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Japanese Candlestick – Overview, How It Works, and Patterns

lnhngn 17/11/2021 12:25 1,008 views

What is a Japanese Candlestick?

Japanese candlesticks are used to describe price action, or exchange rate movements, as well as describe the psychology of traders according to 4 pieces of information that appear in a trading session.

Why should you use Japanese candlestick?

When trading Bitcoin, ETH, or other cryptocurrencies, or even stocks, forex is essentially what you want to know: Is the price going up or down?

Japanese candles partly help traders answer the above question, because in the tens of thousands of Japanese candles displayed on the chart, there will be trees like lighthouses “lighting the way” for traders to know whether to Buy or Sell, or warn to exit before the storm hits.

What does a Japanese candlestick session mean?

If you look at the chart, you will see that Japanese candlesticks have symbols including: M15, H1, D1, W1, simply understood as the time period when the Japanese candle “record” records all market movements during the course of the event.

  • With candles marked “m”, it means that it will run for a certain number of minutes or every 15 minutes, 30 minutes, 45 minutes will switch to another 15-minute, 30-minute, 45-minute Japanese candle.
  • With a candle marked “H” like H1, H2, H4, it means that every 60 minutes running will form an H1 tree, running after 240 minutes will form an H4 tree.
  • With “D” candles, it means that every 24 hours, there will be 1 D.
  • Similar to 1 candle W will be a set of 5 candles D.

Basic structure of Japanese candlesticks

From the above Japanese candlestick trading session, each candle will provide traders with 4 main information, before switching to another candle to continue recording price data:

  • Closing price
  • Opening price
  • Highest price in session
  • Lowest price in session.

So a standard Japanese candle will have to have 3 parts including:

  • Upper candlestick: highest price in the session
  • Lower candlestick: the lowest price in the session
  • Body: the part displayed in 2 red and green colors, showing the price range from opening to closing, in a specific time period.

Meaning:

  • The opening price is SMALLER than the closing price >>> Green Candle >>> Increasing price
  • The opening price is BIGGER than the closing price >>> Red candle >>>> Decreasing price

From these two red and green colors will make the opening price, closing price, placing 2 different positions:

  • Green candle (bullish candle) The opening price is below, the closing price is above
  • Red candle (bearish candle) Opening price is above, closing price is below

With the body, no matter how much the opening price is set, it will be marked as the starting level of the candle. Similarly, what is the closing price of a session, will become the next milestone marked on the candle.

The price parts that are larger or smaller than the closing price, will be located in 2 parts, the upper and lower candlesticks.

As in the example below:

nen-Nhat-la-gi

Opening price: 1881.245

Closing price: 1903.456

So the body will be the entire price range running from 1881.245 to 1903.456.

However, there are times when the price runs up to 1912,785, which at the end will be considered the highest price of the session, which is the upper beard. Similarly, the beard below 1858.240 is the lowest part of the price run during the course of a session.

From this comes some interesting information as follows:

The longer the body of the candle (the closing price and the opening price are very far apart): the session is very active, 1 faction is really overwhelming, extremely strong.

The longer candlestick (upper or lower beard): shows that for every one faction pushing up, there is one side pushing down or vice versa, so the price cannot be fixed. If the closer to the end of the session, the closing price is closer to the opening price, which means that the two sides fight very “tense”, neither side wins.

The most typical Japanese candlestick

Standard candlestick

Structure: The body of the candle is in proportion to the beard of the candle

Personality: gentle, doesn’t like to fight

Meaning: does not provide much information, only shows the trader how the trend is going through the color of the candle. A green candle represents a bull market. A red candle represents a bearish market.

Marubozu

Structure: only the body has no beard

Relatives near and far: Marubozu candles

Meaning: 1 of the 2 factions is overwhelming, extremely strong

Signals: price continuation or reversal

Hammer

This is a candlestick pattern that shows that the sellers are very strong and deliberately pushed the price down, but was prevented by the buyers, so the candle retreated and pulled it up. Therefore, these candlestick patterns often appear at the end of a trend, which will give traders a strong reversal signal.

Structure: the lower beard is 2 or 3 times longer than the body of the candle

Relatives near and far: Hammer candle, Hanging Man candle

Meaning: Reversal, strong sellers try to push the price, but are temporarily stopped by buyers

Location: end of downtrend, end of uptrend

Inverted hammer

Similar to the lower long beard candlestick pattern, this upper long beard candle has the longer the beard, the stronger the reversal signal will be compared to the short beard forms.

Structure: the upper beard is 2 or 3 times longer than the body of the candle

Relatives near and far: Inverted Hammer candle, Shooting Star candle

Meaning: Reversal, strong buyers try to push the price, but are temporarily stopped by sellers

Location: end of downtrend, end of uptrend

Doji

In a doji pattern, the open and close prices are exactly equal (or almost exactly equal). So the body appears as a very thin line – typically less than 5% of the total range of the period.

Like spinning tops, this can tell you that the bulls and bears have cancelled each other out by the end of the session.

There are four main types of doji to watch out for:

  • Long-legged doji have a lengthy wick both above and below the body
  • Gravestone doji have a high wick above the body and nothing underneath
  • Dragonfly doji have a long wick beneath the body and little to no wick above it
  • Four-price doji have no wick at all

Engulfing

This candlestick pattern is favored by many traders, because it is a set of 2 candles. When the first one appears at the end of a trend with a “small candy” shape, it shows that the dominant side is really exhausted. While the second tree is both large and long, embracing in the form of “swallowing” kilometer 1, the trend reversal is likely to take place.

Structure: the 1st candle is very small, the 2nd candle is very large, covering the 1st candle, so it is called “submerged”

Relatives: Bullish Engulfing (sink rising) and Bearish Engulfing (sink down)

Occurrence position: end of a trend

Meaning: reverse

Tweezers

This is a set of candlesticks “couples go together” 1 is to go to the moon together (price increases), 2 is to walk together down the hole (price decreases)!

Structure: 2 candlesticks of equal size

Top of the tweezers: the upper shadow is equal

Tweezer bottom: the lower shadow is equal

Color: opposite

Relatives: Tweezer Tops, Tweezer Bottoms

Meaning: reverse

Occurrence position: end of a trend

Candlestick pattern of Evening star, Morning star

After a previous strong bullish or bearish momentum, with the appearance of the 2nd candle, a doji candle, showing the ambiguity of the two sides, there is no need to push the price up too high, or the price down too low. . Therefore, when the 3rd candle is formed with a color opposite to the color of candle 1, it shows that one of the two sides has completely overwhelmed the flag, causing a trend reversal to appear.

Structure: The first candle: following the previous trend.

2nd candle: doji candle (shows indecision)

3rd tree: candle color is opposite to candle 1

Meaning: Reversal

Where to appear: end of a trend

Candlestick 3 White Soldiers

One of the most powerful reversal patterns, when they appear, will see the buyers have overpowered, indicating that a trend reversal is about to occur.

Structure: 3 consecutive bullish candles, long body, short shadow

Meaning: The buyers are extremely aggressive, the trend reversal is about to appear.

Where to appear: end of downtrend

Candle 3 Black Crows

Similar to the 3 white soldiers, this is also a strong reversal pattern showing that the sellers have overwhelmed the buyers, a reversal signal is about to appear.

Structure: 3 consecutive bearish candles appear in an uptrend

Meaning: the bears are really strong, extremely aggressive

Where to appear: the end of an uptrend

Above, we have become acquainted with some basic types of Japanese candlesticks in trading, if you want to improve your trading skills, you need to clearly remember these basic candles, clear five basic candlestick chart rules. prior to.

The most popular software used to analyze Japanese candlestick charts is Tradingview software. Tradingview is a popular software, but you have to pay a fee if you want a full range of trading tools.

Summary

  • Japanese candlestick charts enable you to analyse price action at a glance
  • Technical traders might use them to spot upcoming trends, reversals and continuations
  • There are three main types of pattern: single, double and triple

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lnhngn

"Don't invest in what you don't know. Learn first then invest"