What is a Japanese Candlestick | Naqdi  

Japanese candlesticks are a technical analysis tool used to chart and analyze the price movements of securities. Developed by Japanese rice trader “Munehisa Homma”, this charting method visually represents price movements, recognizing the influence of traders’ sentiments along with supply and demand. Homma’s candlesticks, using color coding, highlight characteristics of price movements, enabling traders to identify short-term trends and patterns. Homma’s candlestick method, which dominated rice markets, became a cornerstone of Japanese technical analysis when the stock market emerged in the 1870s. Later, American analyst Steve Nison introduced the technique to Western traders with his book “Japanese Candlestick Charting Technique,” cementing its place as a popular technical indicator. 

Japanese Candlestick Trading  

How to Trade using Japanese Candlesticks: 

– Open a Naqdi trading account to get advanced charts across thousands of markets. 

– Identify opportunities using your favorite candlestick patterns. 

– Open your position and execute your trades using a robust risk management strategy. 

Or you can hone your skills risk-free with a Naqdi demo account. 

How a Japanese Candlestick Works 

Japanese candlesticks provide a more detailed view of price action than traditional bar charts, visually representing the supply and demand dynamics at play during each trading period.  

Each candlestick consists of a body representing the range between the opening and closing prices, and upper and lower shadows, indicating the highs and lows of that period. A white (or usually green) body indicates a bullish close (closing price is higher than opening), while a filled/black (or usually red) body indicates a bearish close (close price is lower than opening). Modern trading platforms offer customizable color schemes for candlesticks, allowing traders to personalize their charts. 

What are Japanese candlestick patterns?  

Japanese candlestick patterns are used by traders to analyze price action. Some examples of candlestick patterns include: 

Doji: This pattern characterized by the open and close prices being identical or nearly so. Shadow lengths on a Doji can vary. 

Gravestone Doji: This candlestick pattern is characterized by its resemblance to a gravestone. This occurs when the open and close prices match the period’s low. 

Dragonfly Doji: This pattern occurs when the opening and closing prices of a security coincide at the period’s high. It is characterized by a long lower shadow, indicating a potential uptrend reversal. 

Bearish Engulfing: This pattern indicates a shift in market control to the bears. This pattern is characterized by a larger candlestick body that completely encircles the previous candlestick’s body. As a “down” candlestick (closing price is lower than opening price), its appearance indicates a bearish reversal. 

Bullish Engulfing: This pattern often signals the end of a downtrend, and consists of a smaller bearish candlestick completely surrounded by a larger bullish candlestick. 

Hammer: This candlestick pattern features a long lower shadow and a small or non-existent upper shadow. It often signals a potential reversal in the market, either bullish or bearish. 

Basic Candlestick Patterns 

Candlestick patterns, formed by price fluctuations (up and down), are used by traders for analysis. These patterns are classified as bullish (indicating potential price increases) or bearish (indicating potential price decreases). It is important to remember that these patterns represent tendencies, not certainties. 

Bearish Engulfing Pattern 

This pattern occurs in an uptrend and indicates that sellers are overpowering buyers. This pattern is characterized by a long red (or black) real body completely enveloping a small green (or white) real body, indicating a potential price decrease and that sellers are in control. 

Bullish Engulfing Pattern 

This pattern occurs when buyers dominate sellers and is visually represented by a long green (white) real body completely engulfing a small red (black) real body. This indicates bullish momentum and a potential price appreciation. 

Bearing Evening Star 

This is a topping pattern. It forms when the third candle opens below the small real body (red or black/white or green) of the second candle and closes significantly into the real body of the first candle. This pattern indicates a decline in buyer strength and an increase in seller control and often portends further price declines. The Morning Star is the bullish counterpart to the Evening Star. 

Bearish Harami Pattern 

This pattern consists of a small black or red real body contained entirely within the previous day’s larger white or green real body. Although not a decisive signal, it does indicate buyer hesitation. Further weakness is confirmed with a subsequent bearish candle. 

Bullish Harami Pattern 

This pattern is the opposite of the Bearish Harami pattern and occurs during a downtrend. A small green or white real body appears within the previous day’s larger red or black real body, indicating a pause in the trend. The next day may indicate another upside possibility. 

Bearish Harami cross Pattern 

This pattern occurs in uptrends and consists of a bullish candle followed by a doji candle (opening and closing prices are almost identical) that falls within the body of the previous candle. Its implications mirror those of the bearish Harami. 

Bullish Harami cross Pattern 

This pattern occurs in downtrends and consists of a bearish candle followed by a doji candle within the body of the previous candle, and its implications consistent with the bullish Harami. 

Rising Three Methods (Bullish)  

This pattern begins with a “long white day” (a strong bullish candle). Subsequent trading days (two to four) show small-bodied candles that trend lower but remain within the high and low range of the initial long white day. The pattern ends with another long white day that closes above the high of the first long white day, indicating renewed upward momentum. One variant, the “bullish mat hold,” occurs when the second day gaps slightly higher than the initial long white day, but the remaining pattern structure is identical. 

Falling Three Methods (Bearish)  

This pattern mirrors the bullish version. It starts with a “strong down day” (a long black/red candle). Days (2 to 4) consist of small-bodied candles that make some upward progress but remain confined within the range of the first large down day. Day 5 is another large downward move, closing below the low of the first down day, confirming the dominance of sellers and possible further price declines. 

Candlestick vs. Bar Charts 

Candlestick and bar charts, while displaying identical price data, offer different visual interpretations.  Candlestick shadows (or wicks) represent the day’s high and low, with their length indicating the range. A short upper shadow on a down candle suggests the open was near the high, while the same on an up candle implies the close was near the high.  The “real body” (the thicker part of the candlestick) reflects the open-to-close range and can be long or short, bullish (white/green) or bearish (black/red).  While both chart types convey the same information, candlesticks’ color-coding and thicker bodies offer some traders a more intuitive view of the open-close relationship.  As illustrated above, the same exchange-traded fund (ETF) data is presented in both bar (top) and candlestick (bottom) formats, with some traders preferring the body thickness of candlesticks and others the cleaner lines of bar charts. 

Bar Charts	Candlestick Charts	Feature
Presents the same price data but with a different visual emphasis.	Offers a more intuitive view of price action with color-coded bodies and wicks.	Visual Representation
Similar to candlesticks, wicks indicate the high and low for the period.	Show the day’s high and low prices. The length indicates the trading range.	Wicks (Shadows)
Not explicitly shown as a distinct body. The opening and closing prices are indicated by small ticks on the side of the bar.	Represents the range between the opening and closing prices. Can be long or short, bullish (white/green) or bearish (black/red).	Body (Real Body)
Typically uses only black and white, or a single color, making it less visually intuitive for some traders.	Color-coded bodies (typically white/green for bullish, black/red for bearish) provide a quick visual cue of the open-to-close relationship.	Color Coding
Requires a closer look at the ticks to determine the open and close relationship.	The body’s color and position clearly show whether the close was higher or lower than the open.	Open/Close Relationship
Similar to candlesticks, bar charts show the high and low for the period.	Both chart types convey the same high-low range information.	Trading Range
Others prefer the cleaner lines of bar charts.	Some traders find the thicker bodies and color coding of candlesticks more intuitive.	User Preference

What Candlestick Pattern Is Most Accurate?  

While candlestick patterns provide insights into traders’ sentiment during trading periods, there is no single “most accurate” pattern. 

They should all be interpreted as potential indicators of bullish or bearish sentiment among traders, not definitive predictions.  

Traders often develop their own preferences and strategies based on specific patterns they find reliable in their own experience. 

What Is the 3 Candlestick Rule? 

The “Three Candlestick Rule” suggests that three consecutive candlesticks closing progressively higher or lower can signal a potential trend reversal.  

Traders Usually use this pattern as confirmation of an impending reversal. 

Notable examples include: 

• The bullish Three White Soldiers pattern. 

• The bearish Three Black Crows pattern. 

How Do You Interpret Candlesticks?  

Candlestick interpretation involves analyzing the relationship between the shadows and the body (wicks). The wicks represent the low and high prices for the period, while the top and bottom of the body indicate the opening and closing prices respectively. 

In conclusion, Japanese candlesticks, in their various forms and patterns, provide valuable insights into traders’ sentiment and market dynamics. By understanding these patterns, traders can make more informed trading decisions. However, it is important to remember that Japanese candlesticks are just one tool in the technical analysis toolkit and should be used in conjunction with other indicators and appropriate risk management strategies. Whether you are a beginner or an experienced trader, mastering the art of interpreting Japanese candlesticks can greatly enhance your ability to navigate the world of financial markets.