Japanese traders began using their own technical analysis tools to trade the rice market back in the 1600′s believe it or not. Attempts to make a buck by being ahead of the market indeed go back that far!

Japanese candle charting takes for granted the following ideas and philosophies:

1) All knowable information is already reflected in the price of anything

2) Market movements are based on future expectations and emotions

3) The prevailing market price may not reflect the actual underlying value

Japanese candle charts look quite alien to western Forex market traders when they first encounter them, but the truth is that they are very much like the more commonly known Bar Charts.   See Figure 1.

A standard bar chart gives you the open, the close, the high point for that period, and the low point for that period all in one “bar” or line with the two horizontal hash marks sticking out of it.  The left hash mark is where the price opened during that time period.  The right hash market tells you where the market finished when that period closed.  The top of the bar tells you the high price level for that period, and the bottom of the bar shows you the lowest price reached during the duration of that time period.

The Japanese Candle Chart

Figure 2. The very same chart as above displayed as candles

The Japanese candle chart that you see above is exactly the same trading instrument during the same period of time, in the same time frame.  The only thing that is different from the bar chart is that the information you get is more visual to the trader because the open, high, low, and close are now filled out so that you can see them better.

To generate a candlestick chart, you need to obtain data set that provides the open, high, low and closing values for each time period you want to display.  If you are generating a 15 minute chart, then each single candle will give you that data for a given 15 minute period during that trading session.

For a Japanese candle the empty or filled in portion of the candlestick is called “the body”, and the long (or short) thin lines above and below the body represent the high-low range for the period and are called “shadows”.  Some traders call them “wicks” because candles do have long thin wicks at the ends of them if you think about it.  If it makes you wonder why there would be two wicks, just remember that there are traders who do burn the candle on both ends!

The high price level of the time period is marked by the top of the upper shadow and the low price level is marketd by the bottom of the lower shadow.  If a Forex currency pair closes higher than its opening price, then a white (or hollow candlestick) is drawn with the very bottom of the body (not the wick) representing the opening price of that period, and the top of the body representing the closing price of that time period.  If the currency pair closes lower than its opening price, then a black (or solid) candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.  That would be a “down candle”.

Figure 3. A solitary Japanese Candle. This is an "up" candle

Japanese candle charts have become very popular among stock and Forex currency traders because many of them consider candlestick charts more visually appealing and therefore vastly easy to interpret compared to bar charts. A candlestick gives you a simple to understand visualization of the present price action for any trading instrument including Forex pairs, and you as a trader can at a glance more easily make a comparison between the open and closing price levels.

The relationship between the opening and closing prices is considered to be crucial to momentum analysis and forms the very essence of Japanese candlestick chart analysis. In future articles we will examine some of the many candle stick formations that traders use to forecast future market moves.