When looking at this title, some people may be wondering how this topic relates to the financial world. Like a candlestick, this trading vehicle burns over time and can create a bright light in the hearts of traders around the world.

Seriously though, what is a Candlestick all about and how does it relate to your trading strategy? It is good you are here to find out.

What is a Japanese Candlestick?

In the financial world, a Japanese Candlestick is a type of bar chart that is used to describe price movements over time of a security, derivative or currency. It has been used by the Japanese for hundreds of years but has only been used in the Western world for the past 25. Part of the reason for the time lag was that these trading centers thought it was a hard technique to master and didn’t invest the time to understand the value it could bring to their trading platforms.

As time went on, the technique has been increased in acceptance and, due to the invention of computers and computer programming, the technique is now widely adopted in the financial trading world.

How does a Japanese Candlestick work?

A Japanese Candlestick is not simply a bar chart – it offers a wealth of information for the trader of today. Just by looking at this chart, a trader can tell whether bulls or bears won in the markets – telling us who succeeded in getting the market to close at a higher or lower price than it opened.

Just by looking at the candle, you can tell a lot about what happened on the trading floor. This includes knowing which side of the coin won, whether prices closed lower or higher than they opened for that trading day and gives us a sense of the overall period’s highs and lows.

Understanding the basics of a Japanese Candlestick is fairly logical – the high and the low prices are shown by the candles upper and lower wicks in the chart. As an example, if a candlestick has a very long lower wick, then prices have gone very low during that period’s trading and have returned back to a much higher close.

The candlestick is related to a given period – which is a key factor to understand. The period of a candlestick can range from one minute to fifteen minutes to one day or a week. This is why it is very important to understand the period the candlestick represents.

The anatomy of a Japanese Candlestick

Like most candlestick patterns, the Japanese Candlestick is made up of a visual representation of how a stock is performing. This includes:

• The upper wick – which is made up of:

• The highest price of the day
• Open or closing price

The body – the color varies to how the stock closed:

There are numerous Japanese Candlestick techniques out there from the hammer, doji, engulfing and many more. All of them are comprised of the same components but tell a different story to the trader. Learning Japanese Candlestick techniques is an important part of your role as a trader so it is key to invest the time in understanding them.

Why use a candlestick over a bar or line?

The candlestick graph shows you, as a trader, a lot more information than a line or bar could. It facilitates information to be recognized in a concise way. From a mere glance at the candle, you can see where the bulls won, indicated by it being unfilled and outlined with a blue line. You can also see where the bears won, indicated by a filled candle and outlined with a red line. More importantly, from the length of the wicks, you can see how high and low prices went during the session as well as the distance between the opening and closing prices.

For this reason, the purpose of synthesizing information, the Japanese Candlestick technique is an ideal tool for a trader – relevant information delivered in an instant.

At a first glance, the anatomy of a Japanese Candlestick can seem complex but after breaking it down, it is easy to understand how this simple figure tells the trader so much. As they say, good things come in small packages. Enjoy utilizing this technique in your trading strategy for greater impact.