What are Japanese candles and why should you learn about them?
This is one of the three most popular types of charts used in technical analysis. Compared to line and bar charts, it is more elaborate. From Japanese candles we can find out: the opening price, the closing price, the maximum price, the minimum price for a given session or period.
Japanese candles are the oldest method of technical analysis available in the world. It is named after its creators, the Japanese, who used technical chart analysis in one of the world’s first futures markets back in the early 17th century.
Candlestick charts (so-called candlesticks) – what are they based on?
Candlestick charts, like bar charts, allow to illustrate the changes in prices: maximum, minimum, opening and closing in individual periods. They can refer to a breakdown by days, weeks and months. They differ in the way they are graphically presented. Many traders find them clear, easy to read – most importantly, in terms of the relationship between the opening and closing.
Historical outline and the rise in popularity of candles
The growth in the rice futures sector led to lively speculation, which led to the development of Japanese technical analysis techniques. This was promoted by a certain Homma from the port city of Sakata, who was the first to discover the relationship between demand and supply, and was able to study their impact on rice price levels.
How is the basic Japanese candle constructed?
Information about the structure of a candle provides the foundation for reading charts. The basis of each candle is the body, or rectangle, which is the range between the opening and closing values of the candle. On the other hand, if the closing point of the candle is the same as the opening point then the filling of the candle is white or green. This represents an exception.
If, on the other hand, the candle is upward then the closing value is greater than the opening value, and this means that the filling of the candle is usually black or red.
On most trading platforms the colors of the candles can be changed. The colors given above have been adapted to illustrate the whole phenomenon.
If there were extremes in the candle for a given time interval (that is, there was a maximum or minimum value), larger or smaller than the body of the candle then it was the shadows that were attached to the body of the candle.
The most important information from the candles is:
- Gaps – emotions that arise between trading hours
- Color of the body – the direction of price changes, i.e. the relationship between the opening price and closing price (example: opening price > closing price – white body/demand advantage, vice versa – black/supply advantage)
- Wicks (shadows, hairs) – depict emotions in a given unit of time; the upper wick occurring after increases usually indicates overbought, and the lower wick after decreases vice versa
- Price levels – opening, closing, maximum and minimum levels
Candlestick formations – report the combination of individual emotions into a single whole:
- Candles formed by non-formation have their names, such as falling star, dark cloud veil, hammer or embracing bull market
- Formations formed by candles usually give very important buy or sell signals
Basic types of Japanese candles
It is worth knowing that depending on the type of connection between body and shadows, the pronunciation of the candle changes. The data of the world testify to the strength of the market, indecision or weakness, illustrating the different situation of demand and supply and describing the psychological aspects of the behavior of players in the market.
The most important types of Japanese candles include candle formations, which are combinations of base candles, spool candles, doji candles, long and short days (and marubozu).
How to interpret candlestick charts?
A key aspect in trading is the ability to analyze charts and use the information contained in them for your actions. Not different is the case of Japanese candles, which have their own nomenclature.
The importance of individual candles:
- Accumulation – means absorption of downside potential by demand at low prices and high volume (so-called white bobbin),
- Spools – occur when the forces of supply and demand are balanced and there is relative equilibrium, the fluctuations of which are usually smaller or larger – called long or short shadows. Spools in many cases inform about periods of distribution and accumulation, called consolidation so-called “inside bar”, which occur after or immediately before a larger movement.
- Distribution – suppression of upside potential by supply (black bobbin), occurring at high prices and high volume.
- Umbrellas – it is usually a short body and a long lower or upper shadow, where the second shadow does not occur in most cases. It is characterized by high predictive power, due to the fact that it is a trend reversal formation. The importance of these candles as individual formations increases depending on the timing of their appearance. In the case of large increases it is the pendant and falling star, in the case of large declines it is the hammer and inverted hammer.
- Candles Doji – is a body that has a dash and long shadows. In its case, the opening price is equal to the closing price when the market is in equilibrium. In a situation where it appears in a sideways trend, the significance of its is small and only signifies the lack of determination of investors. If , on the other hand, it appears after a period of a prolonged bull market or bull market, it can be a harbinger of a local peak or bottom.
In the market we distinguish four types of doji candles. These are:
- Four-price doji – signify the same prices according to the equation “open=close=max=min”, and indecision and low turnover,
- Dragonfly and tombstone doji – usually appear as warnings of a change in the market trend, as is the case with the hammer and pendant and the inverted hammer and falling star
- Long-legged doji – so-called doji on high legs, signify great indecision related to the current trend and extreme emotions
