Japanese candlesticks patterns are one of the most important and popular indicators that traders use to enter and exit a stock. They are the foundation to pretty much every trading decision. Watch the video below to get a basic overview of candlesticks and their importance when trading.
In the 1700s a Japanese man named Homma, a rice trader, developed this system after realizing a couple things.
He saw the correlation between supply and demand, price and emotion. The rice market was strongly influenced by emotions. When emotions were in the equation there was a big difference between the value and the price of rice.
The trading principles Homma established are the basis of candlestick charts. They measure the emotions surrounding a stock. It’s now become really popular among traders.
Japanese candlesticks patterns tell us a lot about the direction and trend of a stock. Candlesticks show you the market open, high, low and close of the day. Red or green candles tell you if it’s bullish or bearish for the day. Candlesticks are an early warning system for reversals, and trend changes. Combined with other western indicators, candlestick are a powerful ally to the trader who understands them.
These candlesticks patterns tell us the “what”, “the “why”, expectations and emotions. Markets fluctuate and the price of a stock may not reflect the value.
There are a few different kinds of charts. Bar charts for example, is another kind of chart that you can use. Traders tend to prefer candlestick charts because they’re easier to interpret. You can see everything that happened that day in a glance. Unlike a bar chart, a Japanese candle shows the “force” of the move up and down, providing much more information.
There are some essential stock market books on Japanese candlesticks patterns that we recommend reading. Steve Nison has put together a book on candlestick charting. It’s an easy read and one you’ll refer back to many times. Buy The Candlestick Course. Steve Nisson is considered the god father of candlestick trading. If you’re going to read any book on it, this is the one you want to read.
A second Steve Nison book we recommend is Japanese Candlestick Charting Techniques. He discusses adding candlestick patterns with technical analysis. This book is one that you should read after reading his candlestick course book. It really brings together the big picture with candlestick trading. Buy the Japanese Candlestick Charting Techniques.
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Candlesticks depict the battle between the bulls and the bears. The closer the close is the the high, the more in control the bulls are. The closer the close is to the low the more in control the bears are. Sometimes multiple candlesticks will form their wicks (the lines at the top of a candle) near a key resistance area. This is showing you strong bears that are preventing the candlesticks real body from closing in that area.
On the opposite end of the candle stick, the bottom side, you will sometimes see multiple candlesticks forming “shadows” or “tails” in a common area. This is showing strong bulls that refuse to allow the candlestick body to close in their strong support area.
Candlesticks never look the same from day to day. This is were it gets really important to know what a candlestick is telling you. As we dive into our candlesticks course, you’ll learn more and more about how to read Japanese candlesticks patterns. Recognizing patterns is essential to trading and helps predict price action.
Knowing technical analysis basics is great but knowing what a candlestick is telling you will take your trading to the next level. You can use the wicks and bodies to find support and resistance. The position of a candlestick also tells a story.
You can have your trend lines, channels and your moving averages all telling you one thing. But the candlestick type and position may be telling you another story, and is of great importance.
Homma developed the Japanese candlesticks patterns because he saw how emotions move stock price. Candlesticks help traders gauge the emotions surrounding a stock. It helps make the prediction about where the stock is headed.
Studying these candlestick meanings and patterns help you as a trader. Being informed gives you the advantage over someone who doesn’t take the time to study.
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