Japanese candlesticks are a particular chart pattern that have been around since the 17th century and can be used as a form of technical analysis.
Japanese candlesticks are made up of bodies and wicks, as shown in the diagrams below:
Japanese candlesticks are formed using the open, high, low and close of a candlestick. If the close is above the open, then this is a bullish bar and the candle is normally coloured green or white with a black outline.
If the close is below the open, then this is a bearish bar and the candle is normally coloured red or black. The lines at the top and bottom of the body of the candle are called wicks, and highlight where prices have travelled to during the candlestick period. The wick at the top shows how high the price has travelled, with the wick at the bottom showing how low the price has travelled.
Basic Japanese candlestick patterns
Candlesticks come in a variety of sizes – they can be wide spread or particularly narrow. The wider the spread of the candle, the quicker the price increased or decreased, while the smaller the spread of the candle suggests that the price didn’t travel far in the allotted period. Japanese candlesticks can give you important clue about the trading session – some candlesticks can indicate when there may be a change in behaviour and these type of candlesticks have long wicks on one side of the candle with a smaller body.
The hammer candlestick pattern appears at the bottom of a trend and is a bullish reversal pattern. The candlestick pattern indicates that sellers were in control but the bulls came in and pushed the price back up to close on the highs.
If a hammer pattern forms in a downtrend, you could wait and see what happens next – if the next candle shows a bullish candle, you can consider taking a trade.
A candlestick with a long wick at the top and the bottom either side of a small body is known as a spinning top. This candlestick pattern indicates indecision between the buyers and the sellers. If the spinning top forms in an uptrend, this may mean that the buyers are running out of steam and the price may reverse to the downside. If a spinning top forms in a downtrend, this could indicate that sellers may be running out of steam and the price may reverse to the upside.
A shooting star candlestick pattern may appear at the top of a trend and is a bearish reversal pattern that forms after a rally. The high of the long wick signifies that buyers were in control as they drove the price up, but the seller’s regained control, driving the price back down. If this candlestick pattern appears in an uptrend, you could wait to see if there’s going to be a change in behaviour. If the next candlestick is a down bar, where the close of the candle is lower than the previous candle, the pattern may have developed. A shooting star can be either an up bar or a down bar, but down bar shooting stars have greater bearish significance.
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