What is a Japanese Candlestick in Forex Trading?

The Japanese Candlestick

In Lesson 11, we learned that a candlestick is one of the 3 types of charts in forex trading analysis. Here, we will deeply examine how to analyze currency prices using the Japanese Candlestick.

The adjectival word “Japanese” is used to describe the origins of the concept. Steve Nison developed the term “Japanese Candlestick” to describe a method of technical analysis used in Japan to trade rice. The term was popularized in 1990s and later adopted in Forex trading.

The Japanese candlestick in forex trading is a graph with a thick “body” and two thin lines. They show the movements of a currency price within a given period.

The period could be one hour, a day, a week, etc. The following are the major parts or components of a candle stick:

The Japanese Candlestick
  • Real body – a thick filled or hollow part of the candle stick.
  • Upper shadow – a thin line poking above the real body
  • Lower shadow – a thin line poking below the body
  • High – the highest point on the upper shadow
  • Low – the lowest point on the lower shadow
  • Close – the closing price of the currency pair in the given period
  • Open – the Opening price of the currency pair in the given period.

Reading and Interpreting Candle Sticks

The body of a candlestick has various shapes, colors and sizes depending on the changes in the market prices of a currency pair in the given period.

A white or hollow candlestick shows that the price of the currency pair closed above the opening price. On the other hand, a black or filled candlestick indicates that the closing price was lower than the opening price. That is,

White Body = Closing Price > Opening Price

Black Body = Closing Price < Opening Price

However, the colors might change in different trading platforms because you can customize your own chart by choosing colors. In this lesson, the white body is used to mean the bullish candlestick when prices are increasing. The black candlestick occurs when the prices are going down – i.e. bearish.

A long body of a Japanese candlestick shows a strong buying or selling within the period. Thus, a long body indicates that buyers or sellers in that given period were in control of the trade. When the black bearish candle is long, it means that there was a strong selling action in the market.

Short bodies of Japanese candlesticks indicate a little power of the sellers or buyers, or that the buying and selling activities were limited.

A long white candlestick shows that close price is further from the open price. Hence, buyers were stronger and in control of the market.

A long black candle stick indicates that the close price has deviated significantly below the open price, and that the sellers were aggressive in the time period.

The upper shadows of a Japanese candle stick represent the high of a session. On the other hand, lower shadows signify the low of a session.

Long shadows mean that forex trading activities continued beyond the open and close prices.

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