Understanding Japanese Candlestick
Pro traders likely analysed price action and investor emotions by using candlestick charting style.
Although modernized in the late 1800s by journalist Charles Dow, the core principles of candlestick charting remain intact today. Both the modern and historical technical analysts who swear by the style regard price action as more important than earnings, news or any other fundamental principles.
In other words, all known information is reflected in the price, which is precisely displayed in the candlestick.
A candlestick represents the price activity of an asset during a specified timeframe through the use of four main components: the open, close, high and low.
The “open” of a candlestick represents the price of an asset when the trading period begins whereas the “close” represents the price when the period has concluded. The “high” and “low” represent the highest and lowest prices achieved during the same trading session.
Every candlestick uses two physical features to display the four main components.
- The first feature, known as the body, is the wide midsection of the candlestick and it depicts the open and close during the observation period (most charts will allow you to set the range for the candlesticks)
- The close is represented at the top of the body in the green candlestick and at the bottom of the body in the red candle.
- On the opposite is true of the open, which forms the bottom of the green candlestick and the top of the red candlestick.
- The final two components, the high and low, are represented in the second feature of the candlestick known as the ‘wick.’ Wicks are simply displayed as the thin lines extended above and below the body.
Cryptocurrency traders tend to take advantage of the inherent market volatility by using charts on the intraday time frames. Each candlestick typically represents one, two, four or 12 hours. (A longer-term trader will likely choose to observe candlesticks that represent a single day, week or month.)
A candlestick becomes “bullish,” typically green, when the current or closing price rises above its opening price. The candlestick becomes “bearish,” typically red, when its current or closing price falls below the opening price.
It’s important to keep in mind that the longer the duration of the candlestick, the more powerful its effect is on the overarching trend.
For instance, a hammer spotted in a one-hour candlestick will have almost no impact on a 6-month long downtrend, whereas if the hammer formed on a 1-week long candlestick, its reversal impact would be much more significant.
