’s opening and closing price are the same. This can be seen when the candlestick shows a small or short body, making it look like a thin line. There are typically four main types of Doji Candlestick patterns.
Doji Patterns and Their Implications
When traders detect a Doji pattern on a chart, they usually turn their attention to the candlesticks preceding the pattern.
When a Doji occurs after a series of white Marubozus, this is indicative of weakening market forces on the buyers’ side; that is, when there are not enough buyers in the market to help push up prices. The situation also implies that sellers are possibly looking to jump into the market to drive prices further down.
On the other hand, if the Doji appears after a series of black Marubozus, this indicates that the market forces on the sellers’ side are weakening. In order for prices to fall further, more sellers are necessary. In this situation, buyers will look to pick up a bargain.
Single Candlesticks Patterns
Apart from Marubozus and Doji candlestick patterns, there are also single candlestick patterns to watch out for.
The Hammer and Hanging Man Pattern
Both the Hammer and Hanging Man candlestick patterns look the same with the exception of their color of their real body.
The Hammer
The Hammer is indicative of a bullish reversal pattern, signaling a drop in prices as well as a bottoming out of the market. The long shadow indicates that sellers are pushing the prices of the asset lower.
Hanging Man Pattern
The Hanging Man pattern is the opposite of the Hammer pattern. It is indicative of a bearish trend reversal marked by a strong resistance near the peak of the trend. Here, there are more sellers than buyers in the market. The long shadow of the hanging man indicates strong selling pressure.
Shooting Star and Inverted Hammer
Identical in appearance with the exception of the color of their real bodies, the shooting star and inverted hammer patterns are characterized by long, thin upper shadows with a short real body.
The shooting star pattern is indicative of a bearish trend reversal, showing that an asset opened at the low and rose to a new high but closed at the bottom. It implies that buyers were trying to push prices up but were overwhelmed by selling pressure.
The inverted hammer, on the other hand, indicates a situation opposite from that of the shooting star.
In this situation, prices are falling, but as indicated by the long upper shadow, buyers are attempting to push prices higher. The closing price indicates that despite strong selling pressure, buyers were successful in pushing prices higher.
Other Candlestick Patterns
Conclusion
It is important to note that traders should never base their investment decisions solely on candlesticks. At best, they are just one of the more specialized tools that analysts use to confirm their analysis.
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