How to read Japanese candlestick charts
Japanese candlesticks are a way of presenting the price action over a set period of time. They provide useful information, such as the market sentiment or possible reversals in the markets, by showing the price movement in a specific way.
A Japanese candlestick chart shows you more information
When you trade something, whether it is forex, stocks or commodities, you will use price charts to see the price movement in the markets.
Consider the following two charts:
The line chart is a very simple way of showing the price movement. It displays the information with a simple line using a series of data points. It is the type of chart that you may be used to seeing in magazines and newspapers that shows the price movement of stocks and shares.
The Japanese candlestick chart shows the same price movement, however it is made up of individual candlesticks. Traders prefer to read candlestick charts because they include more information than a line chart and can be more useful for making trading decisions.
Japanese candlesticks represent a set period of time
If a Japanese candlestick chart is set to a 30 minute time period, then each individual candle will form over thirty minutes. Likewise, if the chart is set to a 15 minute time period, then each candle will take fifteen minutes to form.
Consider the following charts:
Each chart shows the price action for the EUR/USD. The two candles in the green shaded area in the left chart are two 30 minute candles. This represents the exact same period as the twelve shaded candles on the 5 minute chart to the right.
The two charts are showing the price action of the same asset, only the chart to the left is showing the price action over a much longer period than the chart to the right.
This is because the chart to the left is a 30 minute chart, meaning that each candle took thirty minutes to form, and the chart to the right is a 5 minute chart, meaning that each candlestick took five minutes to form. The 30 minute chart therefore shows a much broader time scale of price action than the 5 minute chart.
Each candle shows the open, close, high and low price
Take a look at the following image:
The wide part of the candlestick is called the body. It represents the open and close of the period. This means that if the chart is a 1 hour chart, then each candlestick body will show the opening price for that 1 hour period and the closing price for that 1 hour period. The wicks at the top and the bottom of the candlestick show the highest and lowest price reached during that 1 hour period. A chart that displays the open, high, low and close price for a given period is referred to as a OHLC chart.
The different colours of the body tell you if the candlestick is bullish (rising) or bearish (falling). At tradimo, we have set our candlesticks to orange for bearish candles and blue for bullish candles. It does not matter what colour your candlesticks are; they can be set to any colour in your trading software.
If the candlestick is bullish, then the opening price is always at the bottom and the closing price is always at the top. If the candlestick is bearish, then the opening price is always at the top and the closing price is always at the bottom.
The different colours simply provide a means for you to instantly tell if they are bullish or bearish.
A closer look at a bearish Japanese candlestick
The candlestick in this illustration is a period of 1 day, which means that the candle took an entire day to form. The currency pair is the EUR/USD.
From the candle you can identify the following information:
- The candle is bearish because of its orange colour. This means that over the course of a single day the price of the EUR/USD dropped. There were more sellers than buyers throughout the day; the price was lower at the close of the day than when it opened.
- The price at the beginning of the day opened at 1.38278.
- The price at the end of the day closed at 1.34497.
- Throughout the day, the highest price that the buyers pushed the EUR/USD to was 1.38600.
- Throughout the day, the lowest price that the sellers pushed the EUR/USD to was 1.34125.
This, however, only shows the OHLC for that day. If you wanted to see the price movement in more detail, you would go to a lower time frame.
Using the example above, to find out more specifically what happened during the course of that day – that day being the single candlestick shown – you could go to a 1 hour time frame chart. This chart would show candlesticks that more accurately depict the price movement throughout the day.
Similarly, you could go to an even lower time frame – say, a 15 minute or a 5 minute time frame – and find out how the price behaved in even more detail.
You will explore the methods of choosing which time frame best suits your trading style in further lessons.
A further example using a bullish Japanese candlestick
The candlestick in this illustration is a one hour period, which means that the candle took an hour to form. The currency pair is EUR/USD.
From the candle you can identify the following information:
- The candle is bullish because it is blue. This means that over the course of an hour, the price of the EUR/USD increased. There were more buyers than sellers throughout the hour; the price was higher at the close of the hour than when it opened.
- The price at the beginning of the hour opened at 1.3016.
- The price at the end of the hour closed at 1.3175.
- Throughout the course of the hour the highest price that the buyers pushed the EUR/USD to was 1.3185.
- Throughout the hour the lowest price that the sellers pushed the EUR/USD to 1.2956.
Although a trader can use practically any time period for each candle, the most common periods are M1 (1 minute), M5, M15, M30, H1 (1 hour), H4, D1 (1 day), W1 (1 week) and MN1 (1 month). The time frames that are available for your use will depend on the trading platform you choose to use.
So far, you have learned that:
- the Japanese candlestick chart shows you more information than a simple line chart.
- the Japanese candlestick chart is the most common type of chart used by traders
- Japanese candlesticks represent the time that the candle takes to form, which is referred to as a time frame.
- each candlestick tells you the open, high, low and close (OHLC) price of the time frame for that candle.
- an orange candle means that the price has moved down and a blue candle means that the price has moved up.