Japanese Candlestick Structure

Japanese Candlestick Structure

Japanese Candlestick Structure
John Dou - 09/02/2020


In this article, Sharefounders broker will tell You how to use Japanese candlesticks — what they are, history, types, and combinations of graphical analysis.

How to analyze Japanese candlesticks.

Almost every modern trader or investor who relies on graphical market analysis uses Japanese candlesticks in their work. They have earned the trust of market participants due to their inherent informative and clear presentation of data on the course of trading.

Candlesticks are an advanced tool for predicting the behavior of price charts, as well as helping to reveal mood and market psychology.

How to understand Japanese candlesticks.

Japanese candlesticks are a convenient way to display price market movement instruments on the chart in the form of elongated rectangles with tails that resemble candles. Each candle corresponds to a certain time interval in which the quotes were moving. Analysis of candle combinations allows you to make market forecasts even without using mathematical technical indicators.

The main difference between a candlestick chart and a standard linear chart is that one element contains four indicators at once instead of one. And the visibility of candlesticks makes it possible to see repeated graphic patterns on the chart without a long study of the chart, which can be used to open positions. What contributes to the increase of information content of charts by an order of magnitude, which significantly simplifies the complex analysis of the market.

In addition, the structure of the candle helps to understand such an important aspect of trading as market psychology. Graphical analysis using Japanese candlesticks reveals the characteristic behavioral patterns of market participants, which in turn allows you to reliably predict the future reaction of the market to certain events. In technical analysis, candlesticks and their combinations help you find important support and resistance levels.

Sharefounders broker also emphasizes that sometimes the candle body is missing. This occurs when the period was opened and closed at the same price. These candles are called Doji. Also, it is often possible to see candles with no shadows. This means that the prices at the opening and closing of the period were its maximum and minimum.

Professional traders recommend that novice market players use Japanese candlesticks for analysis, rather than bars or a line chart since candles are much easier to perceive visually and easier to interpret the information received.

Important nuances of the analysis of Japanese candlesticks.

Like all other types of market analysis, candlestick charts have their own unique features, knowledge of which is necessary to save time and effort, and ultimately money.

Candlestick analysis shows itself best on the daily chart (D1). The degree of signal reliability decreases in proportion to the decrease in the time interval. A time frame below the hourly one (H1) is considered unreliable.

To determine the overall long — term trends, we use analysis of large time intervals-monthly (MN) and weekly (W1).

Reversal patterns do not always indicate specifically about the reversal of the market. Very often, after the formation of such a pattern, a correction of an established trend occurs or a flat movement is formed. Therefore, a reversal combination is more likely to indicate a change in the situation, rather than a reversal of the trend.

Sharefounders broker emphasizes that the first parameter to consider is the size of the candle. The longer the body of one candle relative to the other, the greater the pressure on the market of sellers or buyers. A large white body indicates that the market is bullish, which means that buyers were more active at the end of the period. If the candle is dark, sellers dominated the close.

If the candle bodies are short, it means that a pullback from the current trend is formed or a flat is planned. This happens when the forces of bulls and bears are approximately equal, and the market is undecided about the future direction of quotes.

Thus, the relative location of the candle is crucial.

Candle mood

To be able to more accurately determine the nature of the candle, lance Begs, a specialist in the «Price Action» method, proposed the concept of «candle mood». This approach has its advantages over conventional candle classification.

The mood of the candle is reflected not only by its color but also by the nature of the price movement. Each of the moods, in turn, is divided into three more gradations — low, medium, and high.

When the candle closes above the last high, this mood is bullish. In turn, if the period was closed below the previous minimum, the candle is assigned a bearish mood. Neutral is the mood of a candle closed in the range of the previous candle. In other words, the current candle after closing falls into one of the three categories relative to the previous one.

At the next stage, the mood gradation is determined. To do this, the candle closing area is detected, which will be low, medium or high. To identify the level of the current candle, it is divided into three zones. The intensity of the mood depends on the part of the range in which it was closed.

How they work Japanese candlesticks.

For Japanese traders, candle bodies are more important than their shadows. That is, the opening and closing prices of the period are in the first place, and the lows and highs are already secondary. Shadows are related to market noise, but this noise also deserves close attention.

The main types and combinations of Japanese candles.

Many types of Japanese candlesticks and numerous patterns, often consisting of 2-3 elements, are used for analysis. Sharefounders broker offers to consider the main types of candles.

  • Marubozu.
  • Dodges.
  • Doji-tombstone.
  • Doji is the dragonfly.
  • Gyroscope.
  • Hammer.
  • Inverted hammer.
  • Hanged.
  • Shooting star.

You should not take the candlestick pattern itself as a signal to open a trade. The patterns reflect only the mood of the market and its probable changes.

Like any type of market analysis, candlestick analysis has a number of advantages, but it also has some disadvantages.

Among the advantages are the following:

Japanese candlesticks, unlike any technical indicators, allow you to analyze the behavior of the price itself, and not the results of mathematical calculations. This is important because we know that the best market indicator is the price itself.

Candlestick analysis of financial charts is suitable for any market — currency, futures, commodity, stock, and others.

As a drawback, Sharefounders broker found only the complexity of development. Candle analysis is not a simple type of market analysis, and a trader will need many hours to study and apply it in practice. However, with proper persistence, the candlestick patterns will be stored in memory, and the work will actually take place in automatic mode.


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