Japanese candles

Galimzyan
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Galimzyan
13 MIN READ
Trading
22 June 2023
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Japanese candlesticks are one of the most popular methods of analyzing prices in financial markets. They are a graphical representation of price activity over a period of time.

Each Japanese candlestick has two main components - the body of the candlestick and its shadows. The body of a candlestick shows the difference between the opening and closing price of an asset in a certain period of time. If the body of a candlestick is full or shaded, it usually means that the close price is lower than the open price, and it can indicate a decline in price. If the body of the candlestick is unfilled or left transparent, it usually means that the closing price is higher than the opening price, and it can indicate an increase in price.

Japanese candlesticks can be used to identify various patterns and signals which help predict future price movements. For example, there are various candlestick patterns such as "Hammer," "Evening Star," "Bearish Takeover" and others which can indicate a possible trend change.

Using Japanese candlesticks in price analysis can help traders make informed decisions about entering or exiting trades. However, it is important for novice traders to realize that Japanese candlestick analysis requires practice and experience. It is advisable to study the different candlestick patterns, their meanings and their application in combination with other analysis tools.

What are Japanese candles

History of Japanese candles

The history of Japanese candlesticks originated in Japan in the 17th century. At that time, drawing price charts became popular among Japanese drawers, who were called "Munehishi". It was they who first created the basis for what we today call Japanese candlesticks.

An important contribution to the development of Japanese candlesticks was made by a drawer named Homma Munehisa, who lived in the 18th century. He did a lot of research and observations in the financial markets, using price charts, and developed a technique for analysis based on candlestick formations. His work became the basis for the development of Japanese candlesticks as a tool for price analysis.

One of Munehisa's main goals was to understand the psychology of the market and the behavior of traders. He realized that traders' emotions and their reactions to price changes can influence market movements. Munehisa used candlestick charts to visualize price activity and create patterns that could help predict future trends.

Over time, Japanese candlesticks gained widespread recognition and use not only in Japan, but all over the world. The technique of analyzing Japanese candlesticks was introduced in the West in the 1980s, when computer programs for displaying and analyzing candlestick charts became available.

Today, the Japanese candlesticks are one of the main tools of technical analysis in the financial markets. They allow traders and investors to analyze price activity, determine trends and make decisions based on patterns and signals which are formed on candlestick charts.

The history of Japanese candlesticks testifies to their effectiveness and practicality in analyzing price activity. Understanding this tool and applying it can help traders make more informed decisions in the financial markets.

History of Japanese candles

How to Read Japanese Candles

Reading Japanese candlesticks is an important skill that helps traders analyze price activity in financial markets. Here are some simple steps to help you get started with reading Japanese candlesticks:

  1. Identify the basic elements of a candle: Every Japanese candle consists of a body and shadows. The body of a candle is a rectangular shape and shows the difference between the opening and closing price over a period of time. The shadows of a candlestick are lines coming out of the body of the candlestick and show the price extremes of that period.
  2. Learn candlestick color values: depending on your chosen chart, candlesticks may be painted in different colors. If the body of the candlestick is full or colored, it usually means that the closing price is lower than the opening price, and this can indicate a decline in price. If the body of the candlestick remains transparent or unfilled, it usually means that the closing price is higher than the opening price, and this may indicate an increase in price.
  3. Pay attention to the length of the shadows: the length of candlestick shadows can give you information about market volatility and the strength of buyers or sellers. If the upper shadow is longer, it could indicate strong resistance to the price level, and if the lower shadow is longer, it could indicate strong support for the price level.
  4. Study Candlestick Patterns and Signals: There are various patterns and signals that can occur on candlestick charts. Some of these include "Hammer," "Evening Star," "Bearish Takeover," and others. Learn about the different patterns and their meanings so you can recognize them on charts.
  5. Use other analysis tools: Reading Japanese candlesticks is best combined with other analysis tools such as trend lines, support and resistance, indicators and others. This will help you get a fuller picture of price activity and make more informed decisions.

It is important to understand that reading Japanese candlesticks requires practice and experience. It is advisable to study different candlestick patterns, analyze their meanings and apply them in combination with other analysis tools for more accurate results. Gradually, you will develop your Japanese candlestick reading skills and use them in your trading in the financial markets.

How to Read Japanese Candles

Types of Japanese candles and their meanings

Japanese candlesticks have different shapes and patterns, each of which can report certain information about price activity in the market. Here are a few basic types of Japanese candlesticks and their meanings:

Hammer: A hammer looks like a candle with a small body and a long lower shadow. It often indicates a potential reversal of an uptrend. The Hammer is hot after the price has declined and is an indication that buyers are beginning to control the market and the price may start to move higher.

Evening Star: The Evening Star is a three-candle pattern. It starts with a large white candle, followed by a candle with a small body and a high upper shadow, and then ends with a large black candle. This pattern indicates a possible reversal of the uptrend and signals a possible price decrease.

Bearish Engulfing: A bearish engulfing occurs when a large black candle engulfs the previous small white candle. It is a reverse reversal signal and may indicate a possible drop in price.

Doji: A doji is a candle with a very small body, with its opening and closing almost the same. This pattern indicates that the balance between buyers and sellers is about to change. Doji can be a reversal signal or indicate a possible sideways price movement.

Shooting Star: A shooting star has a long upper shadow and a small body. It appears after an uptrend and can signal a possible reversal and decrease in price.

These are just some of the many types of Japanese candlesticks that can appear on price activity charts. Studying these patterns and their meanings will help you better understand how to read Japanese candlesticks and make more informed trading decisions in the financial markets.

Types of Japanese candles and their meanings

Combinations of reversal or break consisting of a single candle

You can find single candle combinations on price activity charts that can indicate possible reversals or breaks in the market. Here are some examples of these combinations:

  1. Doji: a candlestick that has almost the same opening and closing and a very small candlestick body. A doji indicates that the balance between buyers and sellers is about to change. If the Doge appears after a long trend, it may signal a possible reversal.
  2. Morning Star: this is the combination of three candles, starting with a big black candle, followed by a smaller candle with a small body and a small shadow, and ending with a big white candle. This combination indicates a possible downward reversal of the uptrend and signals a possible rise in price.
  3. Evening Star: this is the reverse combination of three candles, starting with a large white candle, followed by a small candle with a small body and a small shadow, and ending with a large black candle. This combination indicates a possible reversal up or down of the price after an uptrend.

These are just a few examples of reversal or break combinations consisting of a single candle. Reading and recognizing these combinations can help you make more informed decisions in trading the financial markets. However, it is important to remember that observing other indicators and analyzing the context is also important for making decisions.

Hammer

A hammer is similar to a doge with a long lower shadow and a small body. It appears after a price decline and indicates that buyers are beginning to control the market. The hammer can be a signal of a possible reversal of the uptrend and portends a price increase.

Hanged

The Hanged also looks like a Doge, but with a long upper shadow and a small body. It appears after an uptrend and may indicate a potential price decline. The Hanged Man can be a signal of a possible downward reversal from an uptrend.

Shooting star

A shooting star has a long upper shadow and a small body. It occurs after an uptrend and can be a warning of a possible reversal and price decrease. A shooting star indicates that buyers are starting to weaken and sellers may take over.

Combinations of a reversal or break consisting of two or more candles

On price activity charts, you can find combinations of two or more candlesticks that can indicate possible reversals or breaks in the market. Here are some examples of such combinations:

  • Head and Shoulders inverted model (Head and Shoulders): This combination consists of three candles and represents a model with two peaks (left and right shoulders) and one higher peak (head) between them. It indicates a possible reversal of the uptrend and signals a possible price decrease;
  • Double Top: this pattern consists of two peaks, which are at the same level or very close to each other. It indicates a possible reversal of the uptrend and signals a possible price decrease;
  • Double Bottom: this pattern is composed of two bottoms that are at or very near each other. It indicates a possible reversal of the downtrend and signals a possible rise in price;
  • Triple Top: this pattern consists of three peaks that are all on the same level or very close together. It indicates a possible reversal of the uptrend and signals a possible price decrease;
  • Triple Bottom: this pattern is made up of three bottoms which are all at the same level or very close to each other. It indicates a possible reversal of the downtrend and signals a possible rise in price.

These are just a few examples of reversal or break combinations consisting of two or more candles. Reading and recognizing these combinations will help you make more informed decisions in trading the financial markets. However, it is important to remember that observing other indicators, trends and context analysis is also important to your decision-making.

Combinations of a reversal or break consisting of two or more candles

Trading strategies based on candlestick patterns

Trading strategies based on candlestick patterns are a popular tool for traders in financial markets. These strategies are based on analyzing price activity charts and using different candlestick patterns to predict future price movements. Here are some popular trading strategies based on candlestick patterns:

Inverted Candlestick Pattern Trading: This strategy is based on finding inverted candlestick patterns such as the Hammer, Hanging Man, Shooting Star and others. When this pattern appears on the chart, traders can make decisions about whether to enter in the direction indicated by the candlestick pattern.

Long Candlestick Patterns: This strategy is based on looking for long candlestick patterns such as the Marubozu and the Long Legs. When such a pattern appears on the chart, traders can make decisions to enter and hold a position in the direction indicated by the candlestick pattern.

Trading based on a candlestick pattern: This strategy is based on looking for specific candlestick patterns such as the Inner Bar, Matryoshka, Triple Close and others. When such a pattern appears on the chart, traders can make entry decisions according to the rules of the candlestick pattern.

Candlestick Rebound Trading: This strategy is based upon looking for candlestick patterns that indicate a pullback in price from the previous trend. For instance, a Double Top or Double Bottom candlestick pattern can indicate a potential pullback in price, and traders can decide to enter based on that pullback.

These are just a few examples of trading strategies based on candlestick patterns. It is important to remember that these strategies should be used in conjunction with other tools and market analysis to make more informed decisions.

Trend Following

Trend Following (trend following): This strategy is based on finding and trading in the direction of a trend that is set in the market. When a trend is clearly seen on a chart of price activity, traders will look to enter a position in the direction of the trend. For example, if a steady uptrend can be seen on the chart, traders may look for opportunities to enter a long position and hold it until the trend ends or reversal signals emerge. The main idea behind this strategy is to catch long price movements in the direction of the trend.

The Counter Trend trading strategy

The Counter Trend strategy is based on the idea of finding possible reversal points in the direction opposite to the current trend. When price reaches extreme levels and signals of trend weakness, traders may look to enter a position waiting for a reversal. For example, if price reaches strong support or resistance levels on the chart and shows rebound signals, traders may consider entering a position in the opposite direction to the current trend.

Trading strategies based on candlestick patterns

Pros and cons of candles trading

  1. 1.

    The advantages of trading by candlestick patterns:

    1. Easy to Read: Japanese candlesticks provide intuitive graphical information about price movements. They show open, close, high and low prices over a period of time, making them easy to understand, especially for novice traders.
    2. Visual Trending: Candlestick patterns help determine the direction of a trend in the market. They allow traders to see if buyers (bulls) or sellers (bears) are dominant and can help decide whether to enter a position in accordance with the current trend.
    3. Trend reversal and continuation indicators: Candlestick patterns can give signals of possible trend reversals or continuation of the current trend. They can help traders determine entry and exit points which are important aspects to successful trading.
  2. 2.

    The disadvantages of trading by candlestick patterns:

    1. False Signals: While candlestick patterns can provide trend reversal signals, they can sometimes be false. This means that traders can enter a position and the price will continue moving in the opposite direction. Therefore, it is important to use confirmatory tools and strategies to confirm candlestick signals.
    2. Difficult to interpret: Although candlestick patterns can be easy to read, interpreting their meaning can be complex. Some candlestick patterns have different variations and can have different meanings depending on the context. Therefore, it takes some practice and experience to use candlestick patterns effectively.
    3. Limited Information: Candlestick patterns only provide information about open, close, high and low prices, but do not take into account other factors that can affect the market, such as trading volume or external events. Therefore, traders may need to use additional tools and analysis to make informed decisions.

    It is important to remember that candlestick pattern trading is only one tool for market analysis, and traders should combine it with other methods and strategies to make informed decisions in the market.

Pros and cons of candles trading

Why pay attention to the Japanese candles? Opinion of Cryptology experts

Japanese candlesticks are a powerful tool for analyzing price activity in the market. They provide traders with a visual representation of price movements and can help in determining the trend, reversal and continuation signals.

However, it is important to understand that it takes some training and practice to use Japanese candlesticks effectively. Traders should be able to read and interpret various candlestick patterns, as well as use them in combination with other market analysis tools.

Trading by candlestick patterns has its advantages, such as ease of reading, the ability to identify trends and reversal signals. However, they also have their limitations, including the possibility of false signals and complexity of interpretation.

Overall, Japanese candlesticks are a valuable tool for traders that can help them make informed decisions in the market. When used properly and combined with other analysis methods and strategies, they can be a useful tool in trading the financial markets.

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Frequently asked questions about Japanese candles

What are Japanese candlesticks?

Japanese candlesticks, also known as "Japanese candlestick charts" or "Japanese candlestick patterns", are a type of graphical representation of prices in financial markets. They allow you to analyze price movements over a period of time and identify various trends and patterns.

What is the history of Japanese candles?

Japanese candlesticks were developed in Japan in the 17th century. They were used to analyze rice prices, but then became popular in the global financial markets. Their creation is attributed to Munihishi Miyazaki, who was a draftsman at the Osaka Stock Exchange Hall.

What are the basic elements that make up Japanese candles?

A Japanese candle consists of a candle body (or "candle body"), an upper shadow, and a lower shadow. The candle body shows the difference between the starting and ending prices over a period of time. The upper shadow indicates the maximum price for that period, and the lower shadow indicates the minimum price.

What are the basic Japanese candlestick patterns that exist?

There are many different Japanese candlestick patterns such as the Hammer, the Hanging Man, the Morning Star and many others. These patterns can signal a trend reversal or continued price movement.

How can Japanese candlesticks be used in trading?

Japanese candlesticks can be used to make trading decisions. Traders and investors analyze candlestick patterns to determine entry and exit points for positions. They can also use candlesticks to manage risk and determine stop loss levels.

Can I learn how to analyze Japanese candlesticks?

Yes, analyzing Japanese candlesticks is a skill that can be learned. There are many books, online courses and resources available to help you understand the basics and principles of Japanese candlestick analysis. Practice and experience also play an important role in mastering this skill.
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