Chart analysis is a significant area of forex trading. There are different types of graphical representations of the markets: simple lines, zone, bars, and so-called “Japanese” candlesticks.
Traders widely use this last visualization because it allows them to draw some information at the simple sight of the graph and predict future prices.
In trading, we follow the evolution of the price over time. The X axis is time, and the Y axis is price. We could use a line to represent the price evolution, but we would only have one piece of information: the price at the moment “t.”
Japanese candlesticks give more information. A candlestick corresponds to a period. Looking at the top left corner of the photo above, you can see: “EURUSD, H1…”
This means we are on the EURUSD chart and H1 tells us we are in a range of 1 hour time. This means concretely that a candle represents what happened over 1 hour.
What Is A Candlestick Chart?
A candlestick chart shows the prices – namely the open, high, low, and close – of an asset for a set period of time. Candlestick charts are believed to have been created by Japanese rice traders in the 18th century. They are still one of the most popular ways to display financial market prices.
Note the difference between the “bull” candle (green) and the “bear” candle (red). When the open price of a candle is lower than the close price, the candle is said to be bullish, while the reverse is true.
A candlestick gives a good summary of the price behavior during the period. All charting tools allow you to change the candlestick chart period from one minute to one week or one month per candle. This allows the trader to visualize market sentiment (using colors) and understand how prices have behaved over a given period.
The candlestick is made up of 2 things:
- The body is the solid and colored part. Color gives us meaning. A red candle indicates that the price is falling, and a green one indicates that the price is rising.
- The wicks are the small lines above and below the body.
Can You Predict Price Movements With Candlestick Charts?
As the candlesticks illustrate the asset’s movement during the defined time frame, they can visually indicate bullish or bearish sentiment, especially when the candlesticks are considered a group. Traders call these patterns candlesticks.
Candlesticks are an incredibly important part of bitcoin and crypto-trading. By learning how to read these patterns, you can predict when the market is about to change. This can give you an edge over everyone else in the market. Because, unlike many other tools, these patterns are “leading”, not “lagging”. This makes them incredibly valuable.
The general rule is that the longer the candlestick wick, the more intense the battle between bears and bulls within the time horizon. If the wick is too short, the closing price has reached its maximum or minimum within the specified period.
The green body of the candlestick indicates whether the asset closed lower or higher than it opened. It can also indicate that the asset price was close to the closing price in the specified period.
Some graphics tools may use black or white instead of red and green. Solid candlesticks correspond to downward movements. Hollow candlesticks signify upward movements.
How Do You Read A Candlestick Chart?
A candlestick gives us four price levels at a glance: a period open, close, high, and low. In addition, the color of the “body” of the candlestick, between the open and the close, tells us about the direction of the market during this period. A bullish candlestick is, by convention, green (close above the open), and a bearish candlestick is colored red (close below open).
With a simple “drawing,” we have access to five market elements. A candlestick represents a trading period. If the chart is daily, the candle represents one day, etc. We will also notice the upper and lower “wicks,” these vertical lines which represent the difference between the extreme points and the opening or closing.
The interest in candlesticks does not stop there. Their strength is detecting situations or configurations, allowing them to signal potential future movements, such as trend reversals or accelerations. There are very many configurations that have names like
- Morning star;
- Evening star;
- An abandoned baby, etc.
Each figure can be interpreted in a way to predict what will happen.
As usual in trading and chart analysis, there is no certainty, and you must handle your “signals” cautiously. On the other hand, these configurations depend on the time unit of the graph.
Thus, a figure on a daily chart will no longer be relevant on an hourly chart. This is found in all technical indicators.
What Is A Reversal Candlestick Pattern? (200 Words)
Different candles or sets of Japanese candlesticks in trading announce a likely reversal in the market. These figures are part of the chart but do not represent a buy or sell signal to trade a financial asset on their own. Indeed, it requires certain conditions, such as having confirmation with a momentum indicator or an oscillator.
The best-known candlestick patterns are:
- Inverted Hammer;
- Morning Star and
- Evening Star.
If the stock price is in a support or resistance zone with one of these patterns, you can look for a signal to buy or sell the market.
Then, you will have the possibility of trading a trend reversal with the lowest wick of this figure as a stop loss. The stop can be short, but it is sometimes good to risk little capital in volatile markets. Otherwise, you will already have invalidation price levels thanks to your trading plan.
Thus, a candle gives us four pieces of information, as can be seen in the drawing below:
- The price at the opening during the period covered by the candle.
- The price at the end of the period is covered by the candle.
- The highest price was reached during the period.
- The lowest price that was reached during the period.
The Bottom Line
Now you know how to interpret Japanese candlesticks in trading. You can also invest in books that cover the subject in detail. But in principle, an impulsive candle is usually a strong signal if you have confirmed it with a momentum indicator.
Moreover, you can also invest in a trading education that will help you better analyze and deepen your knowledge about candles.
We have designed specific training for futures markets. Whether a beginner or an experienced trader, you will learn how to trade in a liquid market with professional traders with over 15 years of experience.
Japanese candlesticks can be used to analyze price movements in the past and present, in any time frame you want. It is essential to perform fundamental analysis and examine financial, political, and economic trends that may impact the asset being analyzed.
Let’s take the example of the land of the rising sun to illustrate our point. Most people are familiar with Japanese martial arts like karate and aikido. They will tell you that defense is as important as offense. Remember when you are tempted to sit at your computer and draw lines on the candlesticks?