We talked briefly about Japanese candlesticks before, but there is a lot more to learn. Let’s look closer at them, and why they can be so informative and helpful. You see, before anime and sushi became worldwide sensations – the Japanese had created their own technical analysis system to examine rice. Yes, rice.
Steve Nison, much later, learned about this technique, and then became extremely passionate about it, to the point where he made it his life’s purpose to tell the world about it. He wrote books, and soon, the entire world knew about candlestick charting. By the 1990s, it was everywhere, and globally used.
Let’s talk about the actual makeup of a Japanese candlestick. Check out this picture:
Like we mentioned earlier, there are four aspects of a Japanese candlestick that affect it structure - the open, close, high, and low, of a certain time period. However, there are terms that you should know before learning and using candlestick charting.
If the close is above the open, a hollow candlestick is drawn – and it is usually white.
If the close is below the open, a filled candlestick is drawn – this is usually black.
This makes it easy to convey how price action was at the open, immediately.
The hollow/filled section of the candle is called the “body” of a candlestick, or “real body”.
The lines poking above and below the candle are called “shadows”, and indicate high/low ranges.
The top of the upper shadow is – you guessed it, the “high”, and the bottom of the lower shadow is the “low”.
Japanese Candlestick Anatomy in FOREX
Candlesticks have different bodies that can help inform the trader about price action, which is why they can be so helpful. So, let’s start with long and short bodies.
Based on what you know, what would a short or long body indicate? You might have guessed already. A long body indicates that there was strong buying or selling activity, and that bulls or bears were fighting to take control. A shorter body can often indicate that there was much less buying or selling activity.
Long white candlesticks mean a whole lot of buying pressure. This means that the price closed higher than the open, and the longer the candle, the higher that the close was! This means what you might have already concluded: that even if there were bears, buyers took control and helped take the price up to make a strong close.
Long black (filled) candlesticks means that there was a ton of selling pressure. There was an open, and sellers helped to take the price down, and there simply wasn’t enough buying pressure or demand to keep up. As a result, the close was weak, and bulls were defeated by bears.
Upper shadows help to illuminate the session’s high, and lower shadows help to describe the session’s low. Long shadows mean that trading occurred well past the open/close. Therefore, candlesticks with short shadows show that most of trading was concentrated around the open and close. Simple, right?
What about a candlestick with a long upper shadow, but THEN a short lower shadow? Well, let’s think about this. This would indicate that buyers had control, but then sellers regained control of the price.
A candlestick with a long lower shadow then a short upper shadow indicates that buyers came in and flexed their bids, and that buying pressure helped drive the price up towards the close.