Candlestick charts have proven to be very useful and important in speculating prices. To become a successful trader, you will need to understand and be able to read candlestick charts.
This guide highlights everything a newbie will need to know about Candlesticks charts in the following chapters:
1. Japanese Candlestick Explained
- Basic Definition of Japanese Candlestick
- History of Candlestick Charting
- Various shapes of Japanese candlesticks
- Long Bodies
- Short Bodies
- Bulls vs. Bears: The Implications of Green and Red Candlesticks
Japanese Candlestick Explained
Basic Definition of Japanese Candlestick
Japanese candlesticks are a series of objects in form of candles which is used to portray the price action of an asset/commodity over a set period of time. They provide useful information, such as the market sentiment or possible reversals in the markets, by showing the price movement in a specific way.
The image below illustrates the properties of a Japanese Candlestick:
In cryptocurrency trading, “Open” basically means the price at which the day’s trading began. “Close” means the price of the asset at the end of the trading session. The “High” and “Low” indicates the highest peak and lowest drop in the asset price during the trading session.
Japanese candlesticks can be used for any time frame, whether it is one day, one hour, 30-minutes – whatever you want!
The candlestick patterns describe the price action of a cryptocurrency asset in a given time frame. These patterns are formed using the open, high, low, and close price of the asset in the stipulated period.
Candlesticks are formed when the following conditions are met:
- When the close is above the open, then a hollow candlestick (usually displayed as white or green) is drawn.
- When the close is below the open, then a filled candlestick (usually displayed as black or red) is drawn.
- The hollow or filled section of the candlestick is called the “real body” or body.
- The thin lines poking above and below the body display the high/low range and are called shadows.
- The top of the upper shadow is the “high”.
- The bottom of the lower shadow is the “low”.
History of Japanese Candlestick Charting
The use of candlesticks to describe price movement of stock markets dates back to the 16th century. It was developed by Japanese traders in the 1600's, to trade rice contracts. Yes. You saw right, Rice contracts. Until about the year 1710, only physical rice was being traded on the stock market. Later on, a futures market emerged where 'coupons' were issued. These coupons were records of the promise of delivery of rice at a future time.
This was the beginning of futures trading.
The Japanese candlesticks charts became very popular due to its level of ease in reading and understanding the graphs. The Japanese rice traders also discovered that the resulting charts would provide a fairly reliable tool to predict future demands.
Steve Nison, a westerner, understood the startling power of Japanese candlestick charts and popularized this method to the Western Hemisphere. He is acknowledged as the leading authority on the subject. Articles, written by Steve Nison, that explain Candlestick charting appeared in the December 1989 and April 1990 issues of Futures Magazine. He has also written a definitive book on the subject: Japanese Candlestick Charting Techniques.
The Various shapes of Japanese candlesticks
Candlesticks have different body sizes. These sizes are formed to depict the market behavior at that particular time, and when it comes to Cryptocurrency trading, there’s a whole bunch of these candles that present useful information’s about the market to the trader.
Now, we’ll discuss the various shapes a Candlestick chart can take.
Long-bodied candlesticks indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.
In stock trading, the buyers are known as the bulls and are identified as the green or white-colored candlesticks while the sellers are known as the bears and are identified as the red or black-colored candlesticks.
(To understand more about the concept of Bulls and Bears in cryptocurrency trading, see this guide.)
A short-bodied candlestick signifies weak trading activity. This means that the market was relaxed at that period with little buying and selling activity.
Bulls vs. Bears: The Implication of Green and Red Candlesticks
As stated before, bulls represent buyers in cryptocurrency trading while bears represent sellers.
The long green candlestick in the chart above indicates strong buying pressure. This candlestick can also be represented in white. The longer the green/white candlestick, the further the close is above the open.
This means that the price of an asset increased considerably from open to close and buyers were aggressive. In other words, the bulls were in control of the markets.
Long red (black) candlesticks show strong selling pressure. This indicates that the bears took control of the market, dragging the price of an asset further below the opening price.
Shadows are thin lines drawn across the middle body of a candlestick to indicate the price fluctuation of an asset in relation to its Open and Close. These Shadows, also known as wicks in Candlestick charts, provide important clues about the trading session.
There are basically two types of shadows in Candlestick charts: the upper shadow and the lower shadow.
- Upper Shadows signifies a high session. Candlesticks with long shadows show that trading activity occurred well past the open and close.
- The Lower Shadows means low trading session. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a candlestick has a long upper shadow and short lower shadow, it means there was a high bid for the asset which drove the price higher than its opening price. But then, for one reason or another, there came an influx of sellers into the market, driving prices back down to end the session back near its open price.
In the other way round, a candlestick will have a long lower shadow and short upper shadow when high selling activities forced the price lower, but then, buyers came in and drove prices back up to end the session back near its open price.
In the next chapter, we will look at the basic Japanese candlestick patterns.