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Japanese Candlesticks:

A Cut above the Usual Bar Chart

Japanese candlesticks are techniques which the Japanese had devised ages ago in order to trade rice. In the modern times, this has emerged as one of the foremost ways of trading in the foreign exchange market. The best thing about Japanese candlesticks is that they can be used for any particular time frame (regardless of one hour, 35 minutes, 60 minutes or one whole day), and are formed using the high, close, open and low positions of the forex trading chart. The main use lies in describing the price action that takes places within a particular time frame (which is being considered). There are certain conditions under which the candlesticks work:

-In case the ‘current  price or close’ position happens to lie above the ‘open, then the candlestick drawn is white in colour and hollow in appearance. I.E. Bullish Candle

-If the position is just the reverse of what is described above, i.e. the ‘current price or close’ lies below ‘open’, then a solid red candlestick is shown in the diagram. I.E Bearish Candle

Candles 1

-The section of the body which is shown as either hollow or solid is termed as the ‘real body’.

-The ‘high’ and ‘low’ ranges are marked by the dark lines which extend beyond the body of the candlestick.

-The top portion of the upper shadow is called the ‘High’ part, while the lower one’s bottom portion (the shadow) is called the ‘Low’.

The foremost benefit of using the candlestick system is that they offer a better visual representation of data; especially, the intricate interconnections that exist between the various levels of data. It also helps to better track the fluctuations in investor sentiment over time. In both these functions, candlestick charts are much more superior to the traditional bar charts. The former shows timeframe-based price actions which enable someone to make better use of pattern analysis; so that the future movement of that equity (currency or stock share) can be predicted more accurately. All it takes is a small amount of practise, after which analysis of the candlestick chart pattern would become much easier.

The numerous advantages of Japanese candlesticks:

  • As has already been mentioned, they are extremely easy to understand and do not take a long while to master. Regardless of whether one is an amateur chart-reader or a hard-nosed career trader, anyone would find candlesticks easy to work with. The positions used in a traditional bar chart (i.e. high, low, close and open) are also used in the candlestick diagram.
  • The twists and turns of the market can be much better understood by using candlestick charts. In this regard, Japanese candlesticks shoot right ahead of traditional bar charts; because the signals for the trend reversals can be seen just after one or two sessions. Compare this with bar charts where it can take weeks or more to detect a trend or reversal. Thus, predicting the market movements would be much more improved and accurate with a candlestick chart. Owing to this, one can correctly time their entry and exit in and from the market.
  • Aside from improved predicting powers and easily decipherable, Japanese candlesticks allow the user unique insights into the tendencies of the market. It doesn’t just show a particular move, but also points out the force which is driving a particular movement in any direction; at any time. Thus with candlesticks, you gain heightened knowledge of the market mechanism.

Aside from this, it is also a fact that this candlestick way of measuring price action for market equities has been a success for about 250 years, right from the time it was invented in Japan for rice trading purposes!

This article breaks down the basics of the Japanese candlesticks. Now, to breakdown of the more intricate candlesticks patterns that may help you dictate price action check out this article.