Japanese Candlesticks are one of the most widely used chart types. The charts show a lot of information, and do so in a highly visual way, making it easy for traders to see potential trading signals and perform analysis with greater speed. Here we’ll look at what Japanese Candlesticks are, how the “candles” are created and basic candlestick interpretation.
Japanese Candlestick Charts
Japanese Candlesticks are a type of chart which shows the high, low, open and close of an assets price, as well quickly showing whether the asset finished higher or lower over a specific period. Candlesticks can be used for all timeframes–from a 1 minute chart right up to weekly and yearly charts.
When information is presented in such a way, it makes it relatively easy–compared to other forms of charts–to perform analysis and spot trade signals.
Figure 1. Japanese Candlestick Chart – EUR/USD 5 Minute
Most of the time the candles will be specific color combinations such as green and red, blue and red, or white and black. The charts on Free Binary Options Charts use a green and red color scheme for the Japanese Candlesticks.
Japanese Candlestick Creation
Color is important in Japanese Candlesticks. A green bar (sometimes blue or white) indicates that the price closed higher than the open price of the bar. A red bar indicates that the price closed lower than the open price of the bar.
Figure 2. Japanese Candlestick Green and Red Candles – EUR/USD 5 Minute
Source: Free Binary Options Charts
To understand how this works, we’ll need to look at how each bar is constructed.
As indicated, each candle provides information on the open, close, high and low of an assets price. Each reflects the time period you have selected for your chart. For example, in the figure 1 and 2 a 5 minute chart was used, which means each candle shows the open, close, high and low price information for a 5 minute period. When 5 minutes has elapsed a new 5 minute candle starts. The same process occurs whether you use a 1 minute chart or a weekly chart.
The open and close are marked by the “fat” part of the candlestick. This is called the real body, and represents the difference between the open and close. If the close is higher than the open, the candle will be green; if the close is lower than open the bar will be red.
The open or close are not necessarily the high or low price points of the period though. The high and low prices for the period are marked by a “wick” or “upper shadow” and “lower shadow.” The high point of the upper shadow gives the highest price the asset went during that period, and the low point of the lower shadow gives the lowest price the asset went during that period. Figure 3 shows the basic construction.
Figure 3. Japanese Candlestick Construction
If there are no upper or lower shadow it means the open and close were also the high and low for that period.
Occasionally you will also see bars that are nearly all upper and/or lower shadow, with very little real body.
Figure 4. Japanese Candlestick Long Shadows – EUR/USD 1 Hour
Figure 4 shows several examples of candlesticks with long shadows (also called “tails”). Let’s focus on the one in the blue box. The upper shadow reflects the highest price hit in this one hour period, the lower shadow shows the lowest price hit during the hour, and the small red real body shows that the price closed marginally lower than it opened.
To see the exact prices of the open, close, high and low you can click on a candlestick on Free Binary Options Charts to see a pop-up which provides you with all the info. Figure 5 shows info for the same bar addressed in figure 4.
Figure 5. Japanese Candlestick Info Box
Source: Free Binary Options Charts
Due to the highly visual construction of candlesticks there are many candlestick patterns which traders use for analysis and to establish trade signals (read: A Powerful Candlestick Price Pattern). Such patterns are beyond the scope of this article, but there are general principles that those new to Japanese Candlestick charts should understand.
- A long real body indicates stronger pressure than a small real body. For example, a long green body represents stronger buying pressure than a small green body. A long red body represents stronger selling pressure than a small red body.
- Shadows can be used to determine what group of traders–buyers or sellers–was strongest at the close of a candle. While not always, it is quite possible that the strongest group at the close of the prior bar will be strongest heading into the next bar.
- A long lower shadow with very little upper shadow indicates sellers tried to push the price down, but ultimately the buyers succeeded in pushing the price back up and were strong at the close.
- A long upper shadow with very little lower shadow indicates buyers tried to push the price up, but ultimately the sellers succeeded in pushing the price back down and were strong at the close.
Japanese Candlestick charts are the preferred choice of many traders since the price moves are easy to see and trade signals can be seen spotted quite quickly. There are many Japanese Candlestick chart patterns to explore and methods which can be devised based on the visual nature of candlesticks. Play around with the free charts offered on http://www.freebinaryoptionscharts.com/ to get a feel for candlesticks and how to trade with them.