Listen carefully, traders. We are about to enter one of the most important parts of the Forex price charting. In this chapter, I will discuss the most famous format of Forex charting that has gained immense popularity among the traders these days.
Japanese Candlesticks have become a fan favorite mostly because they are attractive to look at and makes chart analysis very easy and efficient. Unlike the line chart or bar chart, they display a lot of data and are also fairly easy to interpret. So immense is the popularity, that they have also been adopted as the industry standard.
Where did the Japanese Candlesticks originate from?
Okay, this answer might be a little too obvious. As the name suggests, the technique has its roots in the Japanese culture. Initially, most traders resorted to bar charts and other inefficient forms of charting until the Japanese candlesticks came to the arena.
The Japanese were ahead of the Western counterparts when it came to displaying their data on the statistical chart. While the statisticians in the West were using the bar charts, the people of Japan were using the innovative candlestick method to statistically analyze their rice markets. In fact, this technique was not new as it had roots even in the 18th century.
It was Steve Nison, often known as the father of modern candlesticks who discovered the Japanese candlesticks technique that rice traders used in Native Japan and brought the technique back to the West and documented it in his book “Japanese Candlestick Charting techniques” which released in 1991 after which the western culture officially started using them to predict the market.
A Dissection of the Japanese Candlesticks
You can think of the Japanese candlesticks as bar chart 2.0. The basic features are essentially the same. The Japanese candlesticks display the same four set of data but in a more attractive and easy to understand format.
Similar to the bar graphs, each candle in the chart displays high, low, open and close price but in a much more visually attractive way.
High Price – The highest point that the price reaches during the open position is denoted by the top of the candle.
Low Price – The bottom of the candle denotes the lowest point the price reached during the time the candle was open.
Open price – The exact price point at which the candle opened. For a bullish candle, this opening price will be at the bottom of the candle body whereas, for a bearish candle, it will be at the top.
Close Price – The price point at which the candle at which the candle closed. For a bearish candle, this point will be at the bottom of the candle body whereas, for a bullish candle, it will be at the top.
Candle Body – The thick part of the candle is known as the body of the candle. It denotes the difference between the opening and the closing price. In case the closing price is higher than the opening price, it will be a bullish candle. On the other hand, if the opening price is higher than the closing price, it will be a bearish candle. Two different colors can be chosen for the bullish and the bearish candle for easy interpretation. If the candle body is thick, it tells us that there was a lot of buying and selling pressure during the span that particular candle was open.
Candle Range – The distance between the high and the low of the candle is referred to as the range of the candle. When the candle range is large, we know that the market is highly volatile. The release of any major political or economic news can cause a large candle range.
Upper Candle Wick – The candle wick is a straight line starting at the top of the candle body and shows the distance between the candle high and the top of the candle body.
Lower Candle Wick – It is a straight line starting from the bottom of the candle and represents the distance between the candle low and the lower part of the candle body. Candle wicks are also known as tails or shadows of the candles.
While long upper wick is an indicator of a bearish rejection, long lower wick represent bullish rejection.
Candlesticks which have a long wick are commonly referred to as Rejection Candles or Pin Bars from the old charts. Check out the Trading Studio Ban Manipulation course to get a closer look at the Forex Trading strategies proposed by me.
An In-Depth Comparison
Take a quick look at the chart below. You can easily see that the bar chart and the Japanese candlesticks have the same fundamental characteristics but differ in the format and looks.
However, when you see the two charts side by side, you can clearly see the difference. While the basics are the same, Japanese candlesticks reveal more data and provide much more clarity than the bar chart.
The candlestick chart has become people’s favorite because it is more clear and easy to interpret.
You also have the option to change the color scheme of your Japanese candlestick chart with the charting software. This makes the chart more crisp, pleasing to the eyes and easy to understand.
In fact, a few traders like to switch the color scheme after very few days to ward off boredom and monotony. You can alter the aesthetics as much as you want, provided the chart remains interpretable.