Japanese Candles Chart

What is Japanese candles?

Presenting the prices dynamics in a candlestick chart was invented by Japanese businessman, rice merchant Homma Munehisa in the 18th century. He studied the rice market for 15 years, many of the patterns of price changes and conclusions that he made are still relevant to all trading markets. Among the achievements of Munehisa is that he developed a way to reflect one element of the four prices at once in the form of «Japanese candlesticks».

The candles (fig. 1) can be black (colored, often red) and white (unpainted, often green) or have contrasting colors on the same chart. Color means dominant trend in the analyzed time period. Black or red are on lowering, white or green are on growth. The size of the candle shows how much the price of the traded pair has changed. The candle has two «shadows» (candlewicks) on the top and bottom. They show the maximum values of price changes in a certain trading period.

Japanese Candles Chart

Figure 1

Doji and Marubozu brothers

Doji (fig. 2) is one of the types of candlesticks and important for determining the price dynamics. It is a candlestick with a short body, but long shadows. In a perfect form a doji looks like a horizontal line. This means that the opening price is equal to the closing price. This may mean that the market situation has frozen in indecision and is preparing for a reversal.

Doji and Marubozu brothers

Figure 2

But a doji is considered to be formed even if it does not look like a line. If the height of the figure is 5 times less than the width, it is the doji. If such candle is dark, then the opening price is slightly higher than the closing price. On the contrary, if you notice that the candle is light, then the opening price was slightly below the closing price. Doji indicates the upcoming trend reversal, if it will take place at the top or bottom of one of the graphic figures that make up the candlesticks. Doji that confirms a certain trend usually turns into support and resistance lines.

Marubozu (fig. 3) is a candlestick with a long body and no shadows or almost with no shadows; they are antagonistic and also called the Marubozu brothers. This candlestick confirms the formed trend, up or down. Black (painted) Marubozu proves the dominance of sellers in the market, trading opened at the maximum and closed at the minimum. White (unpainted) Marubozu indicates the dominance of buyers who brought prices from the minimum at the opening of the market to the maximum at the close.

Marubozu is a candlestick with a long body

Figure 3

 

Shapes of candles

Hammer

Candle «Hammer» indicates a preparation for a trend reversal from the downtrend to the uptrend. The color of Hammer is not important. The shape of the body is important that has to be square or almost square, that is a short candle. The upper shadow is very short or may be absent, and the lower is about twice the length of the body. If the traders recognize Hammer on the chart, they expect a trend change: either the downtrend will go to a sideways trend, or go to an uptrend. However, the information that is reported by this figure must be confirmed by the following figure. If Hammer is rotated by 180 degrees on a downtrend, it means the same thing as a normal Hammer (fig. 4).

Candle «Hammer»

Figure 4

Hanged man

The figure of a «Hanged man» also refers to the reversal patterns. It is similar to a Hammer, has a short body and a long lower shadow. The pattern is formed on an uptrend and signals its possible end.

The color of the body is important, on short timeframe the signal is stronger if the candle is black (shaded). You also need to pay attention to the length of the candle — it should be twice or even three times longer than the body. A candle is considered to be the stronger the shorter is the upper shadow; the ideal «Hanged man» candlestick is without the upper shadow.

Stars

The stars represent the configurations of several candlesticks; this is a strong signal of trend reversal. A star almost certainly will indicate a trend change, if it is located at the top or bottom of a certain trend.

«Morning star» is a pattern that signals a trend reversal. The figure consists of three candles: a long painted candle, a long unpainted candle and a short candle at the bottom between them. There should be a gap between the candlesticks, the price gap. The figure will confirm an uptrend, if the price rises immediately after its appearance on the chart.

«Evening star» is an antagonist to the morning star. It consists of a shaded long candle, an unpainted long candle and a short candle between them at the top. There should be a gap between the candlesticks. The evening star shows a beginning of the downtrend.

 

Japanese candles analysis

In general, the analysis of candlesticks is reduced to finding patterns on the chart, it allows you to spend less time and effort to develop and implement a trading strategy.

Candlesticks have great potential, but there are also limitations. Thus, candlestick patterns are considered to be more effective on timeframes of an hour, although they are used on other intervals (fig. 5). Candlesticks are also suitable for analyzing movements on weekly and monthly charts.

Japanese candles analysis

Figure 5

Despite the fact that candlestick charts are called reversal charts, they do not always indicate a reversal trend. This may be the beginning of a new trend, different from the previous one, but not opposite to it. In particular, the market may go flat and from the flat, for example, return to the same trend.

 

Japanese candles in binary trading

Japanese candles are the main types of charts on binary options trading platforms. Almost all classic candlestick patterns are used in the binary options market. But traders begin to practice on the candlestick chart with simple strategies.

One of the most popular strategies is Double red. It is implemented on a five-minute timeframe. The trader assumes that two consecutive candlesticks of the same direction confirm the direction of the trend. For example, a «bearish» candlestick appears on the chart, followed by a bearish candlestick at a price below the previous low. Presumably, immediately after that the price will rise slightly, and then the downward trend will prevail. At the time of short-term growth is likely to take a put at a lower price. Call option is purchased in the opposite case, when two bullish candlesticks are formed together on the chart; the second one is higher than the first one.

Inside bar strategy is based on the «Inner candle» pattern. The inner is called a candlestick that does not go beyond the previous candle; limits are the shadows of the previous candle.

If the candle shows the trend direction, then you need to draw a horizontal line through the minimum or maximum of the first candlestick. Accordingly, if a trend is up, the line is held at the maximum, and after the breakdown of this line you can buy an option based on the expiration time before closing. On a downtrend the actions are performed in reverse order.

 

Japanese candles in Forex trading

Japanese candlesticks are widely used in Forex trading, where a lot of strategies were developed for them (fig. 6). In particular, among them is «Elephant and pug».

Japanese candlesticks are widely used in Forex trading

Figure 6

To implement this strategy, you need to have three candles on the chart: for example, a black doji, which shows a trend change; a white candle with a large body, which shows where the trend is moving; and a white candle with a smaller body. The closing price of the second, small candle should be greater than or equal to the maximum price of the previous candle. A buy trade is opened when the next candle is formed. The strategy for the sale works, starting with a white doji and two black candles – large and small.

The strategy of trading on the absorption is based on the classical figure of Japanese candlesticks «Mergence». This figure consists of two candlesticks; the first candle has a body smaller than the second. The candlesticks have different colors. The order of candlesticks in the figure shows a direction of the trend.

In this figure the second large candlestick absorbs the first one with a smaller body; it means on the chart that a large candlestick closes the smaller one. However, if a small candlestick has shadows, then a large candlestick may not cover them, if it does, then the signal to change the trend is considered to be stronger.

So, for example, on a downtrend, an absorption pattern is formed, and a white candle absorbed a black one. Next, you need to wait for confirmation is a doji with a shadow at the bottom or a repeat of the absorption in the same trend. A buy trade is opened on the next candle.

 

Japanese candles in cryptocurrency trading

Japanese candlesticks are the main chart on crypto-exchanges, but crypto-traders do not track patterns so closely, as the prices of cryptocurrencies change too quickly. If you trade cryptocurrencies, it is also difficult to predict the dynamics of prices for a week or a month, and Japanese candlesticks are best suited for it. However, if volatility is not too high, cryptocurrencies are traded on the same patterns as any other assets.

Japanese candlesticks are the main chart on crypto-exchanges

Figure 7

One of the easiest ways is trading the trend, which is used by the vast majority of traders. The main idea of the strategy is to identify a reversal candle configuration accurately and to bid for the purchase or sale in accordance with the identified trend.

Trading against the trend is more difficult. This is a short-term type of trading, when traders mark the figures that are most likely to confirm the trend, for example, stars and try to «catch» the favorable price of the asset on the rebound. But most often crypto traders trade against the trend without taking into account the analysis of Japanese candlesticks not to lose time.

 

Example of trading using Japanese candles

«Three candles» strategy

As part of a strategy, such as binary options, the trader is looking for a figure of Three candles, where the highs and lows of the average candlestick are, respectively, below the highs and lows of both candles on the sides.

This figure occurs more often when there is a price correction after the development of the trend in one direction, and then there appeared two identical candlesticks against this trend — this can be a correction.

In this case it is important to see two candlesticks and behind them – immediately the third, confirming the trend. At this moment you need to bet on an increase in quotes. In this case there should be three green candlesticks.

«Three candles» strategy

Figure 8

If the trend is moving in a downward direction, then three candles also work, but you need to bet on the down trend (fig. 9).

If the trend is moving in a downward direction, then three candles also work

Figure 9


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