Japanese Candlestick Patterns are the most popular concept to study in Forex trading. Japanese Candlestick is so named because the concept of candlesticks was introduced in Japan. In the seventeenth century, the Japanese started doing technical analysis and they used this concept to trade in rice. The credit for development of Candlestick concept goes to Homma, the legendary rice trader. He lived in Sakata, a town in Japan. In 1900, Charles Dow initiated the Candlestick concept. It is the development of his original ideas that has resulted in the Candlestick charting that the most professional Forex traders and investors use today.
Similarity of Japanese Candlestick with the Bar chart
Candlestick is similar to the bar charts and also do not tell anything more or different than the bar charts because both are based on the same data. The same data that is used in both the bar charts and the candlesticks are opening price, high price, low price and closing price. Similar to the bar charts, Japanese Candlestick can also be used for any time period and should be used with other technical indicators, you can find the information you need in our learn Forex school category.
Concept of the Japanese Candlestick
The guiding principles of the Candlestick concept are given below.
In this concept, “what” holds more importance than “why” because price action is more concentrated than Forex news .
Buyers and sellers act in market and their action is based on emotions and expectations.
Market always fluctuates and the currency that has opened at high may close at low.
Design of Candlestick
There are three parts of a Candlestick, Upper shadow, real body and the lower shadow. The figure below shows the three parts of the Candlestick.
The higher point of the upper shadow shows the high in a time frame and the lower point of the lower shadow shows the low in a time frame. The hollow or filled portion of the Japanese Candlestick is the real body. Height of this hollow or filled portion is the difference of the opening and closing price of any currency in any time frame. The white color of the real body shows that the closing price is more than the opening price of the currency and the trend is uptrend. On the other hand, if the color of the real body is black then it means that closing price is less than the opening price of the currency and the trend is down trend.
The top point of the upper shadow is the high price.
Open price of white candle is lower than the close price and open price of black candle is higher than the close price.
Close price of white candle is higher than the open price and close price of black candle is lower than the open price.
The bottom point of the lower shadow is the high price.
If open price and close price become equal then there is no real body. See the figure below for the examples of the white candle and black candle.
The same values of the opening and closing price do not show any real body because the difference between the opening and the closing price is zero. Doji is the name given to these types of candles. An example of Doji candle is shown below.
The Japanese Candlestick is the superior method used for charting prices in the Forex market. Maximum trades of those traders and investors close in profit who use Candlestick correctly.