Lesson 5: What Is a Japanese Candlestick?

Close your eyes and visualize a forex price chart. What did you imagine? Did you envision a price chart with the familiar candlestick price movement indicators? 

Believe it or not, these patterns did not become commonplace in the West until the late 1980s. Before the widespread use of the Japanese candlestick, western traders relied on bar and line charts. 

It wasn’t until Steve Nison, an American analyst, “discovered” the Japanese methodology and popularized it in his book “Japanese Candlestick Charting Technique” that it saw regular use. 

In this lesson, you’ll learn more about the Japanese candlestick and how to interpret its parts. 

Lesson Highlights

• The Japanese candlestick method did not gain widespread popularity until the late 1980s. 
• Steve Nison, an American analyst, popularized the Japanese candlestick method through his book. 
• Munehisa Homma, a Japanese rice trader, originally developed the Japanese candlestick method. 
• A Japanese candlestick signifies price movements over a specific period, such as an hour, a day, or a month. 
• A candlestick can have either a hollow or filled body. 
• Candlesticks have upper and lower shadows that are not technically parts of them.

What’s A Japanese Candlestick?

The Japanese candlestick was a popular charting method in Japan as early as the late 17th century, but it was simply called the candlestick method in the country. 

This charting method was widely used by Japanese rice traders. It was developed by Munehisa Homma, who was a rice trader himself. He initially used it in the Dojima Rice Exchange in Osaka, Japan, where it gained popularity among other rice traders. 

The method became ingrained in Japanese trading culture and was eventually “discovered” by Steve Nison. 

A Japanese candlestick is simply a visual indicator of price movements over a given period. It can indicate how prices moved over different timeframes, such as: 

• A minute 
• An hour 
• A day 
• A week 
• Or even a month 

The opening and closing prices, and the highest and lowest points within it, form the candlestick pattern. 

Parts of a Japanese Candlestick

As stated above, the opening and closing prices, along with the highest and lowest points therein, comprise a Japanese candlestick. 

There are also upper and lower shadows (also called wicks and tails, respectively), but these two aren’t technically parts of a candlestick. 

The image below can help you better visualize a candlestick and its parts. 

A candlestick’s length shows the intensity of market activities in the period it covers. Shorter bodies indicate a small number of buying and selling. This can signify less price movements and lower volatility during that period. 

On the other hand, longer bodies signal a high level of market activities. 

A candlestick’s body can be either hollow or filled. 

When a candlestick’s open is higher than its close, the result is a filled body. A filled candlestick body indicates a bearish market sentiment during the period it covers. 

Conversely, a candlestick with its open below the close will create a hollow body. Hollow candlesticks are indicative of bullish market sentiment. 

The thin lines above and below the bodies are its upper and lower “shadows,” depending on the shadow’s position. Some analysts refer to upper shadows as “wicks” and the lower shadows as “tails.” 

A candlestick’s shadows show the highest and lowest price ranges during the period covered by the candlestick. A candlestick can be missing an upper or lower shadow, or both. 

• Missing Upper Shadow – If the candlestick’s close is at the same level as the highest price point of the period it covers, the upper shadow will be missing. 
• Missing Lower Shadow – If the candlestick’s open is at the same level as the lowest price point of the period it covers, the lower shadow will be missing. 
• Missing Both Shadows – If the candlestick’s open and close are at the same level as the highest and lowest price points of the period it covers, both shadows will be missing. 

Now that you’ve become more familiar with the concept of Japanese candlesticks, you can head on to the next lesson. There, you’ll learn about some of the basic Japanese candlestick patterns.