Japanese candlesticks are one of the most used techniques in the financial markets.
If you have a look in most articles related to investing you will notice that there are many graphs with certain figures.
Those kinds of rectangular figures are normally the Japanese candlesticks.
We can use black and white candlesticks, in which case the white represents the bullish ones and the black the bearish.
Typically used colours for this are blue and green from the rising candles and red for the falling ones, associating colours with the different meanings. Clearly red signifies something negative here. Curiously enough red is the colour of communism, an ideology contrary to the stock market itself. In other words when it is implanted in a country the stock market goes to zero.
Anyhow, concerning our analysis of the candles, their colours are irrelevant.
What really matters is the analysis we can make with the patterns formed by the candles.
Japanese candlesticks origin
This way of using and interpreting the charts was introduced in Japan in the XVIII century by Japanese traders in the rice market.
The supposed creator of this technique was a man called Homma, who used to trade futures at that time.
He discovered that by using this technique there were some patterns that used to give him a good edge.
Much later, around the 90s in the twentieth century, the concept of candlesticks was introduced in the world of trading by Steve Nisson with his famous book.
However, accordingly to Nisson, the creator of these candlesticks, Homma, did not use them but only interpreted the maximums and minimum prices in some way.
How are the Japanese candlesticks formed?
If we analyze one day and have 1 hour candlesticks we should have 24 if the market is like Forex, which opens 24 hours. If it is a stock we should have 8 candles.
The candles show us the opening and closing prices, the maximum and the minimum of the period.
As we can notice the information there is quite better than the one we get with a simple line graph where we do not see the maximum or minimum for example.
Actually the candlesticks will show us sometimes quite strange “behaviour” between the “four prices”.
These differences give us clues of what happened in the market in that time.
Normally when we have a bull market there is a preponderance of the “bullish” candles and when we have a bear market we have a preponderance of “bearish” candles.
Obviously it would be interesting if we could guess whether there will be a bull or bear market after we analyze a series of candles.
Japanese candlesticks use
This candles are used in all financial markets, whether futures, Forex, stocks or bonds of any kind.
They have similar patterns and forms in all the markets, although some markets have particular things.
For instance, we can compare the Japanese candlesticks with the line and bar graphs so you can see some of the differences.
As you can see the candles are quite similar to the bars but are more visual, in other words easy to analyze so to speak.
With this we can see, as in the graph, how there are certain candles with interesting forms.
These forms are a weapon quite popular for Technical Analysis, whether they are 1 day or 10 years charts.
Many people claim that the patterns are the same for the short and the long run however we will se that it is not actually the case.
The same as with other indicators like MACD or moving averages, for example, you can be sure that the long-term charts will give you better signals and confirmation points.
In the short-term, for example in the 1, 5 or 15 minutes charts we will have a lot of noise.
In theory Japanese candlesticks offer us good trend and contrarian signals.
The “turn around” candles tell us that the trend is over and the market is going to change direction.
The confirmation candles tell us that the market is continuing its trend.
As you can imagine the number of patterns and figures is huge.
However we should not try to learn all of them but to know how to come to our own conclusions just by looking at a chart and some patterns.
Japanese candlesticks and Technical Analysis
Japanese candlesticks are quite good to serve us as support to have better understanding on turn around moments.
One good use is to combine them with other indicators like RSI.
For example if we have certain figures in the candlesticks, plus some confirmation by the RSI and some change in volume we may have a better likelihood of making a right decision.
In my opinion if you want to get better signals with them you should not be using candlesticks smaller than 4 hours.
Other popular candles like those of 5 or 15 minutes ones give us many problems.
This does not mean that long-term charts are the panacea but we can be sure that with long frames our chances will increase dramatically.