Analyzing charts is one skill you will need to learn as a forex trader. The Japanese candlestick chart is most widely preferred for chart analysis. It has almost relegated the Western bar charts and point and figures charts to the pages of history. Even the new modifications such as range and Renko bar charts have not gained the level of popularity the Japanese candlestick chart has received. Japanese candlestick chart gives you more information about what price has done during a specified trading period. With its color code and easily visible patterns, you can see what’s happening in the market at a glance.
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History of the Japanese Candlestick Chart
As the name shows, the Japanese candlestick chart originated from Japan. 18th-century Japanese rice traders used it to track the changes in the price of rice. It was later imported into technical analysis of different markets.
Japanese candlestick clearly shows the open, low, high, and close price for the specified timeframe. It has a body, a lower wick/shadow, and an upper wick. The body is between the open price and close price. The lower and upper wick is between the open or close price and the price low or high, depending on the candle direction.
It has a customizable color code for the direction of the candle. A bear (down) candle is when the closing price is below the opening price. A bull (up) candle is when the closing price is above the open price. You can choose any colors you want for the directions but green or white is commonly used for an up candle while red or black is used for a down candle.
Why the Japanese Candlestick Chart?
- Japanese candlesticks are easier to interpret and easier for you to figure out chart analysis.
- Candlesticks are easier for your eyes as they adapt immediately to the information on the chart.
- With its color code, you can easily see price direction.
- Candlestick patterns have cool names such as hammer, doji, etc, which you can easily remember.
- They show you potential market reversal points where price can potentially change from a downtrend to an uptrend and vice versa.
Japanese candlestick chart patterns
You will see a lot of candlestick patterns. Generally, they are classified as single candlestick patterns, two candlestick patterns, and three candlestick patterns.
The Single-candlestick patterns
Hammer has a small body at its upper end, very long lower wick and little or no upper wick. It occurs after a downtrend/dip and has bullish significance.
Hangman has a small body at its upper end, very long lower wick and little or no upper wick. It occurs after an uptrend/rally and has a bearish implication.
Shooting star has a small body at its lower end, very long upper wick and little or no lower wick. It occurs after an uptrend/rally and has bearish significance.
Inverted hammer has a small body at its lower end, very long upper wick and little or no lower wick. It occurs after a downtrend/dip and has bullish significance.
Doji has little or no body as the price closed almost where it opened. It signifies indecision.
Spinning top has a small body at the center with almost equal upper and lower wicks. It signifies indecision.
Marubozo has a big body with little or no wicks on both ends. It is seen mostly in a strong trending market.
The two-candlesticks patterns
A big bullish candle completely consumes the preceding bearish candle in a downtrend. It has a bullish significance.
A big bearish candle completely consumes the preceding bullish candle. It occurs after a prolonged uptrend/rally. It has a bearish significance.
It occurs after a strong downtrend. A series of bearish candles is capped with a big bullish candle that opened below the preceding candle’s low but was forced up to close above that candle’s midpoint.
It occurs after a strong uptrend. A series of bullish candles is capped with a big bearish candle that opened above the preceding candle’s high but was forced down to close below that candle’s midpoint.
These are two consecutive candles with identical lows occurring after a downtrend or two consecutive candles with identical highs occurring after an uptrend. They signify the potential end of the trend.
This can be seen after an uptrend or downtrend. The range of the current candle lies completely within the range of the preceding candle. It can signify potential price reversal.
The three-candlesticks patterns
They are seen after an extended downtrend/dip. The first candle is a big bearish candle, the second candle is a small candle with a gap from the first candle, and the third candle is a big bullish candle. They have a bullish implication.
They are seen after an extended uptrend/rally. The first candle is a big bullish candle, the second candle is a small candle with a gap from the first candle, and the third candle is a big bearish candle. They have a bearish implication.
Morning star doji
They are just like the morning star pattern except that the second candle is a doji candle.
Evening star doji
They are just like the evening star pattern except that the second candle is a doji candle.
Three white soldiers
They are three consecutive big bullish candles following a down move. They are mostly seen as a pullback in a downtrend.
Three black crows
They are three consecutive big bearish candles following an up move. They are mostly seen as a pullback in an uptrend.
Other Tools that can strengthen your Japanese candlestick chart patterns analysis
- Support/resistance zones
- Fibonacci retracement and extension levels
An important Japanese candlestick pattern occurring at an important support/ resistance zone or Fibonacci level carries more significance. In conclusion, the Japanese candlestick chart pattern analysis has made it easier for you to do price action analysis. At a glance, you can easily understand the message of the price action if your eyes are well trained.
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