UK Accounting Glossary
Japanese Candlesticks first appeared in the mid-1850s, based on charting methods developed in the 1700s by a legendary Japanese rice trader named Homma. It is likely this was the first application of technical analysis. While this early version of technical analysis was different from the US version initiated by Charles Dow around 1900, many of the guiding principles were very similar.
Each Japanese candlestick provides an easy-to-decipher picture of price action. Traders can see the relationship between the open and close as well as the high and low. The relationship between the open and close forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.
A Japanese candlestick with an identical open and close price is called a Doji. The Doji represents marketplace indecision and often marks a reversal or pause in the trend.
Japanese candlesticks are typically grouped into patterns, referred to as candlestick patterns. There are many documented patterns used to identify trend continuation patterns as well as trend reversals. An example candlestick pattern is the Morning Doji Star. This pattern consists of three Japanese candlesticks with the middle being a Doji.
In most cases, traders generally like to see a confirmation on the day after the conclusion of the Japanese candlestick pattern. This can be in the form of a gap opening or a long day in the direction of the desired trade. Combined with other technical analysis tools, Japanese candlestick pattern analysis can be a very useful way to select entry and exit points.
Many traders believe that Japanese Candlesticks allow speculators to better comprehend market sentiment. Offering a greater depth of information than traditional bar charts – where the high and low are emphasized – candlesticks give emphasis to the relationship between close price and open price, resulting in unique visual cues that make reading price action easier.
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This glossary post was last updated: 22nd March 2020.