Japanese Candlesticks -
What are They and Why Use Them
Japanese candlesticks are a way to graphically describe what trading of a certain product was like during a particular time frame. As their name suggests, they were developed in Japan by 17th- century merchants who traded rice. Today Japanese candlesticks are used to display data regarding a wide range of financial products which are traded in different markets. Not all traders use this tool and so those who do may gain somewhat of an advantage.
Gather Plenty of Data With One Quick Glance
Japanese candlesticks are unique among other trading analysis tools in the sense that it's enough to just glance at them to gather the information they contain. Traders who can read Japanese candlesticks use them to get a "feel" of the market, this, in turn, allow making moves based on more educated predictions.
How to Read Japanese Candlesticks
Japanese Candlesticks many times resemble candles, hence their name. The way they are drawn out is so ingenious that reading them becomes almost intuitive, i.e. It's enough to look at them to gather the information they store.
A Japanese candlestick has three parts, a cylindrical body (which many times resembles a candle), a line protruding from the body's top end and another from the bottom (these lines are referred to as "shadows")
- Body- The length of the body shows the difference between opening and closing price. If the body is white, the price rose (therefore the bottom end of the body is the opening price and the top end is set at closing price), if the body is black the product's value had depreciated during the timeframe the candlestick is describing. Nowadays colored body candlesticks are also used (rather than just black and white).
How thick the body is shows trading volume, the wider the cylindrical body is, the higher volume of trading was.
- Shadows- The line protruding from the top end of a Japanese candlestick (the top shadow) indicated the highest price reached during the relevant timeframe. The bottom line shows the lowest price.
If a top shadow is long the peak price was much higher than closing price. If a bottom shadow is long the lowest price reached was much lower than starting price (if the candlestick's body is white) or closing price (if the candlestick's body is black).
Unique patterns may occur. For instance, a candlestick with no body shows that opening and closing price were the same. No shadows show that the opening price was also the lowest and closing price the highest, so long as the candlestick is white. On a black bodied candlestick with no shadows, the closing price was the lowest reached and opening price the highest.
Advantages of Using Japanese Candlesticks
Once you get to know how Japanese candlesticks are built you can begin reading them. As you gather experience you will find that using Japanese candlesticks allows you to get a feel of the market quickly, gather plenty of information easily, identify trends and points of interest (such as peaks, slumps and plateaus). The very fact that not all traders use Japanese candlesticks means that those who do may gain an edge which helps them perform better.