Analysis of Japanese candlesticks in trading

As you know, chart analysis of an asset's price can be done using a variety of charting modes. But one of the most commonly used chart types because of the accuracy and amount of information it conveys is the Japanese candlestick chart. If the study and analysis of this type of chart may seem barbaric to you, in this article you will discover some information on how to use candlesticks in the analysis of the markets.  

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Analysis of Japanese candlesticks in trading

Creation of Japanese candlesticks :

The Japanese candlestick chart is probably one of the oldest display modes. It was developed in Japan, hence its name, and was initially used in the late 17th century to perform technical analysis of rice prices.

It was an analyst of that time, Mr. Munehisa Homma, who was the instigator of this method of displaying and analyzing prices. This renowned statistician made a fortune thanks to this system and its exploitation, so much so that he was nicknamed "the god of margins". Initially, Homma was interested in the huge fluctuation of rice prices and decided to create this display which was done manually.

But soon, the Japanese candlestick system was used by other analysts and in other markets than rice. Today, almost all traders use this display mode to perform their technical analysis.


What the Japanese candlesticks represent:

When you look at a Japanese candlestick chart, it is logical to see that the classic bars have been replaced by candles. A color code allows us to differentiate between bearish candles, which are often in black or red, and bullish candles, represented in white or green.

To form this candle, the opening price, closing price, high and low level over the time period in question are used.

The body of the Japanese candlestick has a large part and two shadows which are represented by vertical dashes above and below the body. Thus, when the candle is green, it indicates that the closing price is higher than the opening price and conversely when the candle is red.

The size of the candle body gives an indication of the difference between the closing price and the opening price. The longer the body, the stronger the trend.


Interpretation of the Japanese candlesticks :

While a simple glance can be enough to perform a good analysis of Japanese candlesticks, more experienced traders use futures formed by the candles of this candlestick, called "technical configurations". But here we will only look at candles independently of these patterns.


The marubozu

These are long candles that indicate strong buying or selling pressure.


Belt loops

When the candle has an upper shadow and no lower shadow, it indicates a future uptrend. Conversely, when the candle has a lower shadow alone, it usually indicates a future downtrend.


The hammers

They are characterized by a short candle with a very long shadow below. They most often indicate a reversal of the uptrend.


The Hanged Men

they are the exact opposite of hammers, i.e. a pronounced upper shadow and indicate a reversal of the downward trend.


The high waves

This is a low volume candle with two shadows (lower and upper) associated. This pattern most often indicates a trend reversal.


The dojis

They are figures without a candle body and are often synonymous with more or less strong hesitation of investors.


Interpretation and strategies on the main Japanese candlesticks :

We will now go a little further from a strategic point of view by explaining in more detail how to use the main candlesticks in your trading and which strategies are best suited to each.


Doji candlesticks:

As far as the Doji candlestick is concerned, it is the only Japanese candlestick that does not have a body. Generally and from a charting point of view, we can see that the opening level and the closing level of the candle are very close to each other or even equal. The Doji candlestick can be seen in both a rising and a falling market.

When we observe this candle, it usually reflects indecision as to the direction the market will take. Doji candlesticks are often seen during periods of low volatility, especially at night. It is therefore preferable to trade on Japanese Doji candlesticks during periods of higher volatility and therefore during trading sessions and their opening hours.

There are different ways to trade Doji candlesticks. You can use Scalping, Day Trading or Swing Trading. These Japanese candlesticks can be used by anyone and allow for easy reading of major technical signals. Moreover, they can be used with all possible time units.


Marubozu or Japanese candles from Momentum :

Japanese Momentum candlesticks, commonly known as Marubozu, are candlesticks that most often reflect strong momentum and can usually be seen at support and resistance levels. Let's take a look at their main characteristics.

Chart wise, the Japanese Marubozu candlesticks are full candles that have almost no wick. They are particularly interesting as they show a very strong trend signal. Of course, the strength of the signal will also depend on the size of the candle. So the larger the candle the stronger the signal and vice versa. Momentum candles are indeed strong support and resistance signals. They get their name from the fact that they have almost no wick as the Japanese term Marubozu means "bald" in French.

Generally speaking, all candles with a small wick size can be considered as interesting trend signals in online trading. Let's now look in a little more detail at how to interpret these candles depending on the market configuration.

When you see a blue Momentum candlestick in an uptrend, it means that the trend is likely to continue. If the same blue candlestick appears in a downtrend, it indicates an end to the trend or even a reversal of the trend.

When you see a red Momentum candle in an overall downtrend, it means that the trend is likely to continue. On the other hand, when you see the same candle in an uptrend, it means that the trend is likely to end or that there will be a bearish reversal.

Marubozu are Japanese candlesticks that can be used in different trading strategies such as Scalping, Day Trading or Swing Trading. They can be suitable for traders of different experience levels and can be used with all possible time units.


Japanese Hammer candlesticks:

Visually, Japanese Hammer candlesticks are identifiable by the long wick, which is often much longer than the candle itself and even at least twice as long. The colour of the candle, blue or red, can also vary. Here is how to interpret this type of Japanese candlestick.

First of all, the Hammer is considered an uptrend signal when it is observed in the context of a short-term downtrend and thus means that the asset will resume its uptrend. However, it is preferable to use this type of signal in the context of a structural zone.

Hammer candlesticks can be used in different trading strategies such as Scalping, Day Trading or Swing Trading. They are suitable for traders of different levels and can be used with all time units.


Japanese candlesticks Hanging :

The Japanese candlestick known as Hangman is another form of the Japanese Hammer candlestick. However, there is one major difference as this one is in an uptrend. Here is how you can interpret these signals.

The hanging candlestick is most often a sign that an uptrend is coming to an end. It is therefore used to anticipate a reversal of the downtrend.

Like the previous candlesticks, the Japanese hanging candlestick can be used with different strategies like Scalping, Day Trading or Swing Trading. It is suitable for all types of traders regardless of their experience and can be used with all time units.


Japanese candlesticks Inverted hammer:

Finally, the Japanese candlesticks known as "reverse hammer" are the last figures that we will explain in more detail in this article. As their name indicates, these candlesticks are in fact graphically and visually the opposite of the hammer candlesticks. The wick of the hammer is therefore above the body of the candle and not below it. Here is how to interpret them.

The reverse hammer signal is actually the same as the classic hammer signal and indicates a strong possibility of an uptrend here.

This Japanese candlestick can be used for Scalping, Day Trading or Swing Trading strategies and will suit all levels of experience. It can also be used with the different time units available.

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