There's a wide variety of financial analysis tools available for traders, but none of them is quite as unique as the Japanese candlestick. Japanese candlestick charting is an alternative for bar and point-and-figure financial analysis, aiming to show as much information as possible for a given price. Candlesticks can be used for stocks, currencies, commodities, or any other tradeable asset.
Here are some benefits of using Japanese candlesticks:
- Easy to use. Japanese candlestick charts present a lot of information in a simple way that even beginning traders can understand.
- Locate turning points quickly. Traditional trading charts, like bar charts, can take several weeks to signal reversal. Candlestick charts can locate them in only a couple trading sessions.
- Provide market insights. Unlike other charts, candlesticks also focus on providing information on the forces underlying market movements, instead of simply charting the movements.
- Competitive edge. Point-and-figure and bar charts are common for anybody doing trades, so using them just helps you keep up. Candlesticks aren't used by everybody, however, so they can give you a competitive advantage over other traders.
The Basics of Japanese Candlesticks
The history of Japanese candlestick charts traces back to the 17th century, when they were developed as a way to analyze their rice trade. Candlesticks are based on the principles of focusing on prices and market trends, and including all known information in the analysis.
When first glancing at a candlestick chart, you might be overwhelmed. Each line contains a body and a shadow, each representing different pieces of information. The body and shadow each contains two separate plot points:
Body: The body of a chart is the meat of the plot point. The top and bottom point of the body represent the open and close prices.
Shadow: The shadow is the lines sticking out of the top and bottom of the body. These represent the high and low price points.
The candlesticks color is vital to interpreting it. If the candlestick is white, then the price trended upwards. This means that the bottom of the candlestick is the open point and the top of the body is the close point. If the candlestick is black, just the opposite is true: the top of the body is the open point and the bottom of the bottom is the close point.
Thus, the candlestick gives you four vital pieces of information for an asset over a short period of time: the opening price, the closing price, the highest price, and the lowest price. Once you're able to read them quickly, you'll be able to interpret the psychology of the market and how volatile it is.
The Basics of Interpreting a Candlestick Chart
The first thing you need to take a look at is how long the body of the candlestick is. This will give you an idea of how strong the market pressures are:
A long white candlestick indicates that there is a great deal of buying pressure, and a long black candlestick indicates that there is a great deal of selling pressure.
Short candlesticks indicate that there isn't a great deal of market pressure.
You'll also want to take note of the length of the candlestick's shadows. If you notice that one shadow is much longer than the other, you'll know whether buyers or sellers dominated the period of time. Long upper shadows indicate that buyers were dominant, while long lower shadows indicate sellers were dominant. This trend stays consistent whether the candle is black or white.
Special Chart Trends to Watch For
Sometimes, the body and shadow will work together in very interesting ways. Here are some distinct charts you'll need to keep an eye out for:
- Marubozu. This occurs when a body has no shadow, which indicates that the open or close price was also the highest or lowest price.
- Spinning tops. These are when an asset has a short body with long shadows. This indicates that a price moved significantly, even though it opened and closed at a similar price.
- Doji. When a price opens and closes at the exact same price, or very close to it, a doji occurs. The shadows show that some fluctuation did occur, even if the open and close prices don't reflect it.
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