How To Trade Forex With Japanese Candlesticks?
Japanese Candlesticks analyze future currency pair price action in the market. They help traders interpret the existing trends in the market and place exit or entry orders accordingly. In this article, we take a look at Japanese Candlesticks and how they work.
What is a Japanese Candlestick?
A Japanese Candlestick is a technical analysis tool used to analyze the currency pair’s price movement in the forex market. It was first introduced by a Japanese rice trader who realized that the prices of rice were highly influenced by a trader’s emotions and the rice’s demand and supply. The Japanese Candlesticks also help identify short-term price direction of the currency pairs. These patterns are used to understand detailed, accurate and result-oriented price movement information on the basis of which traders make their future market decisions. Just by looking at a Japanese candlestick, the traders can identify a market’s ongoing trend. When multiple Japanese candlesticks are combined, they help in identifying market reversals.
Components of a Japanese Candlestick
The candlestick body denotes the difference between the opening and closing price of the currency pair. Japanese Candlesticks can either be of a green (bullish ) or red (bearish).
- The lowermost portion of the candlestick’s body denotes the opening price of the currency pair
- The topmost portion of the candlestick’s body denotes the closing price of the currency pair
The upper wick or upper shadow indicates the highest trading price of the currency pair. A longer upper wick than the lower wick indicates a bullish market (green candlestick).
The lower wick or lower shadow indicates the lowest trading price of the currency pair. A longer lower wick than the upper wick indicates a bearish market (red candlestick).
Whenever the forex market opens the next trading day after a break or major economic announcement, the opening price is not always equal to the last trading day’s closing price. This creates a gap between the candlesticks as it opens at a different level than where they closed. Hence, the price points are not connected together, and a candlestick window/gap is formed. The gap or window is a no-trading zone and indicates a sudden surge in the buy or sell orders.
- When the gap is produced due to the previous day’s highest price being lower than the current day’s lowest price, it's considered an upward trend (bullish/green candlestick). It signals traders to enter the market due to an expected continued bullish trend
- When the gap is produced due to the previous day’s lowest price being higher than the current day’s high price, it's considered a downward trend (bearish/red candlestick). It and signals traders to exit the market due to an expected continued bearish trend
How to read a Japanese Candlestick Pattern
The colour of the candlestick, the wick’s size, and the body size help read candlestick patterns. The colour of the candlestick depicts in which direction the market is headed, the body depicts the opening and closing points, and the wick depicts how much or how little the prices have fluctuated.
- When the candlestick has a long body and is green in colour, it signifies a bullish price trend. But red colour signifies a bearish price trend
- When the upper or lower wick is longer than the candlestick’s body itself, it depicts high volatility during the trading period
- When the candlestick’s body is short with a longer red, it indicates a bearish market trend reversal
- If the candlestick’s body occurs without an upper wick, it indicates that the high price is equal to the closing price
- If the candlestick’s body occurs without a lower wick, it indicates that the low price is equal to the opening price
Three types of Japanese Candlestick Patterns
1. Single Japanese Candlestick
This pattern consists of only one candlestick. It provides traders with the right signals to long or short the trade.
- If it is a bullish candlestick, it signals traders to long the trade due to an uptrend
- If it is a bearish candlestick, it signals traders to short the trade due to an downtrend
2. Double Japanese Candlestick
The double candlestick pattern consists of two contradicting candlesticks. It is a market reversal signal as the trend that occurs with the second candle is continued thereon.
- If the first candlestick is bearish and the second is bullish, it is an uptrend indication signalling traders to place long orders
- If the first candlestick is bullish and the second is bearish, it is a downtrend indication signalling traders to place short orders
3. Triple Japanese Candlestick
This pattern consists of three candlesticks that signal a market reversal. It is identified by two candlesticks in the same direction, followed by the third one in the opposite direction.
- If the first two candlesticks are bullish and the third one is bearish, it indicates a downtrend and signals to short the trade
- If the first two candlesticks are bearish and the third one is bullish, it indicates an uptrend and signals to long the trade
How to trade forex with Japanese Candlesticks
1. Open a forex account
Open a Forex account to navigate through the forex market prices and to place orders easily. If you are new to trading, you can also start with a demo account to practice different forex trading strategies.
2. Look through the currency pairs you want to trade
After opening an account, go through the list of currency pairs and choose the ones you want to trade. Let us assume that you choose USD/EUR to trade as your first currency pair.
3. Place a buy order
Enter the amount of how many USD/EUR you want to purchase and hit the buy order button to complete the transaction.
4. Visit the currency pair’s price chart
After you make the purchase, it is time to monitor the currency pair to predict future market movements and make trading decisions accordingly. Go through the currency pair’s Japanese Candlesticks chart and identify the ongoing market trend.
- If the bullish (green) candlesticks in the market have a longer body than the bearish (red) candlesticks, it indicates a potential uptrend and signals traders to enter the trade
- If the bearish (red) candlesticks in the market have a longer body than the bullish (green) candlesticks, it indicates a potential downtrend and signals traders to exit the trade
5. Place stop loss and take profit orders
Before moving further, it is essential to identify the significant stop loss and take profit orders in the market to protect oneself from the market risks and lock in the potential profits. Stop loss orders
- You can place a stop loss order at the bottom-most level or opening price of a bullish (uptrend) candlestick
- You can place a stop loss order at the topmost level or closing price of a bearish (downtrend) candlestick
Take profit orders
- You can place a take profit order above the current currency pair price level during an uptrend
- You can place a take profit order below the current currency pair price level during a downtrend
6. Make a trading decision
Place a long or short order according to the ongoing market trend. If there is a continued uptrend and you wish to trade with the market, long orders can be placed. If there is a continued downtrend and you wish to trade in the falling markets, you can place a short order instead.
Basic Japanese Candlestick Patterns
Doji candlestick is formed whenever the opening and closing prices of a currency pair are almost the same. It helps traders identify the price levels where a market can potentially reverse and make entry/exit decisions accordingly.
- During an uptrend, the Doji Japanese Candlestick pattern indicates a downtrend reversal and signals traders to exit the trade
- During a downtrend, the Doji Japanese Candlestick pattern indicates an uptrend reversal and signals traders to enter the trade
Originating from the Japanese word that translates to ‘bald’, a Marubozu Japanese Candlestick pattern refers to a candlestick without an upper or lower wick/shadow. It indicates that the currency pair prices did not trade beyond the price range between their closing and opening prices. Marubozu is a strong market reversal signal and provides traders with ideal entry and exit price levels. Traders use this candlestick pattern when the currency pair prices trade within a range continuously, for a few days.
- When the candlestick opens near to the high price level of the trading day, it indicates a bearish Marubozu Japanese Candlestick pattern and signals traders to exit the trade due to an expected market downtrend reversal
- When the candlestick opens near to the low price level of the trading day, it indicates a bullish Marubozu Japanese Candlestick pattern and signals traders to enter the trade due to an expected market uptrend reversal
3. Spinning Top
The Spinning Top Japanese Candlestick pattern is a pattern that is formed as an indecision signal in the market, indicating that neither the buyers nor the sellers are able to gain an upper hand in the market. This candlestick pattern has a short body, indicating the open and close prices being very near to each other with long upper and lower wicks, signalling a large market price range. When a Spinning Top pattern occurs, it indicates traders a reversal in the ongoing trend.
- If a Spinning Top Japanese Candlestick pattern is formed after a prior uptrend, it signals traders to exit the market due to an expected downtrend market reversal
- If a Spinning Top Japanese Candlestick pattern is formed after a prior downtrend, it signals traders to enter the market due to an expected uptrend market reversal
4. Shooting Star
A Shooting Star Japanese Candlestick is a bearish pattern that occurs during the top level of an uptrend. It provides traders with ideal exit price levels as it indicates a market reversal. It is made of a small body that is near the lowest price level of the trading day and comes with a long upper wick and little to no lower wick, confirming the downtrend reversal. Even though it is a bearish pattern, it can have both green and red coloured candlesticks.
- In a red Shooting Star Japanese Candlestick pattern, the currency pair prices are pulled below the opening price, signalling traders to exit the trade as soon as possible due to the upcoming downtrend
- In a green Shooting Star Japanese Candlestick pattern, the currency pair prices are pulled a little above the opening price, signalling traders to either be indifferent or enter the trade due to an expected uptrend
5. Hanging man
The Hanging Man Japanese Candlestick pattern is made of a single candlestick and is a reversal signal that occurs during an uptrend. It consists of a very small candlestick body, a long lower wick and little to no upper wick. It is a bearish pattern as it provides traders with ideal exit levels and warns them about the level where the prices may start falling drastically.
- Traders can place the sell orders near the closing price of the current day’s currency pairs or near the opening price of the next day’s candlestick
- Stop-loss orders can be placed near the high price of the candlestick
Trade with the Japanese Candlesticks to predict future price movements
The Japanese Candlestick helps traders benefit from potential buying and selling opportunities. Trade with Blueberry Markets to experience a seamless trading process yourself. Sign up for a live trading account or try a risk-free demo account.
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