What is a Japanese Candlestick?

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What is a Japanese Candlestick?

Japanese Candlesticks are a technical analysis tool that traders use to chart and analyze the price movement of securities. The concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the rice market was influenced by the emotions of traders, while still acknowledging the effect of demand and supply on the price of rice.

Homma developed candlesticks that graphically displayed the nature of price movements by using different colors to denote the differences. Traders can use the candlesticks to identify patterns of price action and make decisions based on the short-term direction of the prices.

As a legendary rice trader of financial instruments, Homma dominated the rice markets and became popular for discovering the candlestick charting method. When the Japanese stock market began in the 1870s, local technical analysts incorporated Homma’s candlestick methodology into the trading process. American technical analyst Steve Nison introduced the technique to the West through his book “Japanese Candlestick Charting Technique.” Japanese Candlestick charting is now a popular technical indicator that traders use to analyze financial markets.

How Japanese Candlesticks Works
Japanese Candlesticks provide more detailed and accurate information about price movements, as compared to bar charts. They provide a graphical representation of the supply and demand behind each time period’s price action.

Each candlestick includes a central portion that shows the distance between the open and the close of the security being traded, the area referred to as the body. The upper shadow is the price distance between the top of the body and the high for the trading period. The lower shadow is the price distance between the bottom of the body and the low for the trading period

The closing price of the security being traded determines whether the candlestick is bullish or bearish. The real body is usually white if the candlestick closes at a higher price than it opened. In such a case, the closing price is located at the top of the real body and the opening price is located at the bottom.

If the security being traded closed at a lower price than it opened for the time period, the body is usually filled up or black in color. The closing price is located at the bottom of the body and the opening price is located at the top. Modern candlesticks now replace the white and black colors of the body with more colors, such as red, green, and blue. Traders can choose among the colors when using electronic trading platforms.

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