Forex Price Action Basics - Lesson 2: Japanese Candlesticks
Previous lesson, What is Price Action Analysis?
Japanese candlesticks are a way to display price data when studying Forex price charts. As the name suggests, Japanese candlestick charts originate from Japan - they were originally used for tracking the price of rice! In the 1990's, candlestick charts started to grow in popularity. Today they are widely used in Forex trading analysis as well as stock and commodity analysis.
What are Japanese Candlesticks?
Below is a screen shot of a Japanese Candlestick Chart. In fact, it is the same AUD/CAD chart used in the previous lesson. This time price data is displayed using a candlestick chart instead of a line chart. Individual candlesticks display opening and closing price as well as the high and low of price for a specified duration. Line charts simply display the closing price for a specified duration.
Candlesticks open and close at a specified time. If you were to choose a 1 hour price chart, each candlestick would represent 1 hour worth of price action (how price behaved during that hour). After every hour, a candle will close and another candle will begin. This is the same for any specified time-frame - 15 minute charts display a new candle every 15 minutes, 4 hour charts every 4 hours, daily charts every 24 hours and so on.
Each candlestick consists of a candle body and candle wicks. The candle body displays the opening and closing price of the candle. The illustrations below should help.
The above illustration is of a bullish or upwards candle - the closing price was higher than the opening price. For the purposes of this course, bullish candles will be displayed in green and bearish candles in red.
The next illustration shows a bearish or downwards candle - the closing price was lower than the opening price.
The opening price of a candlestick is usually the same price as the closing price of the previous candle. Please review the illustration below. Can you identity the opening and closing of each candle? Do you notice that a new candle opens where the previous candle closed? If the illustration below was taken from a 30 minute price chart, each candle would represent 30 minutes worth of price action. A candle would close every 30 minutes and a new candle would begin, this would usually happen in line with the hour, 1000, 1030, 1100, 1130, 1200, etc.
Japanese Candlesticks don't just show the opening and closing price by candle bodies, they also show the high and low of price by candle wicks.
Each candlestick can have an upper wick and a lower wick. The lower wick will show the low of price throughout the candlestick duration, the upper wick will show the high of price throughout the candlestick duration.
Candlestick wicks don't just show the high and low of price for the duration of the candle, they also show where price was for the duration of the candle. In essence, the candle wicks are 'footprints' of price. Below is an illustration of a daily candlestick.
Doji candles appear in the Forex market when a candle has the same (or very similar) opening and closing price. Below are some illustrative examples of doji candles.
At some point in the day price was up here
At some point in the day price was all the way down here!
Price opened here