In addition to Support and Resistance lines, Japanese Candlesticks are the most important Technical Analysis tool you will be using in your Fx trading. Japanese Candlesticks are showing us the Price Action during the specific time period. This time period depends on your chosen chart type. On 4 Hr. chart every Japanese candlestick will represent price action during 4 hours, on 1 Hr. chart – price action during 1 hour and so on.
How to Interpret Japanese Candlesticks
On chart you will be able to recognize 3 different types of Japanese Candlesticks:
- Japanese candlestick going up
- Candlestick going down
Japanese Candlesticks contain body and wick (shadow) of the candlestick.
Important: The higher chart you are using more precise the candlesticks will be, as more orders went into the ForEx market.
Again, like with everything ForEx, always make sure that you are reading Japanese Candlesticks in context, not as isolated cases. Failing to do so will eventually lead to very costly mistakes.
Japanese Candlesticks should be taken into account together with other Fx Technical Analysis Tools as Technical Indicators and Support/Resistance lines.
Popularity of Japanese Candlesticks comes from their ability to give you:
- Very good entry points, revealing reversals and retracements in trends
- Precise stop loss points (above/below reversal Japanese candlestick)
Conservative approach: When entering the position on Japanese candlestick reversal candle wait for confirmation of that signal, wait for the next candle that will go above/below (according to reversal direction) the candle that gave you the entry signal. (Recommended)
It is already said that nothing in Fx currency market is perfect, neither are Japanese candlestick patterns and Japanese candlestick formations.
You will be able to recognize these formations and patterns only by practice.
Most Popular Japanese Candlesticks and How to Read Them
The Hammer Candlestick
It is a most famous Japanese candlestick shape and it looks like a hammer, with small body and big lower shadow.Upper shadow is very small or does not exist at all. It is bullish reversal pattern. Lower shadow to candlestick body ratio should be 2:1 or greater.
If you look at the hammer candlestick you will read this price action as price started going in one direction, but turned the other way.
Inverted Hammer emerges when buyers push the price higher than sellers, but the price retraces and closes near the opening price.
In addition to its reversal pattern function, Hammer can also mark bottom of a trend or strong support level.
Hammers are great patterns as they, as said before, will give us precise stop loss points, putting the stop loss just below the candle. If that stop loss gets broken, you can be sure that there was no reversal at the first place.
Hammer Japanese candlestick that appears in uptrend is called Hanged Man. It signifies strong resistance or market peak. Hanged Man is formed when price from the opening falls down due to strong pressure of Bearish market, but it manages to retrace back during that candle period.
You can also use Hammer as an entry point and Hanged Man as an exit point for a trade.
Marubozu Japanese Candlestick
Marubozu Japanese candlestick has very long body with small to none shadows.
How to read Marubozu candle? If you look at it you can see that market is very sure about direction it wants to go (down), from open to close. It is usually traded in Breakouts and in most cases trends emerge after Marubozu candlestick as market is sure where it wants to go.
Marubozu Japanese candlestick is usually traded in breakouts. Breakouts come with strong momentum and sometimes you won’t get your confirmation like you do with The Hammer candlestick. Again, practice.
Doji Japanese Candlestick
What does Doji candlestick shows? Indecision of the market. Doji is usually traded in multiple candlestick formations.
Multiple Japanese Candlestick Formations
These are formations that need more than one candlestick to be confirmed.
Morning Star Candlestick Pattern
Bullish Japanese candlestick reversal pattern. Three candlesticks that signify the reversal of the downtrend.
First candlestick is Bearish, in direction of the trend
Second candle shows indecision of the market
Third candlestick is trong market move in opposite direction
Tip: Use RSI Indicator to signify when market is in overbought/oversold level and then start looking for Japanese candlestick patterns (like Morning/Evening Star patterns) that will announce reversal of the market.
Evening Star is Bearish reversal pattern with 3 candlesticks that signify the reversal of the uptrend.
Always use Japanese candlesticks in combination with other Technical Analysis tools.
Confirmation of Morning/Evening Star is Japanese Candlestick that signifies change of direction. It should not go lower than previous Candlestick and should go lot higher than previous Candlestick.
Enter the market on the confirmation, put your stop loss below the hammer, put your take profit according to your money management strategy.
Engulfing Candlestick Pattern
Trend is going in one direction and body of the candlestick in other direction, completely engulfing the body of previous Japanese candlestick.
As before, use this with other Fx Technical Analysis Tools. For example, look for RSI Indicator to get in oversold/overbought level and look for this engulfing Japanese candlestick pattern.
If you read the candlesticks this way, you will understand the price movement better. That will help you in your Fx market analysis and your overall ForEx trading.
As a beginner Fx Trader, you should not look for formations that contain 4 or more Japanese candlesticks. Focus on simple formations which will be a lot easier to spot. Again look at Japanese candlesticks in context, and practice.
Download Japanese Candlesticks Explained PDF
Feel free to download and share Japanese Candlesticks Explained in PDF format.