In this lesson of the CFD course, we focus on Japanese candles. This is a type of price chart visualization widely used by traders and especially analysts.
Although online trading is a modern practice, Japanese candles are actually a very ancient method, dating back more than 500 years and originating in Japan.
This is how they look on eToro’s trading platform, which is free to access and can also be used in demo mode without a deposit.
Advantages of Japanese candles
Graphing the trend of the markets using Japanese candles has several advantages , even for beginners:
- An immediate and global view of the market trend , since the market imbalance between purchases and sales is immediately perceived visually for each trading session.
- The record of the minimum and maximum points touched for each time period, that is, for each period in which a candle has been active.
- Perfect integration with technical indicators
- Models that help in the technical interpretation of price trends.
Speaking of market imbalance, we recommend that you read the lesson on gaps and turns.
How do you read the candles?
Since candles can read a summary of the phases of opening, closing, maximum and minimum of a given action over a period of time. In fact, each of them is made up of:
- Body: starts from the opening price and reaches the closing price, can be green / white for rises and red / black for falls
- Tail: relates the maximum and minimum of the session with the body of the candle (we will see more in the next paragraph)
Below is an example of Japanese candles.
As can be seen in the figure, Japanese candles are very easy to read . The next step is to interpret the data and changes in detail. In the next paragraph, therefore, we will list the most common candles that can lead to potentially predictable market situations.
Japanese candlestick analysis
Each Japanese candle can be presented in different ways, with small variations that allow you to derive various types of analysis.
Long White Body – We find it in strongly bullish situations. The market that we observe in the presence of this particular candle shaping is practically moving in one direction, up. In cases where there is so much rise that the session ends with its maximum, there are no shadows and we speak of «marubozu». This is a strong imbalance in favor of buying, which promises a potentially bullish scenario even for the next trading session (for example, the next day, unless factors that influence this movement arrive, such as statements by politicians, important events, negations, etc.).
Long Black Body : it is the wing that is in a perfectly opposite condition to that of the White ones. Therefore, we have a bearish scenario and the probable continuation of the same trend in the following sessions, starting from the immediately following one.
Spinning Top : These candles are in a stable market, with no particular clues to identify market trends and imbalances between buying and selling. Looking at the forecasts, the green / white candle could lead higher, the black / red candle lower.
Long Top Shadow Candle – These overhead shadow lines imply a bear market, but only on one condition, which is that they should be located after a fairly strong uptrend.
In this case, the shadow indicates that although the buyers have tried to obtain more increases, they have had to give in to the return of the sellers, who have “rejected” the prices. By doing this, a pronounced upper shadow was created. This is an important candle as a resistance area can be identified near the highs of this candle. On the trading path, it represents a downward signal for the next session.
Long lower shadow candle : the situation is diametrically opposite to that of the upper shadow lines. These shadow lines above imply a bull market, but only on one condition, which is that they must be after a fairly strong downtrend. In this case, the shadow indicates that although sellers have tried to obtain further reductions, they have had to give in to the return of buyers, who have “rejected” the prices. By doing this, a pronounced lower shadow was created. This is an important candle as a support area can be identified near the lows of this candle. In the negotiation route it represents a rising signal for the next session.
Doji : it is a candle that is in a perfect balance between buyers and sellers. However, it is not at all a moment of “inner peace”, but a situation ready to change, a situation of uncertainty. In fact, the Doji represents a crossroads.
In terms of forecasts, a violation of the high can be read up, a violation of the low down.
Go to the next lesson on Gap and Lap.
Japanese candles faq
What are Japanese candles?
Japanese candles are a way of looking at price charts, used for financial markets and CFDs.
How do you read Japanese candles?
The color can be green or red depending on whether there has been an up or down movement.
Why is the length of Japanese candles different?
The length of the candles depends on the price change recorded during the lighting of the candle. The duration of illumination is the same for everyone, depending on the set time frame.
What signals can Japanese candles offer?
The shape of the candles and their succession can offer bullish, bearish and trend reversal signals.