Your starting guide on price action and Japanese candlesticks

Dimitrios Gourtzilidis
Jan 2 · 5 min read

Inside the realm of technical analysis, there is only one king. His name is “Price Action.” This is the first subject a beginner trader should need to master.

Simply put, price action is the movement of the price in relation to time. All the transactions within an instrument create a summarized chart, and this is the most important indicator that we have to analyze.

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The History of Japanese Candlesticks

Single candlesticks, according to their shape and size, can have “nicknames.” Most of these names came back from the Homma’s era in their original Japanese, and many others have been translated into English.

The candlestick pattern chart has been brought to the West by Steve Nison in 1989. This chart pattern replaced, in many cases, the bar pattern chart that was used in the West until that time.

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No timeframe is better than the other, it simply contains more or less information than the other. The bigger the timeframe (months, weeks, days, etc.), the less the noise in the chart. The smaller the timeframe (five minutes chart, ten minutes chart, etc.), the more the noise. On the other hand, the bigger the timeframe, the lesser the trading opportunities. The opposite is true for the smaller timeframes.

Bigger Timeframes

  • Less Trading Opportunities
  • Less Volatility
  • Shows the Bigger Picture

Smaller Timeframes

  • More Trading Opportunities
  • More Volatility
  • Shows the Details

OHLC (Open-High-Low-Close) Candles

The body of a bullish candle, which usually is green, includes the opening price on the lower side and the close price on its upper side. The upper line of a candlestick is either called ‘shadow’ or ‘wick,’ and it represents the highest value that the price has taken. The lower wick represents the lower price that the asset has taken.

The red or bearish candle represents the same information with the difference that the upper side of its body represents the opening value and the lower side shows the closing price.

The red and green colors are the most popular choices. Other choices include black and white or hollow bodies with other color choices. The colors are mostly a cultural thing. In the West, the red color symbolizes danger, that’s why we use it to represent the downwards movement or the price. In China, red symbolizes luck and positiveness, that’s why they use this color for the upward price candle.


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Support and Resistance

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The opposite is true for what we call a ‘resistance’ level. The image below shows that the price tried three times and at the fourth time broke through the resistance level.

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The support and resistance level can be drawn by either a single line or with a rectangle. The rectangle represents an area of resistance or support.

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Uptrend and Downtrend

When the price is trending upwards, it creates a higher high and a higher low. The image below shows an uptrend. The green arrows represent the higher highs and the yellow arrows show the higher lows.

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On a downtrend, on the other side, the price creates lower highs and lower lows. The image below shows a downtrend, with the green arrows shows the lower highs and the yellow arrows the lower lows.

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