There are many indicators that help make day trading successful but none with the history of Japanese Candlesticks. This trading indicator dates back to 18th century Japan when Samurai wielded swords in battle. Today Japanese Candlesticks are used to trade stocks, commodities, currencies, options, and futures. It is popular because the signals are easy to read while also providing the same degree of accuracy of modern statistically derived indicators.
History of Japanese Candlesticks
The basic concepts of Japanese Candlesticks go back to the 18th century. Almost 300 years ago Soyu Honma traded rice in Sakata, Japan. He noticed that by tracking price movements he could predict where the price would go next. This approach to using daily trading patterns to predict market movement was the first application of technical analysis. Honma became wealthy using his insights in trading rice. The system was fine tuned over the years so that today there are many Candlestick patterns that assist traders in anticipating price movement.
Japanese Candlestick Patterns
Japanese Candlestick patterns are symbols that are placed on a trading chart. These patterns consist of a rectangle with a single line extending both above and below. The rectangle’s vertical length is set by the opening and closing prices for the day or other time frame that the pattern describes and the lines portray the highest and lowest prices for that time frame. The rectangle is black or another dark color when the trading period closed lower than when it opened and white or another light color when the trading period closed higher than its opening.
Japanese Candlestick Chart
A Japanese Candlestick chart consists of a price line with Japanese Candlestick signals superimposed. Day traders commonly use charts that reflect hourly time intervals or even shorter while swing traders commonly use charts with signals that reflect daily time intervals or even longer. The price line on the chart indicates current trends and the signals indicate where the market is likely to go next. The signals pack a lot of information into small packages but to trade effectively with this approach a trader needs to learn at least the basic signals.
How to Read a Japanese Candlestick Chart
Reading a Japanese Candlestick chart starts with knowing the signals. A simple and common signal is the Doji. This signal indicates a market that does not know which way it is going yet. The trading period opens and closes at nearly the same price so the rectangle or “candle” is short or even a flat line. The high and low for the period are represented by the lines called shadows extending above and below. This signal often foreshadows a reversal or a breakout in the direction of the previous trend. By learning to interpret the signals one can profit from reading a Japanese Candlestick chart.
Japanese Candlestick Charting Techniques
One of the important factors in successful use of Japanese Candlesticks for day trading is to use the correct time frame for refreshing the candlestick signals. This is similar to making sure that your moving averages are recalculated in a time frame that matches your trading. If your time frame is set too long, a signal like a Doji which signals market indecision could come and go and you could miss the chance to pick up on a price reversal.
Japanese Candlestick Strategy
Japanese Candlestick strategy is the same as any trading strategy, to accurately predict market movement in the time frame in which you are working and to trade profitably. Although candlesticks are commonly explained in terms of stock or currency trading, they had their beginnings in trading commodities, rice contracts in Japan of the Samurai era. Successful traders learn to interpret these trading signals in terms of market sentiment. In terms of the Doji traders are undecided with some trying to take the market higher and some lower. Success comes from understanding what the current signal says about the market and trading accordingly.
Japanese Candlesticks Explained
This set of technical analysis signals has been around for a long time and has survived to prosper in the transition from rice trading in Japan to being used to trade stocks, currencies, and commodity futures contracts in the modern era. As a practical matter a day trader can learn and apply one or two signals at a time until they have developed a full arsenal of Japanese Candlesticks with which to analyze a market. With time a trader learns when to pull the switch on a trade at the first sign indicated by a candlestick signal and when to wait for confirmation before jumping all in on a trade.