Learn To Profit With Japanese Candlestick Charting

Much has been written on the subject of candlestick charting and trading but most of it leaves the trader with more questions than answers. Candlestick charting is one of the most powerful tools a trader can use to quickly assess the mood of the market. Better yet, it can be used to accurately predict turning points in any tradable market. Then why has your experience with candlestick charting produced mixed results at best? Because candlestick charting has to be applied with present day market analysis to produce valid signals! No, I don't mean using a "magic" trading system or a pack of useless indicators. I mean a simple, straight forward approach that will produce valid signals.


Japanese candlestick charting techniques have been around for over 400 years beginning with a Japanese rice trader named Homma who successfully used candlestick charting to trade rice commodities. Today, candlestick charts are used in almost every form of trading including stocks, options, index and commodities futures as well as the popular forex markets. Acquiring the knowledge to identify candlestick patterns can determine whether or not a trader is profitable. A candlestick tutorial is the first place to start for those new to Japanese candlestick trading.

AAPL Three Month Candlestick Chart

A Japanese candlestick chart is one of the most recognizable of all charts used in trading. Easily identified by a thick bar with two thin lines on either end, each individual candlestick provides important information about each day’s trading. Not only do the candlesticks show where the trading session opened and closed, but also can reveal a great deal about the tug-o-war that took place during the session between buyers and sellers.

The thin lines found at the top and bottom are called shadows. These lines show the extreme high and extreme low for the entire daily session. The shadow at the top of the candlestick body shows the extreme high point of the day with the shadow at the bottom revealing the extreme low of the day. The shadows are important since they can reveal not only technical information but also the emotional mindset of buyers and sellers. The shadows are important because they will show the absolute high and low of the trading session outside of the opening and closing range.


The body of the candlestick also provides important information about the days session. Candlesticks that close higher than the previous day’s trading session are usually white or green with candlesticks closing below the previous day’s session colored in either red or black. Individual traders can usually choose, depending on their trading software, the color of up or down daily candlesticks depending on their personal preference.

Candlesticks can also be used for different time periods, not only the daily session. Time periods can be shown in ranges starting at one year all the way down to 1 minute with the time interval chosen dictating when each candlestick will form. If a trader needs to chart a long term trend for the past ten years, each candlestick represent one year for each of the previous 10 years. Futures traders or traders using scalping techniques will often use short term candlesticks such as the 5 minute, 3 minute and 1 minute candlestick time frame. Long term investors will not use the same time frame as short term traders using swing trading or day trading techniques.

Four levels or prices are revealed in each individual candlestick. The opening, the close, the absolute high and low during the time period selected, whether on a monthly chart or a 5 minute chart. Candlesticks combined together create patterns called formations that can often predict which way a stock or commodity is headed.

Some formations can show when a strong uptrend is nearing exhaustion and a reversal to the downside may be about to begin. Others may show that a breakout is about to occur as a upside move has broken through a strong resistance. One individual candlestick alone will not provide much information on determining which way the chart is heading, However, Japanese candlestick charting becomes very powerful once candlesticks are combined together in formations and patterns. These formations or patterns have been given colorful names such as: dark cloud cover, bullish engulfing pattern, bearish engulfing pattern, hanging man, morning star, evening star. Once a trader learns to recognize these formations, he can quickly determine which trades may be profitable and which are not.

Profitability is the goal of all traders no matter which market they choose to trade and Japanese candlestick charts can be used in all forms of trading. Learning to recognize profitable formations and set-ups will greatly improve trading results. Find out more about candlestick formations with this Japanese candlestick tutorial.