Japanese Candlesticks: What they are and how to Interpret them in Technical Analysis

There are different types of charts in technical analysis, but the most used by traders are Japanese candlestick charts. Next, we explain simply what Japanese candlestick charts are, what information they provide, and how they are interpreted when making investment decisions.

The first thing you should know is that graphical analysis is a widely used technique in the world of trading and investments, but for a beginner, this may be an overwhelming task.

However, being able to identify trends and patterns in the behavior of an asset over time can be the difference in minimizing risk and obtaining the best return on investment.

Table of Contents

Learn about Japanese candlestick charts and their functions:

Learn about Japanese candlestick charts and their functions:

A Japanese candlestick chart shows how the price of an asset fluctuates between two extremes, that is, it reflects the opening, high, low, and closing point of an asset in a given period.

But it is also capable of showing trends, for example, if there is an upward or downward trend in the future behavior of an asset.

This tool has its origin in 18th century Japan when a merchant named Munehisa Homma managed to identify that the price of rice was influenced not only by supply and demand but also by the emotions of the merchants.

Homma developed a method to identify patterns and trends that were repeated in the fixing of the price of rice, being able to visualize data such as the opening, maximum, minimum, and closing price in a given period.

This technique brought him huge profits on the Dojima Rice Market, the first futures market in history, and is the theoretical basis for today’s candlestick charts.

How a Japanese candlestick chart is formed

A Japanese candlestick chart is made up of the opening, closing, and high and low prices of an asset over a period, often one day.

A Japanese candlestick is made up of the following parts:

Body: it is the thickest, colored part that indicates the variation between the opening and closing price of a given asset.
Wick or shadow: these are the lines that protrude from the top and bottom of a candle and represent the ups and downs in price on the day.
The color: represents the direction of the market movement. A green or white body indicates that the price is increasing and a red or black body indicates that the price is decreasing.

How to interpret a Japanese candlestick chart

On a Japanese candlestick chart, candlesticks form with the up and down price movements of an asset.

Over time these candlesticks form patterns that are used by traders to make trading and investment decisions in the stock market.

These patterns can be bullish, indicating that a particular asset may rise in price; bearish indicates that it can go down in price and a pattern called Doji, which indicates a change in trend.

The size of the candlestick body indicates the intensity of the buying or selling pressure on an asset. If the wicks of the candle are short, it indicates that the maximum or minimum price of the asset in a given period was close to the closing price.

The colors of the candles will indicate bullish or bearish patterns. If the candlestick is green or white, it indicates that the closing price of the asset is higher than the opening price and suggests a bullish pattern.

If the color of the candlestick is red or black, it indicates that the closing price of the asset is lower than the opening price and suggests a bearish pattern.

A possible change in trend can be identified with a Doji candle, in which the opening and closing prices are close to or the same and can anticipate the end of a bullish or bearish period.

Japanese candlesticks are generally a visual image of the behavior of an asset’s price over time and, together with the rest of the technical analysis tools plus fundamental analysis, they will help the investor to make the best investment decisions.