It is rather difficult to trace the history of such a popular analytical technique as the Japanese candlestick charts. It is known that at the beginning of 18th century, the Japanese merchants developed their own approach to the technical analysis that was widely used in trade. Some researchers suppose that one of the founders of the theory was Munehisa Homma, a rice seller.
” A candlestick chart has long been used as a basic instrument for the technical analysis of the forex market. “
Most trading platforms include the Japanese candlestick charts. The tool gained its popularity due to its easy-to-read and flexible charts which include interval and linear approaches.
The Japanese candlesticks can be used together with various methods of technical analysis. Besides, signals from such candlesticks appear earlier than signals from other tools of technical analysis. Moreover, applying the Japanese candlesticks you can indicate such trading signals that cannot be noted via other analytical tools.
” That is why this method is preferred by most market participants as their principle instrument of technical analysis. “
Let’s look at the Japanese candlestick charts in detail. A candlestick consists of four elements: Open, Max, Min, and Close. The Open element stands for the open price, Max indicates the highest price for a particular period of time, Min reflects the lowest price for a particular period of time, and Close shows the close price.
” The main advantage of the Japanese candlesticks is that they accurately indicate a market trend, i.e. bearish or bullish. “
If a candlestick is long and white, the market is under bulls’ control. If it is long and black, the market is bearish. It should be noted that the open price of a long white candlestick does not exceed the close price. However, the open price of a long black candlestick is usually higher than the close price. A situation when open prices equal close prices is called Doji. In this case, a candlestick does not show any signals amid the sideways movement. But, if it appears in the uptrend, the current trend is likely to make a reversal.
Bullish Candlestick Patterns and their Combination
The pattern’s body is rather small and can be black or white. The Hammer appears at the end of the uptrend and signals a trend reversal. The importance of the signal depends on the candlestick’s length.
” The Bullish Engulfing is another reversal pattern that is characterized by a large white body engulfing a preceding smaller black body. “
The pattern is formed within the downtrend. Thus, if the second candlestick has a big body, it usually indicates the strengthening of the bullish market.