Today I would like to discuss Japanese candlestick analysis as it is quite common in the market and can be termed as a distinct type of analysis. It was created in the 18th century in Japan by a rice merchant Munehisa Honma (Sokyu Honma).
A little history
In the 18th century, the Honma family traded in rice and owned extensive rice fields. In 1750, after the death of the father of the family, the capital passed into the hands of Munehisa, who was, surprisingly, the youngest child of the family.
The Honma family lived in a town called Sakata, which was a major port and one of the major rice trading centers. When Munehisa inherited the business from his father, a rice trading market opened up in Santa, which later changed the lives of Munehisa and his family.
For many years, Munehisa traded at the rice exchange market and earned a fortune. Over time, the family business moved to Osaka and Edo (modern Tokyo).
One of Munehisa’s records was making around 100 successful trades in a row!
Japanese candlesticks: chart analysis
Munehisa Honma studied the market deeply for 15 years and concluded that the main part of forex trading is the psychological state of the trader which is the index of rice price formation.
This is how Honma designed its method of representing 4 prices at once, and no longer just one price as before. As the main prices, it took the open, high, low and close over a certain period, say an hour.
This is how the Japanese candlesticks with their bodies and shadows were created. After being designed and put into practice for the technical analysis of rice trading, some laws and patterns have been noticed. Some of them will be discussed below.
This must be the most popular type of Japanese candlestick for chart analysis. It is peculiar because the closing and opening prices coincide, that is, the candlestick has practically no body.
This type of candlestick predicts an upcoming market reversal, but only for instruments for which it is rare. If Doji appears frequently on the chart, it loses power and cannot be called a reliable signal.
The longer the shadows of such a pattern, the stronger the reversal signal it gives. For example, if the upper shadow is longer than the lower shadow, it is a bearish signal, i.e. the market will soon reverse lower. If the close and open prices are right in the middle of the candlestick, this pattern is called Rickshaw.
This type of candlestick is the opposite of the Doji: its opening and closing prices coincide with the high and low depending on whether the candlestick is bullish or bearish.
A white candlestick symbolizes the positive mood of the market, i.e. shows that growth will continue. A black candlestick speaks of bearish market moods and further decline. Thus, Marubozu is a Japanese candlestick signaling the continuation of the trend.
This type of candlestick has a small body and small shadows. They signal market consolidation. In other words, it means that the trader should refrain from trading the instrument.
The types of candlesticks listed above are the simplest and most widespread. More details are in the RoboForex blog, especially in candlestick analysis: 24 major candlestick patterns.
By Dmitriy Gurkovskiy, Chief Analyst at RoboForex