What is a Japanese Candlestick?

 

 

What is a Japanese Candlestick?

A Japanese candlestick or candlestick chart is a type of technical charting used by the Japanese about 300 years ago to monitor the price and check the supply and demand of rice. It is still being used until today by many traders as a tool for their asset trade.

Since you know briefly what a candlestick chart is from the previous subject on forex charts, here you will find more details on the Japanese candlestick.

In 1700s, a Japanese commodity trader by the name of Homma found that beside the connection between the price and the supply and demand of rice, the emotions of traders also affected the markets strongly. He realized that once human emotions were manipulated into the equation, a huge difference happened between the value and the price of rice.This difference also affects other assets such as stocks, futures, currencies etc in the present time. Homma then introduced these principles as the basis for the candlestick chart analysis.

Later, this method of Japanese candlestick trading was discovered by a Westerner named Steve Nison through a Japanese co-broker. He studied and researched extensively, and later wrote about it. It was through him that the Japanese candlestick becomes very popular until today.

One main reason for its popularity is that the Japanese charts reflect only on a short-term basis and at times it will lasts until about 10 trading sessions. Sometimes it is also not easy to understand the candlestick charting system due to its complexity. You need to look at what its pattern is and how it can helps you with your trade.

Figures 1 and 2 below show you the differences in appearance between the bar chart and the Japanese candlestick chart. A look at the candlestick chart, you would definitely want to use it as one of your technical analysis tool to trade instead of the bar chart, and this is one of its advantages.

Figure 2: Japanese Candlestick Chart

Figure 2: Japanese Candlestick Chart

Figure 1: Bar Chart

Figure 1: Bar Chart

 

 

 

 

 

 

 

 

 

As mentioned previously, the body of a candlestick consists of:

  • A rectangular box or ‘real body’ standing vertically and it can either be long or short. It is usually represented by two different colors. If the opening price is below the closing price then the color of the body will be displayed in white or green. If the opening price is above the closing price its color will be displayed in black or red.
  • Two thin vertical lines attached to the body one on the top side, the highs and the other on the bottom side, the lows. Like the real body, both can either be long or short. These two thin vertical lines are also referred to as ‘shadows’, and for some chartists they would think them as the wicks of a candle.
  • The whole structure of the candlestick contains the opening, highest, lowest and closing price of that particular asset traded at a certain period of time. It can be 1 minute, 15 minutes,1 hour and so on.

Figure 3 shows a sample of a red candlestick with the high, open, close and low price.

Figure 3: Japanese Candlestick

Figure 3: Japanese Candlestick

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