Surely you already know that the graphical analysis of the prices of an asset can be done from different modes of visualization of the graphs. But one of the most widely used chart types due to the accuracy and amount of information it conveys is the Japanese candlestick chart.
77% of retail investor accounts lose money trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take a high risk of losing your money.
Creation of the Japanese chandeliers:
The Japanese candlestick chart is undoubtedly one of the oldest visualization methods. It was developed in Japan, hence its name, and initially, at the end of the 17th century, it was used to carry out technical analysis of rice prices.
But very soon, the Japanese candlestick system was used by other analysts and in markets other than rice. These days, almost all traders use this display mode to perform their technical analysis .
What the Japanese chandeliers represent:
When looking at a Japanese candlestick chart, we logically realize that the classic bars have been replaced by candlesticks. A color code makes it possible to differentiate the so-called bearish candles, which are often in black and red, from the bullish candles, represented in white or green.
To form this candle, the opening price, the closing price, the highest level and the lowest level in the given time period are used.
The body of the candlestick of the Japanese candlestick has a wide part and two shadows that are represented by vertical dashes located above and below the body. In this way, when the candle is green, this indicates that the closing price is higher during the opening and vice versa when the candle is red.
For its part, the size of the body of the candle provides an indication of the difference between the closing price and the opening price. The longer the body, the more pronounced the trend will be.
Interpretation of Japanese chandeliers:
If a simple glance can be enough to make a good analysis of the Japanese candlesticks, the most experienced traders use futures formed by the candlesticks of these candlesticks, called “technical setups”. But here we are going to be interested only in the sails independently of these figures.
El marubozu
They are long candles that indicate strong buying or selling pressure.
belt loops
When the candle has an upper shadow and no lower shadow, this indicates a future uptrend. Conversely, when the candle has a lower shadow, this generally indicates a future downtrend.
the hammers
They are characterized by a short candlestick with a very long shadow below. They generally indicate a bearish or bullish trend reversal.
The Hanged
They are just the opposite of hammers, i.e. a pronounced upper shadow and indicate a bullish to bearish reversal.
the high waves
It is a low volume candlestick with two associated shadows (lower and upper). This setup generally indicates a change in trend.
the dojis
These are figures without a candle body and are often synonymous with more or less strong doubt from investors.
Interpretation and strategies of the main Japanese candlesticks
Now we will go a little deeper into the strategy and give you more details on how to use the main candles for trading and which strategies are best suited to each of them.
Doji candles
As regards the Doji candle, it is the only Japanese candle that does not have a body. In general, and from a graphical point of view, we can see that the opening level and the closing level of the candle are very close to each other and sometimes even the same. We can look at the Doji candlestick both within the framework of a bullish strategy and in that of a bear market.
When we look at this candle, it means that there is generally indecision as to which direction the market will take. We often see frequent appearances of the Doji candlestick during periods of low volatility, especially at night. Therefore, it is preferable to trade Doji candlesticks during the periods when volatility is strongest and therefore during the sessions and their opening times.
There are different ways to trade Doji candlesticks. For example, you can use the Scalping, Day Trading or Swing Trading strategy. Furthermore, they can be used with all possible units of time.
Las Marubozu or Japanese Momentum sails
Momentum candlesticks, commonly called Marubozu, are candlesticks that almost always reflect strong momentum, and can usually be seen at support and resistance levels. Now we will see together what its main characteristics are.
Graphically speaking, Japanese Marubozu candlesticks are filled candles with virtually no wick. They are especially interesting as they demonstrate a very strong trend signal. Of course, the strength of the signal will also depend on the size of the candle. Also, the bigger the candle, the stronger the signal, and vice versa. Momentum candles are, in effect, strong support and resistance signals. Their name comes from the fact that they have practically no fuse, since the Japanese term Marubozu means “bald” in Spanish.
In a general way, all candlesticks with a rather short wick can be considered as interesting trend signals within the framework of online trading . Now we will see in more detail how to interpret these candles based on the configuration of the market.
When you see a blue Momentum candlestick as part of an uptrend, it means that this trend has a good chance of continuing. If this same blue candle appears within the framework of a downtrend, this indicates the opposite, that is, the end of this trend or even its reversal.
When you see a red Momentum candlestick as part of a global downtrend, this means that the trend will continue without a doubt. Conversely, when you see this same candle as part of an uptrend, this certainly means that the trend is coming to an end or that we are in for a bearish reversal.
The Marubozu are Japanese candlesticks that can be used within the framework of different trading strategies such as Scalping, Day Trading or Swing Trading.
Hammer Japanese candlesticks
Visually, Hammer candlesticks can be identified by their long wick length, which is often much longer than the candle itself, and sometimes even twice as long. The color of the candle can also vary, and can be blue or red. Now we will explain how to interpret this type of Japanese candle.
First of all, we consider the Hammer to be a bullish trend signal when we look at it within the framework of a short-term downtrend, and it means that the asset will return to its underlying upward trend. However, we will prefer to use this type of signal in the framework of a structure zone.
Hammer candlesticks can be used within the framework of different trading strategies, such as scalping, day trading or swing trading.
The Hanging Man Type Japanese Candlesticks
The so-called “Hanging Man” or “Hanged Man” candlestick is another form of Hammer-type candlestick. However, there is a difference in size, since it occurs within the framework of an upward trend. Now we will explain how you can interpret these signals.
The hanging man candlestick is almost always a sign that an uptrend is coming to an end. Thus, it is used to anticipate a downward trend reversal.
Like the previous candles, the Japanese hanging man candlestick can be used with different strategies such as scalping, day trading or swing trading. It is suitable for any type of trader, regardless of his experience, and can be used with any unit of time.
Inverted Hammer Type Japanese Candlesticks
Finally, the Japanese candlesticks called Inverted Hammer are the last figures that we are going to explain in this article. As their name suggests, these candlesticks are actually, graphically and visually, the opposite of Hammer candlesticks. The wick of the hammer is in this case above the body of the candle, and not below. We can interpret them as follows:
The inverted hammer signal is actually the same signal as the classic hammer signal, and indicates in this case a wide possibility of an uptrend.
This Japanese candlestick can be used for Scalping, Day Trading or Swing Trading strategies, and is suitable for all levels of experience. It can also be used with the different time units available.