Japanese candlesticks are one of the most important fundamentals of technical trading. Developing a good understanding about the candlesticks will go a long way towards trading success.
Candlesticks are used for understanding the market psychology. Candlesticks form charts which are used in technical analysis for taking trade decisions.
Different candlestick patterns have evolved over a period of time. These patterns give the trader a better understanding about the market. These are used to make trading decisions along with other fundamentals of technical analysis.
Japanese Candlestick Chart : The data points
To plot a Japanese Candlestick chart ,we need four main data points.
- Open Price
- High Price
- Low Price
- Closing price
This is also known as OHLC open, high, low and close. Looking at it, you will realize that to complete a candle, all these events must have already happened. This means, any decision that you take on a completed Candlestick is already lagging in nature.
Let’s see the candlestick in a bit more detail. There are three main components to the candlestick. The body, the top wick or top Shadow and the bottom wick or bottom shadow.
Japanese Candlestick Chart : The color of the candle
Depending on whether the open price is higher or lower than the closing price , the color of the Candlestick is decided.
If the open price is lower than the closing price. It indicates that the market has moved up for the given time frame and hence, the Candlestick is colored green and is bullish in nature.
Similarly, if the open price is higher than the closing price then it indicates that the market has moved down during this particular time frame and hence, the Candlestick is red and it is bearish in nature.
Japanese Candlestick Chart : The time frame
Time frame also has important when it comes to Candlestick. A daily Candlestick chart will have each candlestick representing one day. Open is the opening price for that particular day. High is the highest price the stock reached on that day, low is the lowest price for that day and close is the closing price for that day.
Japanese Candlestick Chart : The Body of the candle
Now, let’s understand what the body of the candle signifies. The bigger the body of the candle, higher is the significance of the candles. For example, a small green candle is bullish in nature a large green candle is also bullish in nature. However, the large green candle indicates a stronger bullish sentiment in the market.
Similarly, a bigger red candlestick indicates a larger bearish sentiment in the market.
Japanese Candlestick Chart : The Wicks
The wicks also have their own importance, a large top wick indicates that the market tried to move up. But it to face a lot of resistance and had to finally settle at a much lower price compared to the high point.
Similarly, a large bottom wick indicates the resistance on the downside. It means the market tried to move down but faced rejection and had to finally settle or close at a higher value.
To put it all together large Body candles with small wicks indicate a trending market, Small Body candles with small wicks indicate a non-trending market, Small Body candles with large wicks indicate choppy or indecisive market.
As traders, we are trying to use technical analysis for making trade decisions. Understanding the candlesticks is only the first step in that direction.
The Japanese candlestick chart consists of main body, top wick and bottom wick. Size of the candle and size of the wicks have their own importance and the trader must understand the importance of these features to trade the market well.