Understand how Japanese candlesticks work

Fluctuations in the exchange rates of the various currencies on the foreign exchange market can be assessed on the basis of the curves. In general, the Japanese candlestick is the most used by traders.

The Japanese candlestick chart

This type of graph has been used since the 18th century by Japanese traders to forecast the value of rice.
A Japanese candlestick is materialized through several candlesticks. Just like its name, this type of graphic takes the form of a series of candles.
Each candle has two parts:

  1. the body: depending on the trend, the colour of this element will be red or green. In the first case, the closing value is higher than the opening value. In the second case, the closing value is lower than the opening value.
  2. the wicks: The candle also includes two wicks. The latter is a line on the head or tail of the candle body.

To be able to highlight Japanese candlesticks, the trader must therefore take into account four data: the highest value at opening, the highest value at closing, the lowest value at opening and the lowest at closing. These factors form the “wick” of the candle. The body of the latter reflects the different price variations during the day.

The advantage of Japanese candlesticks is that they can be used to analyze trends over the short, medium or long term. Regardless of the unit of time the trader uses, it is therefore possible to use this type of graph. The latter also makes it possible to detect psychology within the different markets.
There are several types of Japanese candlesticks:

  • the dojis,
  • hanged them,
  • the stars,
  • the training in pinch,
  • the three top-down methods, etc.

It is therefore up to investors to highlight these different graphs and interpret them in the context of chartist figures.

Interpreting Japanese candlesticks

In order to be able to identify the information delivered by a candle, the trader must take into account a few elements.

  • the importance of bodies and wicks: the larger the size of the candle body, the more pressure the market is under. This is especially true if the shadows are small.
  • in addition to this factor, in the context of Japanese candlesticks, existing figures must be interpreted. If the trader does not master these figures, it is difficult, if not impossible, for him to define the underlying trend in the market.

To be able to properly use Japanese candlesticks as a trading instrument, each investor must be trained on the meaning of the candlesticks and their impact. A Forex broker like eToro thanks to its social trading allows you to exchange with its community of traders and to better understand these figures.