A Japanese candlestick is a technical tool used by traders to pack price information into a single candle. They are considered an extremely useful tool, since the traders are able to easily see and analyse a large amount of data.

Origins of the Japanese candlesticks

Japanese candlesticks go back to as far as the 18th century. A Japanese trader Munehisa Homma traded rice in the local markets. He also served as an adviser to the Japanese government.

Homma started recording prices of rice on a daily basis, including opening price, high, low, and close. After some time, he started noticing patterns that were repetitive.

In 1755, he wrote a book titled:

The Fountain of Gold — The Three Monkey Record of Mone,
discussing the psychological aspects of the trading process.

He is believed to be the first person to realise that the behaviour of other participants in the market is a crucial element in trading. The emotions of traders play a huge part in their decisions. Homma realised this and took advantage while trading the rice.

Homma is also known for introducing the Sakata Rules

A set of five rules that outline patterns developed by local traders. It is exactly this set of rules that created the basis for the birth of Japanese candlesticks.

It was not until the end of the previous century that Steve Nison introduced the concept of Japanese candlesticks to the wider public in a classic investing book titled:

Japanese Candlestick Charting Techniques.

The essence of this concept is the psychology of a trader, which we will discuss in detail below.

The key elements of Japanese candlesticks

A Japanese candlestick consists of four main elements:

Opening price
Highest point reached by the asset’s price
Lowest point reached by the asset’s price
Closing price of the candle

structure of a Japanese candlestick

As seen in the photo above, the four elements create two parts of the candle: the wick (extending up and down) and the body that consists of the opening and closing prices. The wick can be long or short, depending on the price movements.

As such, candlesticks differ from the simple bar charts by displaying more information, but in such a way that they are still easy to read.

narrow- and wide-spread candlestick

Traders usually use either green (bullish) or red (bearish) colour to paint the candlestick, although some also use white (bullish) and black (bearish) as well.

green (bullish) and red (bearish) colors

As seen in the photo above, the bullish candle is formed when the close is higher than the open, and the opposite is the case for the bearish candle. There is a wide range of different shapes, from those with long wicks to either side to those with almost no body.

The top of the upper wick shows the session’s high and vice versa. The longer the distance between the high and the low, the wider the price range of the given session is.

You can test how different Japanese candlestick patterns work by trading without risking your capital first, by opening a demo trading account.

What the Japanese candlesticks tell you

As noted earlier, the Japanese candlesticks are important as they display data to traders that reflect the state of the market. Based on the key elements, traders can better understand the prevailing trend in the market and which side has the upper hand.

Looking at the image above, we see the EUR/USD daily chart. At the right end of the chart we see a series of long and green candles. This type of candle is very strong as the body is long and the close is usually near the top of the candle. It means that the bulls are in control of the price action as they could facilitate a series of wins that brought them huge gains.

A clean uptrend, which is characterised by a series of higher highs and higher lows, sends a message that there is a continuous interest from the side of buyers to push the price higher. On the other hand, the long and red candles are a sign of strong selling pressure.

It is exactly the relationship between individual candlesticks that creates patterns that help traders predict future price changes.

The most popular candlestick patterns

There are two major groups of candlestick patterns: bullish vs bearish, and then there are reversal, transitional and continuation patterns. Patterns also differ based on the number of candles, starting from a single-candle formation to those consisting of two and three candles.

Bullish patterns are those that predict that the price of an asset is likely to rise while the latter indicate the price is likely to fall. A reversal pattern signals a potential change in direction, while the continuation, as the name itself says, signals an extension of the current trend.

In the section below, we will discuss the five most powerful candlestick patterns used by traders to predict price movements and make profits. All of these patterns generate a sign or message only, and you should consult other technical indicators before you engage in a trade.

For this purpose, we have prepared detailed guides to explain the best candlestick patterns with examples and how to use them in your trading strategy. See a short summary for the most popular ones below or just follow the links here to the detailed guides gain deeper understanding:

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