Japanese candlestick trading guide

Japanese candlestick trading:

## Japanese Candlesticks: What They Are and How to Trade

A Japanese candlestick is a type of price chart that shows the opening, closing, high, and low price points for each given period. It was invented by Japanese rice merchants centuries ago and popularized among Western traders by a broker named Steve Nison in the 1990s. Today, Japanese candlestick charts are the most popular way to quickly analyze price action, especially among technical traders.

### Key Elements of Japanese Candlesticks

1. Color: The color of a candlestick indicates the direction of movement within the period. Green candlesticks represent upward movement, while red ones indicate a move down. Occasionally, white (up) and black (down) are used instead.

2. Body: The body of a candlestick displays the market's opening and closing levels. On a green candle, the top of the body is the close, and the bottom is the open. For red candles, it's the opposite.

3. Wick (Shadow): The wick shows the high/low range within the period. The top of the wick represents the highest point reached during that time, while the bottom represents the lowest.

### Interpreting Candlestick Patterns

- Long Body: A long body on a green candlestick suggests significant bullish price action occurred during that period.

- High Volatility: If the wick is taller than a long body, it indicates high volatility within the period. Bulls and bears may have been vying for control.

- Short Red Body with High Upper Wick: This pattern suggests bulls pushed prices higher but were beaten back by bears before close.

#### Reading Japanese Candlestick Patterns

Technical traders look for recognizable shapes in candlestick patterns that often lead to continuations or reversals. Here are some common patterns:

1. Doji: Occurs when the opening and closing prices for a period are roughly (or exactly) the same. It signals indecision in the market.

2. Spinning Top: Similar to a Doji but with a small body. It suggests uncertainty or potential reversal.

3. Marubozu (Bullish/Bearish): A long body with no wick (shadow). Bullish Marubozu indicates strong buying pressure, while Bearish Marubozu signals strong selling pressure.

4. Hammer: A bullish reversal pattern with a small body and long lower wick.

5. Hanging Man: A bearish reversal pattern with similar characteristics to the Hammer but occurs after an uptrend.

6. Shooting Star: A bearish reversal pattern with a small body and long upper wick.

7. Engulfing Patterns:

- Bullish Engulfing: Two-candle pattern where the second candle completely engulfs the first.

- Bearish Engulfing: Similar to Bullish Engulfing but signals potential downside reversal.