Japanese candles or Candlestick are a graphical representation of the financial market price in the form of candles. Trading Japanese candles are composed of a body and 2 wicks.
Candles represent price action over a set period of time. Furthermore, they can provide useful information, such as market sentiment or possible reversals in relevant markets by demonstrating price movement in a particular way.
Being aware of this is a good starting point to better understand and use candle charts during your trading.
If we compare the line charts with those of the Japanese candles, you will see differences instantly.
what are the Japanese candles
Source: EURUSD, Chart H4, MT5 Admiral Markets. Taken on January 14, 2020. Please note that past performance is not a reliable indicator of future results
The line chart is a very simple method to demonstrate price movement. Display information with a single line using a series of data points. This is the type of chart you might be used to seeing in different magazines and newspapers.
As for the Japanese candles, we know that it represents the price movement, but it does not consist of a single line, they show more information within each candle. Traders prefer to read the Japanese candlestick charts because they include much more information than a line chart and can be much more useful in making prudent trading decisions.
Japanese candlestick patterns show and predict price variations. This analysis can be used for both the Forex market, stocks, commodities or cryptocurrencies .
Japanese candles show us the following data:
the “what” (price movement) is more significant than the “why” (earnings, news, etc.)
all present and available information is reflected in the price.
Buyers and sellers move markets based on expectations and emotions like fear and greed.
markets tend to fluctuate.
the actual price may not reflect the value of the underlying asset.
As you can see, candles provide visual cues that make it easier to understand price action.
Thanks to Steve Nison, Japanese candlestick charts offer more information than traditional bar charts. It was Steve Nison who introduced Japanese candles to the western world. But the credit for the development of Japanese candles goes to a rice merchant known as Homma.
Candlestick charts provide a more detailed description of the price on the chart, with an almost three-dimensional effect. With this type of graph we can better distinguish graphic figures compared to other graphs.
Components of Japanese candles
Japanese candles have the following components:
Body: thickest part of the candle that indicates the variation between the opening and closing prices.
Wick or tail: upper and lower line of the body of the candle that represents the entire route of the price during a specific time frame, indicating the maximums and minimums.
Color: it will allow us to identify if the candle is bullish or bearish, that is, if the price has increased or decreased. This can be customized according to the trader’s preferences. In our examples we will use the blue color for bullish candles and the red color for bearish ones.
With the ability to be used in various temporalities (H1, D1, etc.), the Japanese candle trading chart provides us with four fundamental data on that chosen temporality:
After the closing of the previous candle, a new one begins to form, with the starting point being the closing level of the previous candle. There may be exceptions if there is a gap in the market.
It is the highest level of the body of the candle if it is bullish. In the event that it is bearish, it will be the lowest point of the body. From that level, under normal conditions, the next candle begins.
It is the highest level reached by the price in the time interval in question. The price fluctuates and peaks at the end of the wick. It is less visible when the closing price is at the upper end of the candle
It is the lowest level reached by the price in the time interval in question. The price fluctuates and marks a minimum at the end of the wick. It is less visible when the closing price is at the lower end of the candle
In the following image we see how to interpret the Japanese candles.
As you can see in the image:
Closing the price above the opening price produces a blue (bullish) candle.
If the closing price is lower than the opening price, a red (bearish) candle is created.
How to interpret the Japanese candles
The signal given by the candle represents either an uptrend signal or a downtrend signal. Japanese candles show the price movement in the market very well, with its size, as well as the distance between the maximum and minimum price.
By looking at the Japanese candles on a trading chart, traders can identify the strength of the trend.
Japanese candlestick charts allow for more analysis. the trader can more easily notice the market trend by observing:
The different patterns of Japanese candles.
The wick length of a Japanese candle shows the highest and lowest point reached by the price of the asset to be analyzed.
If we see long streaks on top of the blue (bullish) candles during a bullish trend, this may indicate that the market is running out of steam and that a new trend will soon follow.
If we look at long streaks at the bottom of red candles, in a downtrend, we can expect the trend to reverse.
The analysis of the length of the wick in relation to the candle is important because it can give an image of the signal strength.
It is important to know that the top of a candle is a resistance and the bottom is a support. The larger the candle, the more important are the supports and resistances drawn respectively by the top and bottom of the candle.
Below is an example where the candlestick trend reversal figures are blue.
Japanese candles chart
Japanese candles depending on the time frame
Japanese candles are used in different time frames. Technically, if we put the chart of the Japanese candles in a period of 30 minutes, each candle will form after 30 minutes of trading on the market. Similarly, if the chart is set to a 15-minute period, it will take 15 minutes for each candle to form.
Let’s deepen the analysis of candlesticks. Let’s take two charts of the EUR / USD pair, one in 30 minutes and the other in 5 minutes:
how Japanese candles work
Source: Demo Account – MetaTrader 5 Supreme Edition – EURUSD M5 and M30 comparison. Taken on January 14, 2020 – Please note that past performance is not a reliable indicator of future results.
As we just mentioned, the opening and closing time of a candle in the time unit of 30 minutes will be 30 minutes, showing the price action during this same period in a single candle.
Therefore, when we look at the 5-minute chart, we will have to wait for the formation of 6 Japanese candles to see the evolution of the price in the same period of time as the 30-minute candle.
How to measure the length of a Japanese candle in pips
Candles give us a measure of price behavior between your high and your low. The maximum of a candle acts as resistance, while the minimum as a support. The higher the candle, the stronger the support and resistance levels.
But how can we measure the length of a candle in pips ? Very simple, first press the cross icon located at the top of the MetaTrader.
After clicking once on the shortcut, a cross will appear on your trading chart, where the mouse icon is located.
To measure the size of the candle, follow these steps:
Stand on top or bottom of the candle in question
Click the left button of your mouse.
Hold down the left button.
Go to the bottom or top of the candle.
Read the information displayed on the right side of the cross icon.
japanese candle pips
It should be mentioned that:
The first information on the left represents the price where the cross icon is currently located.
The second shows us the number of candles.
The third indicates the number of points or pips, that is, how much the Japanese candle measures
Lastly, the price variation percentage appears.
Information on the number of pips should be read by adding a decimal point.
Example of euro dollar – EURUSD: if you read the number 49, it is actually 4.9 pips.
An automatic reading of the top and bottom of the Japanese candle is also possible.
If you place the mouse cursor over the Japanese candle that you want to measure, all the necessary information will appear in the bottom right of the MT5 trading platform:
The date of the candle in question
O: Opening price of the candle
H: Maximum price reached
L: Minimum price reached
C: Closing price of the candle
You just need to measure the candle in pips taking the highest price and the lowest price:
H (Maximum price reached) – L (Minimum price reached)
how to measure japanese candles
Source: Demo Account – MetaTrader 5 Supreme Edition – EURUSD – Daily chart – Data range: November 08, 2018 to January 14, 2020. Taken on January 14, 2020 – Please note that past performance is not a Reliable indicator of future results.
H = 1.11467
L = 1.11123
The candle size is then H – L = 1.11467 – 1.11123 = 0.00344, that is, 34.4 pips
Before continuing, if you want to learn more about trading concepts and hone your knowledge, you can attend our free online trading course:
The 8 most important Japanese candle patterns
Next, we will explain the most relevant Japanese candle patterns and their usefulness in technical analysis.
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Of course, there are many more Forex Japanese candlestick patterns.