Japanese Candlesticks

by Unknown 8:50 AM 1 comments Investment Theory Japanese Candlesticks Technical Trading

The first concept you must understand in order to analyse a graph properly are the JAPANESE CANDLESTICKS. These easily understandable icons contain vital information that will help you understand what happened during a certain period of time (minute, hour, day, week) in the market.

If the candlestick is red the market opened on the top and decreased until the bottom. If the candlestick is green then the market opened at the bottom and closed up top. The black line, or shadow, in the middle of the rectangle indicates the fluctuation (ups and downs) during the day.

There are 3 main types of candlesticks: the stable, the unstable, and the pretty much useless ones.

The STABLE candlestick looks something like this. We can clearly observe how this states the value of the stock went down, as explained previously, from the top of the rectangle to the bottom. It most likely fluctuated during the day with a downwards trend. There is no shadow indicating that the downward movement was consistent. This means that the next day the stock will most likely decrease even lower since it has not reached any resistance points.


 Next up, the UNSTABLE candlestick looks like the figure on the right. There was a slight increase in the value of the stock as the figure is green. The stock's went from the bottom to the top of the green rectangle. There is a huge shadow indicating fluctuation. This means a lot of stock was probably bought and sold. The candlestick was supposed to follow a trend but it reached a resistance point where most stockholders will want to sell. As stockholders sold the price decreased drastically making other less attentive stockholders sell too. Since everybody sold the stock's value decreases and it will probably adopt a downwards trend as this is most likely the pivot (moneymaking) point.


Finally, the USELESS candlestick looks like the figure on the left. The value of the stock has increased that day, as it is obviously green, therefore going from bottom to top. However this candlestick does not help us at all, as it will give us no clue of what will happen next. We know not whether it will increase of decrease since we can only note stockholders or the news has made investors indecisive. This indecisiveness is represented by a long shadow that goes both up and down. An example could be a stock that started off going downwards drastically. At the lowest point people bought stock. However so many people bought that it started rising quickly until it reached a point (top part of the shadow) where people started to sell once again, decreasing the value of the stock.

Now that we know the types of candlesticks we can use our knowledge on a graph. Take a quick look at the following graph.

We can clearly see both upward and downward trends. Take a look at the las  downwards trend. We can see how there is a drastic decrease in the value of the stock as all candlesticks are red. Now that we can identify the different kind of candlesticks we can classify the last one as UNSTABLE. We know that a unstable one usually means people are satisfied with the stock's price and they deceived to buy or sell depending on whether the candlestick has a low or a high price. Therefore the last candlestick probably represents a turning point.

The next figure illustrates my point as the stock's price rose once again with the change in stock position going from short to long.