If you are a technical analysis trader, you certainly understand what Japanese candlesticks are. Because this is a tool to help investors grasp price movements in the market and the psychology of traders. In this article, Learn Forex Trading will help you understand what Japanese candlesticks are, the meaning of Japanese candlesticks, and the most popular Japanese candlestick pattern today
History of Japanese candlestick pattern
Let’s learn about the history of the Japanese candlestick pattern through the content below.
The game is for information
On candlestick patterns originated from a Japanese rice trader named Munehisa Homma.
Munehisa Homma was born in 1724 in the port city of Sakata, Honshu Island, Japan into a wealthy family that owned many large rice plantations.
After taking over the “family business”, he went to Osaka to become a rice speculator because Osaka was then the largest rice trading market in Japan. Rice is not just a commodity but can be exchanged for household items or other food goods. Rice is even “sold” before harvest through “rice selling documents”. These documents were exchanged and bought and sold widely and simply like we buy and sell shares of companies now.
Munehisa Homma believes that to win this game, information is the decisive factor, whoever gets the information first will be the winner. Munehisa Homma employed hundreds of people spread across the largest rice-growing areas to create the largest rice information network in Japan at that time…
Munehisa Homma invented something called a “candle graph” (now (what we call the Japanese candlestick chart) to show price fluctuations in the market for many years in a row. He draws them, studies them, and compares them with the effects of factors such as weather fluctuations, economic situation, state tax policies, etc. to find the rules of price movement.
Forms a Japanese candlestick pattern
After many years of research, the famous speculation that went down in history was called “three days to buy, one day to sell”.
For 3 consecutive days, Munehisa Homma only bought but did not sell for 3 consecutive days, he received a lot of curiosity and even ridicule. During those 3 days, there was only good information about the crop. On the fourth day, information about crop failures continued to pour in from everywhere, prices skyrocketed without any rice or documents to buy, and everything had to be bought from Homma.
In just 4 days, Munehisa Homma not only became the richest man in Japan but also controlled the entire Japanese rice market at that time.
After that, Munehisa Homma went to Tokyo to work as a financial advisor to the King and won 100 consecutive speculation deals! From then on he was dubbed the “Lord of the Market”.
200 years later, Japanese candlestick patterns and charts were introduced to the Western world by Steve Nison, in his book titled Japanese candlestick charting techniques.
See more: Gold prices worldwide: Things should know
Characteristics of Japanese candlestick pattern
Talking about Japanese candles, it is best to use an image:
- OPEN: Opening price
- CLOSE: Closing price
- LOW: Lowest price
- HIGH: Highest price
Japanese candlesticks can be used for any timeframe, whether it is one day, one hour, or 30 minutes – whatever timeframe you want! They are used to describe price action within that time frame.
If you open the D1 (Daily) chart, 1 candle represents price action in 1 day – 24 hours.
If you open an H4 chart, 1 candle represents price action every 4 hours. To know when the H4 candle starts, you need to know the opening and closing time of the Forex market, accordingly, every 4 hours from when the market opens will be an H4 candle.
The opening and closing prices are determined based on the color of the Japanese candlestick pattern
- The bullish candle (green) has an opening price LOWER than the closing price.
- The bearish candle (red) has an opening price HIGHER than the closing price.
- The part between the opening and closing prices is called the body.
- The straight lines above and below the candle body are called candle shadows, the upper candle shadow is the upper shadow, and the lower candle shadow is the lower shadow.
- The highest price (high) is the price at the upper shadow of the candle.
- The lowest price (low) is the price at the lower shadow of the candle.
Basic Japanese candlestick patterns
What basic Japanese candlestick patterns are there currently? There are many, let’s find out what they are.
Spinning Top candlestick pattern – Spinning top
Identifying Japanese candlestick pattern Spinning Top:
- Small candle body.
- The upper and lower candle shadows are long.
- Meaning of Japanese candlestick pattern Spinning Top:
- When the market opens, both buyers and sellers try to gain control (this leads to long upper and lower shadows).
- At the end of the session, neither side had the upper hand (small candle body)
In summary, the Spinning Top candlestick shows significant fluctuations in the market, and pressure to compete for control between buyers and sellers but there is no clear winner.
Marubozu candlestick pattern
Identifying the Japanese candlestick pattern Marubozu:
- Large candle body
- There are no candles
Meaning of Japanese candlestick pattern Marubozu:
- The rising Marubozu candle shows that buyers controlled the entire trading session from beginning to end.
- The falling Marubozu candlestick shows that the sellers controlled the entire trading session from beginning to end.
Japanese candlestick pattern Hammer và Inverted Hammer
In this candlestick pattern, it is divided into two different patterns. These are Hammer and Inverted Hammer candlesticks.
Hammer candlestick pattern (Hammer candlestick)
Hammer candle identification:
- Small candle body
- The upper candle shadow is very small or absent
- The lower candle shadow is long
Meaning of Hammer candle:
- The Hammer candlestick shows that initially, the sellers had the upper hand when they dropped sharply compared to the opening point, but later the buyers regained the upper hand by pushing the price up, creating a long shadow under the candle.
- If the Hammer candlestick appears in a downtrend, it is most likely a forecast for a bullish reversal.
Inverted Hammer candlestick pattern (Inverted Hammer candlestick)
As the name suggests, the Inverted Hammer candlestick is similar to the Hammer candlestick but rotated in reverse.
Identifying the Inverted Hammer candlestick pattern:
- Small candle body
- The lower candle shadow is very small or absent
- The upper candle shadow is long
Meaning of the Inverted Hammer candlestick pattern:
- The Inverted Hammer candlestick shows that initially the buyers dominated by pushing the price higher than the opening price, but later the sellers regained the advantage by pushing the price down, forming a long upper candle shadow.
- If the Inverted Hammer candlestick appears in an uptrend, it is most likely a forecast for a bearish reversal.
Doji candlestick pattern
Identifying Doji candles:
Doji is a candle whose opening price is the same or very close to the closing price.
Meaning of Doji candle:
Doji candles show a balance between buyers and sellers. Neither the bulls nor the bears were able to gain control and the result was essentially a draw.
However, Doji has 2 variations with different meanings:
Dragonfly Doji
Identification of Dragonfly Doji:
Unlike a regular Doji, the opening and closing prices are near the middle of the candle. Dragonfly Doji’s opening and closing prices are both the highest price of the session.
Meaning of Dragonfly Doji:
Dragonfly Doji shows buyers rejecting lower prices as buying pressure increases until the end of the trading session. Thereby, it shows that the buyers have a greater advantage going into the next trading session.
Dragonfly Doji
Gravestone Doji
Identifying Gravestone Doji:
Gravestone Doji’s opening and closing prices are both the lowest price of the session.
Meaning of Gravestone Doji:
Gravestone Doji shows sellers rejecting higher prices as selling pressure increases until the end of the trading session. This shows that the sellers have a greater advantage going into the next trading session.
Gravestone Doji
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What limitations does the Japanese candlestick pattern have?
When using this candlestick pattern, there are a few disadvantages as follows:
Japanese candlestick patterns cannot predict trends
As you know, a Japanese candlestick pattern only shows the closing price, opening price, highest price, and lowest price in a certain period.
Therefore, the Japanese candlestick patterns only tell you what is happening in the present.
The Japanese candlestick pattern alone will not show the trend and will not help you determine the current trend of the market.
For example, the current candlestick pattern is a Doji, which only means that the buyers and sellers are in a temporary truce. You cannot look at the Doji candlestick pattern to know whether the buyers or sellers will win.
The Japanese candlestick pattern itself is a TRADING TOOL. Not a complete TRADING SYSTEM.
You need more than just looking at Japanese candlestick patterns to be able to identify trends and trade!
Japanese candlestick pattern does not clearly show the price movement within it
Please observe the image below:
On the left is a D1 candlestick pattern, on the right are 2 price actions on H1. Do you know what price action is inside that D1 candle?
The price action within the candle itself is MUCH MORE IMPORTANT than the candle itself because it tells you more about the market.
With the above two disadvantages, it is clear that this candlestick pattern cannot create a complete trading system on its own. But the Japanese candlestick pattern is an EXTREMELY IMPORTANT tool. If you know how to use them properly in combination with other technical tools.
Conclude
This article taught you about the origin of Japanese candlestick patterns and their characteristics.
The Japanese candlestick patterns introduced in this article are all typical and are used a lot in Forex trading and gold chart.
In addition, it has special candlestick patterns such as doji or hammer. Learn Forex Trading will have separate articles to specifically guide how to use them effectively in trading.
