– LESSON 2 –
What is a Japanese Candlesticks?
Japanese Candlestick Patterns (JCP) were invented by a Japanese rice trader called Munehisa Homma around the 1700s. They are often used today in the trading world, like forex, stocks, cryptocurrencies, and any other financial market.
Candlesticks are used for charting the price action. A single candle displays the HIGH, LOW, OPEN, and CLOSE prices for the selected time frame.
The opening and the closing prices, for the selected timeframe, are represented by the candle’s body, and the highest and lowest price is represented by the candle’s wick.
I’ll show you in detail right away…
If the candlestick closes higher or lower than the opening price, then it will have a different color, red for a down candle (bearish), or green for a rising candle (bullish).
They are used to describe the price action during the selected time frame. Meaning that on the 1h timeframe a candle represents the price range for every hour. On the 4h timeframe, a candle represents the price range for every 4 hours, and so on. We have already discussed that.
So, a candlestick shows the price range for any selected timeframe.
The best way to explain is by using a picture:
Let me tell you more…
A candlestick is formed by two elements: the BODY and the WICK.
- WICK: shows the price range for that period of time (lows and highs)
- BODY: shows where the price open and close
See the picture below:
A candlestick includes 4 pieces of information. The Opening price, the Closing price, the Highest price, and the Lowest price. These info are known as OHLC.
OHLC MEANING (Open, High, Low, Close) explained:
- OPEN – Price level when a new candle is opened
- HIGH – Highest price for that timeframe
- LOW – Lowest price for that timeframe
- CLOSE – Price level when the candle closes
When all of this information comes together, a candlestick takes a shape that describes the market sentiment.
Let’s see another picture:
For a green candle (bullish), the closing price is always higher than the opening price, meaning that the price has increased.
For a red candle (bearish), the closing price is always lower than the opening price, meaning that the price fell in that period of time.
Now let me tell you the short definition of BULLISH and BEARISH.
Bullish means that the market prices will rise, so by going up you want to buy low and sell high (buying at $8 and selling at $10 generates a profit of $2).
Bearish means that the market prices will fall, so by going down you want to sell high and buy low (selling at $10 and buy back at $8 generates a profit of $2).
You need to become familiar with the terms BULLISH and BEARISH because you will hear these terms a lot.
Remember, all those who buy are bulls and all those who sell are bears.
In conclusion, one who is optimistic and believes that the price will go up has a bullish outlook and he is a bull also. The bears are on the opposite side, with a pessimistic vision thinking the price will fall.
Let’s get back to candlesticks and take another example…
Let’s assume that it’s 1:00 PM and the selected timeframe is 1h. That means the last candle on the chart was formed from 12:00 PM to – 1:00 PM.
How was it formed?
Exactly as we learned in the first lesson, at 12:00 PM the candle OPENS at X price, then the price goes up and down to form the wick (price range between 12:00 PM and 1:00 PM), and at 1:00: PM the candle CLOSES at Y price.
It looks like this:
As a final example, I will show you how to read a candlestick by its shape:
As you see in the above picture, the wick of the candle shows that the price has fallen, but then the buyers came in and pushed it back up above the opening price. This means that a lot of buyers are interested to jump into the market causing the sellers to stay away because of the pressure that comes from the buying segment.
Remember what we have discussed about supply and demand, that’s how the price will rise or fall.
Just wait to see how powerful candlesticks are when combined with other information.
Congratulations, now you know how to read a candlestick by its shape!
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CANDLESTICKS BONUS LESSON
Each candlestick tells us a story, we just have to look at its shape.
But how do we know if a candlestick is bullish, bearish, or neutral?
We have two options:
- Body length
- Body location
If the candlestick has a really long body with short wicks, it comes down to whether the closing price is higher or lower than the opening price.
So if the closing price is above the opening price and it is also above the halfway mark of the candlestick, then it’s a bullish candle.
And as long as the body closes below the halfway mark, it’s a bearish candle.
Let’s see an example of bullish candlesticks:
Now, let’s see the example for bearish candlesticks:
Long story short, if a candle closes above half of its length then the candle is bullish, if the candle closes below half of its length then it is bearish.
But what if the candlestick has a small body?
We then have to look at its body location.
2. Body Location
The body’s location comes into play when the body is less than half the size of the length of the candlestick.
In general, the body can be located at the top, bottom, or center of the candlestick.
Let’s see an example:
In the above example, the candlesticks are represented by blue color because it doesn’t matter whether the color of the body is green or red, it matters where the body of the candle is located.
If the body closes above 50% of its length, it’s considered bullish. If the body closes around half of its length, it’s considered neutral or indecision in the market. And if the body closes below 50% of its length, it’s considered bearish.
Congratulations, now you know exactly how to read a candlestick and how to interpret whether it’s bullish, bearish, or neutral.
Let’s get further to the next lesson and learn how candlesticks are forming patterns that indicate price reversal …
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