Full Review of the Japanese Candlesticks Binary Options Technical Analysis Trading Tool
Contrary to what some of you might think, trading naked does not mean trading with no clothes on, but using charts free of any indicators. This is where Japanese candlesticks play an important role because the shapes they take and the patterns they form are indication of future price direction. A Japanese candle show us the Open, High, Low and Close of the period analyzed. If we are using a Daily chart, one completed candlestick will give us the highest point reached by price during the day, the lowest price, the open price and the close price. Same goes for a 1 hour candle or a 1 minute candle (this applies to all Japanese candles). Here is a graphic explanation:
This is a bearish candle, which means that the Closing price is lower than the Opening price (price fell by the end of the analyzed period). The upper wick shows the highest point reached by price and the lower wick shows the lowest point reached by price in our period. This is the basic information that we get from a Japanese candlestick but now comes the interesting part: I am going to explain how to use some of the most important Japanese candlesticks.
How to use different types of Japanese candlesticks
The Pin bar
This is one of the most powerful candlesticks and you might remember it from the Pinocchio Strategy. The Pin bar (Pinocchio or simply Pin) tells a story and we must know how to read it: in the beginning, the Bears were strong and confident, pushing price lower, but by the end of the period, the Bulls starting to become more and more powerful, pushed price higher than the opening point and managed to close it higher, with a small upper wick. After a candle like this one, the Bulls are in control and prices are more likely to move even higher. A Bullish Pin bar has the following characteristics: it has a big lower wick, a small body (the body is about one third of the length of the whole candle) and a small upper wick. A Bearish Pin is the opposite. You will not always see perfect Pin bars like the one in our picture above, but they can still be categorized as a Pin. Sometimes in a Bullish Pin, the closing price will not be higher than the opening price. That is still a Bullish Pin bar, but it will not be as powerful as the one in our picture.
A Doji candle is formed when the Open price and Close price are almost the same, which will create a very small body and long wicks. Usually in a Doji candle the upper and lower wicks are almost the same length, but if they are not, the candle still qualifies as a Doji as long as the opening price and the closing price are almost the same. Look at the picture bellow to see what a Doji candle looks like:
Usually the Doji candle signifies indecision in the market. Neither the Bulls nor the Bears can move price in one direction and this causes price to fluctuate up and down during the period and eventually close almost in the same point where it opened. If after a strong, prolonged move in one direction, several Doji candles appear, we must be aware of a possible reversal, but given that the Doji is mainly a indecision sign, price can go either way because eventually one of the two sides will win the battle.
A Marubozu candle is a clear indication of one-sided strength: a bullish Marubozu means that the Bulls are in complete control and a bearish Marubozu candle signifies that the Bears are in total control. Here is how Marubozu candles look like:
Marubozu is a single candlestick, not a formation and in the picture above I exemplified both Bearish and Bullish ones, but that doesn’t mean that you have to find them together to qualify as a Marubozu. The characteristics of this type of candle are: long bodies, signifying strong selling or buying pressure (depending on the type of candle – bullish or a bearish) and no upper or lower wicks, signifying that the other side of the market has no power. Although a perfect Marubozu is hard to find, when we find one it is a clear indication that price will continue in the direction indicated by it. One more important and helpful thing to know is that whenever you see a breakout accompanied by a Marubozu candle, it is most likely to be a real breakout and not a false one. Here is a picture:
In the picture above, price was confined to a range, finding Resistance at the top and Support at the bottom. About half way into the ranging period, price tried to escape to the downside, but that resulted in a false breakout as we can see. Then again, price tried to break the bottom of the range, but this time, a Marubozu appeared and the breakout was clearly confirmed by it.
Why do Japanese candlesticks suck?
If all the signals given by the Japanese candlesticks would be 100% accurate, we would have found the Holy Grail. Unfortunately, like all other tools, they sometimes fail and cannot be trusted always; at least not on their own and they must be combined with other tools. The candles presented above are just some of the most important ones, but if you want to use more of them, you will have to remember all their shapes, names and prediction value; not to mention that there are formations composed of 2 or three candles and that’s where things really start to suck.
Why Japanese candlesticks don’t suck?
Developed by Japanese rice traders in the 18th century, candlesticks have been used by them ever since and relatively recent they started to receive credit in the Western trading world. Today almost all the charts we see use Japanese candlesticks. Their predictive value is probably the reason for their longevity and their wide use. As we know, price is driven by people and people are driven by emotions; with the help of Japanese candlesticks we can take a peek inside the mind of the majority and gauge the market sentiment.
For More Information or Questions About Japanese Candelsticks Click Here.