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Basics of Japanese Candlestick - Part 1

Basics of Japanese Candlestick (I)

Wouldn’t it be interesting to learn a trading system refined by centuries of use? Japanese candlestick is one versatile and powerful trading system refined by centuries of use. Japanese candlestick charts are older than bar charts and point & figure charts.

Candlesticks can be used for speculation and for hedging and the best part is candlesticks are applied in futures, equities, options and anywhere technical analysis is applied.

If you think terminologies like “Three white soldiers”, “Three black crows”, “Doji”, “Morning star”, etc.. excite you , Japanese candlestick trading system is for you.

What are candlestick patterns?

Candlestick patterns are premier tools for reading a chart and understand if the stock is trading in an up trend, down trend or sideways trend. Before we look into the advanced patterns lets understand the basic chart patterns.

Figure : Black candlestick                White candlestick

Foundation pattern has to be a black candle and a white candle.Black candlestick is formed for a period when the stock (underlying asset) opens at a particular levels and manages to close below the opening levels. Consequently the stock can touch lower levels in the concerned period  , lower than the closing levels and finally manage to close at the closing prices.

The thin line in the above figure representing highs & lows are known as shadows. Shadows represent the session’s price extremes. The shadow above the real body is called Upper shadow. Shadow under the real body is Lower shadow. Accordingly, the peak of the upper shadow is the high of the session & bottom of the lower shadow is the low of the session.

If a candlestick line has no upper shadow it is said to have a shaven head. A candlestick line with no lower shadow has a shaven bottom. The real body reflects the essential price movement. The shadows are usually considered as extraneous price fluctuations.

What is “real body”?

The distance between open and close is reflected by a thick bar. This thick bar is known as “real body” of a candlestick. This thick bar is coloured black if the open is higher than the close. The candlestick places great emphasis on the relationship between the open and close because they are the two most emotionally charged points of the day. (Technical’s are the only ways to measure the emotional component of the market)

Similarly for a white candlestick the high and lows are reflected by the shadows and the real body is reflected by the thick bar. The thick bar has a white colour because the close is above the open price. It is important to note that the same black candle can be represented by red candles in few softwares and the white candles represented by green candles.

Figure: Red candle                 

Figure: Green candle

The white candle also known as green candle is often referred as long candle. Similarly black candles or red candles are referred to as short candles.

In candlestick patterns as in technical analysis, the patterns can be categorised in:-
1.    Reversal pattern
2.    Continuation pattern

We will discuss the above two major chart pattern in the next article


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