What are the Japanese Candlesticks?

Candlesticks are one of the most important tools we have in the forex and stock market technical analysis. The information that the candlesticks give us are the best and most accurate. If you like to become a good trader and you like to have successful and profitable trades, it is highly recommended to learn to read the candlesticks’ signals.

What are the Japanese Candlesticks?

Candlesticks are the oldest form of technical analysis in the world. Japanese Candlesticks were invented by a Japanese rice trader, Sakata, in 17th century. He spent about ten years of his life in researching and analyzing of the effect of weather, psychology of buyers and sellers and many different conditions on the rice price. Then he made 100 successful trades and retired a rich man and wrote two books about technical analysis.

I highlighted the “psychology of buyers and sellers” because candlesticks are the indicators of the market psychology. This is the first and most important thing you have to know about the candlesticks. Price volatility is the result of nothing but the behavior of the buyers (Bulls) and sellers (Bears).

When there is more buying than selling, the price goes up and visa versa.

Candlesticks are the indicators that reflect the feelings (fear and greed) of the buyers and sellers. Candlesticks has their own language which is very easy to learn. If you learn their language, you will see that they really talk to you and tell you what will happen in the future.

Candlesticks are the only real time indicators that we have and when you combine them with other useful indicators like Bollinger Bands, they will become the best trading tools. All other indicators like Stochastic,MACD and RSI are delayed and produce a lot of false signals. Ignoring the candlesticks and trading based on these indicators is like driving with closed eyes and just by listening to the directions that someone else gives you. It is clear that he can not give you the directions “on time”. Your reflections will not be on time too and you will be delayed which can be too dangerous.

Candlesticks, candlestick trading and the related technical analysis were introduced to the western countries in 1985 and became so popular.

Candlestick is basically a rectangle that gives 4 different information in a special time frame. If you use the daily time frame, for each day we will have one candlestick and if you use a 5 minutes time frame, for each 5 minutes you will have a candlestick and so on.

Each candlestick includes 4 numbers:

1. Open price
2. Close price
3. High price
4. Low price

For example, in the one hour time frame, the open price is the price of the currency pair at the time that the candlestick is started. In the one hour time frame, it takes one hour for each candlestick to be formed completely.

So let’s say when a candlestick is just started in the one hour chart, the price is 1.9825. This is the open price. The prices goes up and down during one hour and finally, when one hour is over, the price is 2.0080. This is the close price.

When the close price is higher than the open price, the candle is Bullish. It means the price has gone up during the formation of the candlestick. If the open price is higher than the close price, the formed candlestick is a Bearish candlestick. It means the price has gone down during the formation of the candlestick.

High price is the maximum price and low price is the minimum price during the formation of the candlesticks.

The shape and color of a candlestick may change several times during its formation and you have to wait for the candlestick to be formed completely and then read the candlestick signal and make your analysis and decision.

Candlesticks have two main parts: 1. Body and 2. Shadows

Psychology of the market:

Candlestick trading means knowing the psychology of the market using the candlesticks shapes and colors. Candlesticks are the indicators of the market psychology. They show us if there is more buying than selling or there is more fear than greed in the market and visa versa. Using this information, you will be able to predict the direction of the price. You will learn about it here.