Japanese Candlesticks are gaining popularity among individual traders, due mainly to the reason that they are easier to learn and interpret versus bar charts. Of equal importance is the fact that they fall into the category of leading indicators. Unlike lagging indicators (for example; a moving average) which appear after the fact, the Japanese Candlesticks signals are leading indicators because they provide early warning alerts to possible price movements. When you see one of these alerts confirmed by moving averages, they can provide profitable trade opportunities.
Rather than bore you with the history of Japanese Candlesticks, suffice it to say they have been in use for over 400 years. They are reliable and provide traders with extremely valuable insight to potential price movements. This article will concentrate on introducing you to the advantages of charting with Japanese candlesticks versus bar charts.
Many traders use japanese candlestick charts simply because they are considered to be more visually appealing than bar charts and as a result they are easier to read and interpret. The candlestick chart appears to be 3-dimensional making it easier to see the relationship between the open and close and the high and low. Each candlestick also allows you to more easily detect the price action that is indicative of either selling pressure or of buying pressure. The body of the candle itself is thicker than the shadow also making it far easier to see how the close price relates to the open price than when reading bar charts.
Japanese candlesticks also provide more of a real time depiction of market sentiment whereas bar charts often only signify market noise. Candlesticks utilize one to three time periods and are able to visually block out market noise unlike bar charts. Bar charts will actually allow spikes to highs and lows to be prominent in their data unlike candlesticks which are able to focus on what the market actually did to force price action during a period of trading.
The image below illustrates the construction of japanese candlesticks.
Bearish Candle Bullish Candle
The hollow candle forms when the stock price closes higher than its opening price.
The solid candle forms when the stock price closes lower than its opening price.
Start your Japanese Candlestick education now!
Once you are able to identify the major candlestick signals continue your education and read about the secondary candlestick patterns.
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