Here we will not only answer the question of whether Japanese candles work and what they mean, but we will give you real-time examples.
History and essence of Japanese candlesticks
Japanese candles have been used in commercial practice for more than 100 years. This chart was the first, then the bar chart and the line chart were added, but we’ll talk about them in another article.
The most important thing to remember is that Japanese candlesticks are one of the most powerful weapons in forex trading. If we learn the basic formations from Japanese candles, we will add a significant arsenal to our trading strategy.
Forex traders use the chart of Japanese candlesticks to be able to forecast the market both long-term and short-term.
Elements of Japanese candlesticks
Both bars and Japanese candles show the opening and closing prices, the highest and lowest for a certain period of time. However, there is a broader part that we call the “body.”
It shows the difference between the opening and closing prices for the respective period. If the closing price is higher than the opening price, a positive or “bullish” candle is obtained. Conversely, if the closing price is lower, then the candle is negative or “bearish”.
In some situations, neutral candles are obtained and the two prices coincide. The XM trading platform allows each trader to adjust the filling color of the “bullish” and “bearish” candle according to their own wishes.
Japanese candlesticks can be used on any time frame, starting from 1 min, 5 min, 15 min, 30 min, 1 hour, 4 hours, daily schedule, weekly, and monthly. The trend that is being drawn is constructed from Japanese candlesticks, both bullish and bearish.
You have to remember that candlesticks can be long, short, with big tails with small tails, without tails.
Bar chart versus Japanese candlestick chart.
In the first image, we took out a bar chart of the currency pair EUR/USD. As we can see the chart draws some green bars and some red bars. The color depends on whether the price falls or rises.
This is information that this bar chart provides for us, but we will talk about it in another article. We just wanted to show you so you can take a good look at it because we have prepared a chart with candles.
We want to show you what information each chart gives us.
Here is the same currency pair, but with Japanese candlesticks chart. Remember one thing, this type of chart is the most traded not because they are candles, but because it gives us more information than any other chart, both linear and bar chart.
By information, we mean certain models, which we will show you later in this article and in the following articles. This is what makes it such a strong chart, based on it we can determine whether the price of a particular instrument (currency pair) will jump or fall.
Linear chart versus Japanese candlestick chart.
Here is a comparison with the line chart.
If we look at the line graph, we can see only one line that draws tops and bottoms. It is only good for a person to find a level of support and resistance, this does not mean that it cannot be found in the other charts.
For these two charts (bar chart and linear) you can get more information in our free course for MT4 and MT5.
It’s time to take a look at a few models for trading Japanese candlestick formations.
Bearish engulfing model
First, let’s look at what engulfing is, engulfing is when the body of one candle engulfs the body of another (it has a bigger body than the previous candle). This model shows us that sellers are taking matters into their own hands and the price may continue to fall.
On the chart above with a yellow circle, we have marked the bearish engulfing candles. As you can see, we also cut them out and enlarged them to make it clearer to you. An engulfing candle is a candle with a different color from the previous one, and with a larger body than the previous one. We will soon prepare videos for you so you can see in real-time how we trade them.
With the Japanese candlesticks, we can determine our entry position, but we can also determine our stop loss and take profit.
Bullish engulfing candles.
As we know bulls are buyers in this market. Here is an example of bullish engulfing candles. We have marked the bullish engulfing candles in yellow, we have also enlarged them into rectangles so that you can see them better.
The bullish engulfing candle shows us that the power of sellers is waning, and it’s time for buyers to prevail. Or simply put, we expect an upward movement (the price of the instrument to rise)
Hammer formation in Japanese candlesticks
Hammer formation gives us a signal to buy the instruments we trade. This formation can be found in two ways, the common hammer and the inverted Hammer.
First, we want to introduce you to the formation “Ordinary hammer”. The ordinary “hammer” is formed by a candle with a large lower shadow and a body that is at least twice smaller than it and is located at the top.
Another feature is the small or completely missing top shade. It is not obligatory, but it is desirable for the candle to be a “bullish”.
With a yellow color, also in the rectangle, we have taken out the formation of a regular hammer. You can see how strong it is, and it gives us a really good entry point. In the following articles and videos, you will have the opportunity to get acquainted with it in detail, and we will show you how to trade it in real-time.
Let’s look now and the formation inverted hammer. An “inverted hammer” is formed by a candle with a large upper shadow and again by a body that is at least twice smaller than it, but it is located at the bottom. There should be little or no lower shadow.
Here is an example of the inverted hammer formation. We have marked it in yellow, we have also enlarged it in the rectangle to make it more visible to you.
We will show you all the reliable formations of Japanese candlesticks in the following articles. Here we wanted to show you how powerful this chart is, and how important the Japanese formations are for our technical analysis.
Here we were able to answer the following questions:
How do you use Japanese candlesticks in forex?
Do Japanese candlesticks work?
What is a bearish candlestick?
In the following articles, we will answer many more interesting questions.
And during this time you can open a demo account from HERE, and try to play one of the Japanese formations with virtual money, without risk, of course, until you learn. Practice everything learned so far.