Japanese Candlestick

Updated on April 4, 2024

What Is Japanese Candlestick?

A Japanese candlestick is a technical analysis instrument that financial traders use to predict the market movement. They make their investment decisions based on the Japanese candlestick patterns. The candlesticks depict a particular stock’s opening and closing prices. Technical analysts use the Japanese candlestick analysis to identify market trends and reversal patterns.

Japanese Candlestick

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The Japanese candlestick charts are multi-dimensional market price charts that show the price changes and the market sentiment that influence those price changes. They are used to forecast whether the stock market will continue its current price trend or if there is a possibility of a trend reversal.

Key Takeaways

  • A Japanese candlestick is a method that technical analysts use to identify the current market state and predict future movements. It is a valuable tool for identifying an anticipated price trend reversal.
  • It was initially invented in the early 1700s by Munehisa Homma, a Japanese rice trader. Steve Nison introduced it to the world in his book Japanese Candlestick Charting Techniques, first published in 1991.
  • It provides an elaborate and accurate depiction of the market price through a graphical presentation. Traders can easily identify market trends by looking at the candlestick’s length and color.

Japanese Candlestick Explained

A Japanese candlestick is a tool that technical analysts use to identify stock market price trends. Financial traders use the Japanese candlestick patterns to forecast the forthcoming price trends and their reversal patterns. Furthermore, the Japanese candlestick charts are valuable tools for determining the market sentiments that cause price fluctuations. These candlesticks provide a visual representation of the financial data. Thus, they have grown increasingly popular among traders over time.

Each candlestick represents the market price of a particular stock. They illustrate the opening and closing prices of the stock. Additionally, a Japanese candlestick analysis also helps to identify whether there has been a rise or a fall in price over a specific period. In the Japanese candlestick charting techniques, a candlestick shows the opening price, closing price, high point, and low point of a particular stock over time. The chart is made up of individual candlesticks.

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How To Read?

Let us look at the Apple stock price chart below to understand how one can read or interpret Japanese candlesticks to make prudent trading decisions. 

Source

As one can observe in the above chart, a Japanese candlestick is comprised of three elements with the following functions:

#1 – The Upper and Lower Wicks

The wick of the candle represents a stock’s highest and lowest points. The upper wick is the highest price point, while the lower wick is the lowest.

#2 – The Color

The candle’s color represents whether there has been an increase or decrease in the security price. For example, a red candle body indicates a decrease in the market price, while a green candle body indicates an increase in the market price.

#3 – The Body

The body of the candle depicts the security’s opening and closing prices. For example, in a green candle, the lower end of the body represents the opening price, while the upper end represents the closing price. Likewise, in a red candle, the lower end of the body depicts the closing price, while the upper end depicts the opening price.

These elements are used to read and analyze the market prices. The distance between the candle’s wick and the body is known as the shadow of the candle. The upper shadow depicts the security’s price difference between the highest price point and the opening or closing price in a particular trading session.  Similarly, the lower shadow shows the difference between the lowest price point and the opening or closing price in a specific trading session.

The candle’s shadows indicate the market trend. A longer shadow suggests that the trading price exceeded the stock’s opening and closing prices. A shorter shadow indicates that the trading price remained closer to the opening and closing prices. A longer shadow signifies a considerable change in the market pattern, while a shorter shadow signifies fewer fluctuations in the market prices.

The stock’s closing price determines whether the market is on a bearish or a bullish trend. If the closing price is higher than the opening price, it indicates an increase in the stock prices. In contrast, a closing price lower than the opening price suggests a fall in the stock prices.

One can look at the candlestick charts of different stocks on TradingView to better understand the concept. 

Examples

Let us understand the Japanese candlestick with the help of these examples:

Example #1

Techno Apex is a company that manufactures phones. On a particular day, the opening share price of Techno Apex is $100. After that, the market shows an upward trend where the shares peak at $150. From there, the price of shares starts to fall until it reaches $90. Then, the price rises again, and it closes at $120. This pattern implies that the highest price point is $150 and the lowest price point is $90, while the opening price is $100 and the closing price is $120.

It can be represented on a candlestick pattern where the candle’s body represents the difference between the opening and closing prices, that is, $100 and $120, respectively. The upper wick is the highest price point which is $150, while the lower wick is the lowest price point which is $90. The upper shadow indicates the difference between the highest price point and the closing price, that $150 and $120, respectively. The lower shadow suggests the difference between the lowest price point and the opening price, that is, $90 and $100, respectively. This indicates that Techno Apex’s stock price is on an upward trend.

Example #2

On November 12, 2022, crude oil prices showed a bullish trend reversal after facing three consecutive days of significant losses. This trend reversal resulted from a weaker dollar and the relaxation of Covid-19 protocols in China. China reduced its quarantine period for travelers, which caused an increase in international travel leading to rising demand for oil. The charts depicted an evening star candlestick pattern followed by a morning star candlestick pattern. This indicated indecisiveness in the market.

Graph

A Japanese candlestick chart shows the price movement in a market during a specific period. The graph is made up of individual candlesticks. The Japanese candlestick charting techniques help to determine the current market state quickly at one glance.

Japanese Candlestick Chart

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Additionally, it helps study the market price trends and identify whether the market is on a bearish or bullish trend reversal pattern.

Japanese Candlestick vs Heikin Ashi

 The differences between Japanese candlesticks and Heikin Ashi are as follows:

  • Japanese Candlestick: This candlestick displays a raw form of the high, low, opening, and closing price points. The candles are independent of each other and show more volatility. It offers more unprocessed, noisy, and real-time information about the market with no time gap.
  • Heikin Ashi: The Heikin Ashi candlesticks display an averaged version where the data from the previous candle is used to calculate the current candle. Each candle depends on the last candle; they are smoother with less noise. These candles consist of filtered and processed data with a time gap.

Frequently Asked Questions (FAQs)

1. Who invented Japanese candlesticks?

These candlesticks were invented by Munehisa Homma, also known as Sokyu Homma. He was a rice trader and a pioneer in tracking the rice market. He introduced candlesticks in the early 18th century. Steve Nison introduced it to the world in 1991. He mentioned them in his book called “Japanese Candlestick Charting Techniques.”

2. Do Japanese candlestick patterns work?

Yes, these candlestick patterns work as they provide comprehensive and precise information about market price movements. They visually represent the market supply and demand that influence price fluctuations. They are instrumental in identifying price trend reversals. Financial traders find most of the patterns reliable and accurate. Thus, traders prefer them over other instruments like bar charts.

3. What is the importance of Japanese candlesticks?

The importance of this candlestick can be summarised in the following points:
• The current stock market scenario can be determined easily. Traders can identify the market state by looking at the candlestick’s length and color and deciding whether it is bearish or bullish. Additionally, it also determines whether the market is in a volatile or a stable state. Furthermore, it can identify market indecisiveness.
• The candlestick’s length and color can also easily depict the direction of price movement. 
• Traders can forecast any forthcoming price reversal trend by studying the candlesticks.

This article has been a guide to what is Japanese Candlestick. Here, we explain how to read it, its differences from Heikin Ashi, graph, and examples. You may also find some useful articles here –

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