In this lesson of the guide on CFDs trading we’ll focus on Japanese Candlesticks, a tool that allows an overview of the performance of a given market based on the colours and lengths associated with up and down movements. It is an ancient method, which dates back more than 500 years, born in Japan. To date, it is the most used graphic base for the analysis of financial markets.
Advantages of Japanese candlesticks
Charting market trends through the use of Japanese candlesticks has several advantages, even for beginners. In fact, thanks to them, one is able to have an immediate and overall view of market trends, since visually the imbalance between purchases and sales is immediately evident, for each single trading session. In regards to market imbalances, we recommend you read the lesson on gaps and lap.
How to interpret Japanese candlesticks?
From the candlesticks it is possible to summarize the opening, closing, maximum, and minimum phases of a given stock in any given period of time. In fact, each of them is formed by:
- Body: starting from the opening price and ending at the closing price, it can be green/white for the ups and red/black for the downs
- Tail: puts the maximum and minimum of the session in relation with the body of the candle (we will explain this further in the following paragraph)
Here is an example of Japanese candlestick.
As can be seen from the graphic, Japanese candlesticks are very simple to read. The next step is to interpret data and variations in detail. In the next paragraph we will list the most common candlesticks that can lead to potentially irrefutable market situations.
Analysis of Japanese candlesticks
Each Japanese candlestick can present itself in different ways, with small variations that allow us to derive various types of analysis from them.
Long White Body: found in highly bullish situations. The market we observe in the presence of this particular shape of candle, moves practically in only one direction, upwards. In cases where there is so much rise that the session closes with its maximum, there are no shadows and we are talking about “marubozu”. This is a strong imbalance in favour of buys, which promises a potentially bullish scenario for the next trading session (for example, the day after, unless there are factors that influence this movement, such as political statements, important events , denials, etc.).
Long Black Body: a condition perfectly opposite to that of the white body; a bearish scenario and a probable continuation of the same trend in the following sessions, starting from the one immediately after.
Spinning Top: these candles are in a stable market, with no particular clues to identify market trends and imbalances between buys and sells. As for forecasts, the green/white candle could lead to up swings, the black/red to downward swings.
Long Upper Shadow Candlestick: these shadow lines above imply a bear market, but only under one condition, which means that they must position themselves after a fairly strong uptrend.
In this case, the shadow tells us that although the buyers tried to obtain further gains, they had to give in to the return of the sellers, who “rejected” the quotations. In doing so, a pronounced upper shadow has been created. This is an important candle because an area of resistance can be identified near the maximums. In the bargaining process, it represents a downward trend signal for the next session.
Long Lower Shadow Candlestick: this is a situation diametrically opposite to that of the Upper Shadow Lines. These shadow lines imply an upward market, but only on one condition, that is, that they must be situated after a fairly strong bearish trend. In this case, the shadow tells us that although the sellers have tried to obtain further reductions, they had to yield to the return of the buyers, who have “rejected” the quotations. By doing this, a pronounced lower shadow has been created. This is an important candle because a support area can be identified near the lows. In the bargaining path, it represents an upward signal for the next session.
Doji: a candle that has a perfect balance between buyers and sellers. However, it is not at all a moment of “inner peace”, but of a situation ready for change, a situation of uncertainty. The Doji represents a crossroads. With a view to forecasts, one can read a violation of the maximum on the upside and a violation of the minimum on the downside.
Go to lesson 9 on Double Top and Double Bottom