Lesson 9: Summary: Why Should You Use Japanese Candlesticks When Trading?

Throughout the module, you've learned how to spot Japanese candlestick patterns in your price chart. More importantly, you're the best practices in trading candlestick patterns to analyze the price action and predict its future movement.

Now, let's review the key reasons why Japanese candlesticks are an essential tool for traders and how they can enhance your trading strategy.  

Lesson Overview

• Many traders prefer analyzing the market using a Japanese candlestick chart because of its visual clarity.
• The parts of a Japanese candlestick – the upper shadow, real body, and lower shadow – tell you about the opening, high, low, and close (OHLC) price.
• Japanese candlestick patterns are useful in predicting the future market trend, whether it will reverse or continue.  

Candlesticks Are More Informative Than Other Price Charts

For technical traders, it's easier to analyze the price action and predict the future market trend using Japanese candlesticks. Why?

Simple: These candles provide sufficient price data while giving visual clarity to smoothen the chart.  

At its core, a Japanese candlestick is formed with the open, high, low, and close of the specific market period – these are the four major data points. These price points are essential to understand the prevailing market sentiment, analyze the trend's strength, and predict future price movement.

Additionally, the colors of the candle make chart patterns easier to spot and the ongoing trend easier to interpret.  

Say the market forms a long series of green (white) candlesticks. It means that it's currently bullish. Otherwise, a red (black) candle series indicates a bearish or declining market.  

The color and shape of candlesticks make it easier to see market trends and patterns at a glance. For example, green (or white) candlesticks indicate a bullish trend, while red (or black) candlesticks indicate a bearish trend.

Note: The period that a single candle represents depends on the timeframe of your chart. If you've set the chart to a 4-hour timeframe, one candle represents the 4-hour market period.  

The Anatomy of the Japanese Candlestick

By showing the market's OHLC, the Japanese candlestick has become the favorite of technical analysts.  

Real Body

The candle's real body shows the period’s open and close range. The wider the range, the taller the candle—and vice versa.  

Meanwhile, its color signifies the battle between the bulls and the bears.  

A price that closes above the opening point indicates a bullish market. This market will form a green (white candle).  

On the flip side, a price that closes below the opening point forms a bearish (red or black) candle.  

Shadows or Wick

The candle's shadows (also known as wicks) represent the period's high and low.  

The upper shadow shows the highest price. The formation of the upper shadow indicates that the buyers temporarily had control but couldn't maintain it.  

On the other hand, the lower shadow reflects the lowest point the price had reached within the period.  

Together, these shadows provide key insights into the tug of war between the buyers and sellers during a specific time frame.

Provides Signals

Since Japanese candlesticks comprise the price's OHLC, these candles can form chart patterns. These patterns signal the potential market trend.  

These can give out either a reversal, continuation, or bilateral trend.

Say you're looking at a bullish chart in a 4-hour timeframe. One candle later, you've noticed the market forms a candle with a small real body, extended shadow, and almost non-existent lower shadow.  

Because you're already familiar with different candlestick patterns, you know you're looking at a shooting star pattern.  

This formation signals the potential bearish reversal because the bullish trend is running its course – representing the real small body and an extended upper shadow.  

And because you're so knowledgeable about pattern trading, you waited for a decisive candle to confirm the bearish signal. Four hours later, the market creates a bearish candle that's triple the size of the shooting star.  

Indeed, the bearish market will happen.

Shows Various Patterns

Japanese candlesticks form various chart patterns – the singles, duals, and triples. These chart patterns require a specific number of significant candles to confirm the pattern formation.  

Pro tip: You can't expect these patterns to form by the book. They may form more candles than they're supposed to form. Just remember that the forex market is dynamic and complex – so is the pattern it creates.  

Single Candlestick Patterns 

As its name suggests, a single candlestick pattern requires only one significant candle to form to confirm the signal. These patterns are known to be self-confirming.  

However, if you live by this idea, you set yourself up for a losing streak. No indicator should be treated as self-confirming due to the complexity of the forex market.  

Remember to perform a multi-indicator analysis to supplement your findings. Additionally, you can ask the community to confirm the accuracy of the signal.  

Dual candlestick patterns

A pattern with two significant patterns belongs to the dual candlestick pattern group. Like singles, dual patterns are also common in the market. However, duals provide clearer signals than singles.  

Triple candlestick patterns

A triple candlestick pattern must form three consecutive candles of specific length and color. With their complex formation, the triples' signals are considered the most accurate among the three categories.  

The most accurate? Does it mean you can trade it as soon as you spot it?

No – you never do that. You trade the candlestick signal with support and resistance to ensure it is profitable.  

Use Japanese Candlesticks with Support and Resistance

As you already know (hopefully), support and resistance are the market levels at which the price can't trade beyond. The support level acts as the market floor, while the resistance level is the ceiling.  

These two extremes give you a better, wider, and more informed perspective on the market.  

Thus, analyzing the S/R levels helps you assess the accuracy of the pattern's signal.  

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