I’m going to admit something right off the bat…
A Japanese candlestick isn’t the most interesting and exciting thing in the world. In fact, it’s a bit boring on its own.
But if you want to become a successful trader, understanding the candlestick patterns and formations in this post is essential.
There are no two ways about it.
So buckle up, grab your favorite cup of coffee or tea (perhaps coffee, so you stay awake) and let’s turn this often boring topic into a profitable endeavor.
The (Long) History of Japanese Candlestick Charting
To fully understand the Japanese candlestick, we need to go back to the 17th century when the Japanese were using technical analysis to trade rice.
Yes, technical analysis is that old!
The history of trading candlesticks is a bit of a mystery, with much of it being left to stories. But we do know that a great deal of credit belongs to a legendary rice trader by the name of Homma from the town of Sakata.
His original ideas and concepts have no doubt been modified since then, but his early development of the candlestick pattern laid the path for further refinement.
The Japanese candlestick charting techniques made popular by Homma later made their way to the U.S. around 1850, where technical analysis and price action were further developed by Charles Dow.
If you’ve spent some time around the U.S. stock market, that name should sound familiar.
Charles Henry Dow founded the Wall Street Journal and later invented the Dow Jones Industrial Average as part of his ongoing market research as it relates to price action.
You read that correctly, the founder of both the Wall Street Journal and the Dow Jones Industrial Average was adamant about Japanese candlestick patterns.
So much for technical analysis being some form of “hocus pocus” that doesn’t really exist.
Japanese Candlestick Anatomy
Now that you have a firm grasp of how the Japanese candlestick was developed and where it came from, let’s discuss what it is and how we can use it to trade price action.
However, before we can use candlestick patterns to our advantage, we need to understand the anatomy of one. In other words, what makes it tick (pun intended).
The video below will walk you through the various parts of both a bullish and bearish candlestick.
Here are those characteristics for those who prefer a static diagram.
Notice that the only real difference between the two is that the open and close are opposite. This is because the one on the left with the hollow body is considered a bullish Japanese candlestick, where it closed higher than it opened. Whereas the one on the left is considered a bearish Japanese candlestick, in which it closed lower than it opened. The shadow is also sometimes called a “wick”.
The one on the right is considered a bearish candle as the close is lower than the open.
As a side note, the shadow is also sometimes called a “wick”.
Here’s the Japanese candlestick in action on the daily time frame. As you review the chart below, try to piece together the different parts of the candlestick (high, low, open and close). Follow each one from left to right across the chart.
If you’ll notice, the market doesn’t always open exactly where it closed. This happens quite often, especially on a daily chart like the one above when the market opens on Sunday.
This is because there are events which occur over the weekend that can effect price to where it may not open exactly where it closed on Friday. These are called “gaps”. Sometimes these gaps are small, sometimes as large as 100 pips or more. For this reason, many Forex traders will avoid holding positions over the weekend.
Japanese candlesticks can be used for any time frame. The chart above is the daily time frame, but the anatomy of the candlestick doesn’t change whether it be a daily chart, four hour, one hour, you name it.
That about wraps up this lesson on Japanese candlesticks. I hope you’re moving on from this lesson feeling better about reading candlesticks and how you can use them as a price action indicator. Please share your thoughts on this lesson by leaving a question or comment below. I will respond ASAP.
Do you use a Japanese candlestick chart for trading the markets?
Leave your comment or question below and I’ll be sure to respond.