Japanese candlesticks as the name implies, were invented by the Japanese. It was as their way of making technical analysis in order to trade rice. This system was discovered by Steve Nison from a Japanese broker. He researched Japanese candlesticks intensively and started writing about it. The technique gained popularity in the nineties and started being used as a measure to calculate trading volumes. Without Steve Nison, there would be no Japanese candlesticks.
What are Japanese candlesticks ?
Japanese candlesticks can be used to show the volume of trading within any trading time frame. If you are looking at short term trading, or binary options, you will be looking at candlesticks that show trading patterns of one minute, 5 minutes, 15 minutes, half an hour, hour etc., If you are looking at forex or long term trading, you look at candlesticks that are in a 24 hour time frame, two days, one week or one month time frame. A candlestick shows a lifetime performance within its time frame.
Each candlestick on any time frame shows the volume of trading in that particular time, from the beginning to the end of that session. In the fight between the Bulls and bears, each Japanese candlestick tells you a story. As the story goes. It tells us who started off the fight, who had the best brute force, and who eventually won the session. The tug of war between the Bulls and the Bears in any time frame is snap shot in a Japanese candlestick.
Let us visualise this analogy. Japanese Candlesticks in action!
If we look at the visual above we understand the following price movement in each of the Japanese candlesticks.
- The top of the candlestick is called the upper shadow whilst the bottom is called the lower shadow. These two positions show us how far the price shot up ( upper shadow) and how far down it sank (lower shadow) in any time frame. Therefore if we are looking at a one hour chart the span of the top to the bottom is the price movement that occurred in one hour.
- The solid part of the body is the actual net positive or net negative movement between a currency pair or an asset. The solid part of the Japanese candlestick shows us the position where the price started and the position where it ended. The solid body shows us and entry and an exit price. If the price has risen it is shown as a blue body. If the price has fallen from the opening price to the closing price it shows off a solid red body.
- The top of the solid body on a red candlestick is the starting or entry price in that particular hour whilst the lower solid part of the candlestick is the exit price or ending price. Alternatively the lower part of the solid blue Japanese candlestick is the entry price – also called opening price – whilst the top part of the solid body is the exit price – also called closing price. The shadows are the full price movement from the lowest ebb to the highest peak during the time frame in our case one hour.
The size and shape of the Japanese candlestick tells a story about the trading nature of bulls and bears in that particular time frame. In forex and binary trading, Bulls are the aggressive traders hitting with their horns, and they are the Buyers. Bulls are the protective ones and the are the sellers. A Bullish market is a buyers market and will create an uptrend. A Bearish market is a sellers market and will create a downtrend. Never for an is trance underestimate the Bears. They are just as strong as the falls. This is a clash of the Titans.
A Japanese candlestick with a long body shows a strong activity in trading. A long red candlestick means that the Bears are dominating the market. A long blue candlestick means that the buyers are stronger and it a Bullish market. Big candlesticks indicate big activity in the market. If they create a trend, this is s perfect setting for setting up a trade.
On the other hand, Japanese candlesticks with short bodies, are displaying a market where buyers and sellers are equally strong, or equally sleepy and the tug of war is going nowhere. The price opens and closes at a similar price. This is a point which gives us a lot of information about the market. If the market is asleep, or dead, or inactive, we do not want to trade. If this is a tug of war between Giants, we want to wait for the outbreak and cash in!!
Japanese Candlesticks – Their shadows tell us mysterious stories
Shadows which form at the top and bottom of Japanese candlesticks give us very important information about a trading time frame or trading session.
As explained earlier the upper shadows signify how high the price rose in that specific trading session. Whilst the lower shadows signify how low the price fell.
Candlestick with very long shadows tell us that the price rose or fell far past the opening and closing prices. They also signify a lot of action, very much like the long candlesticks with long bodies. The difference is that whilst the candlesticks with long bodies signified that either the Bears or the Bulls were the net winners, in the case of long shadow candlesticks the net winner had only a marginal success. The price was a tug of war with no one winning much brownie points in that trading session!
In Japanese Candlesticks Long Upper Shadows signify that the Bulls or the Buyers were strong and were pitching for a higher price, but for some reason the Bears still took control and lowered the price to the level they wanted. On the other hand a Long Lower Shadow means that although the Bears or the sellers were very strong and drove the price down, the Bulls still fought with their horns until the last drop and drove the price up to the level close to where the price had originally opened.
In the next session we shall be dealing with Basic Japanese Candlestick Patterns and see how the behaviour patterns in pairs or trios will tell us much more about how the market is reacting to prices, than when we look at Japanese candlesticks individually.