Trading - Japanese candles

Japanese candlesticks are one of the most widely used tools in technical analysis. They make it easy to visualize price trends over a given period and interpret market sentiment. Each candle represents four pieces of information: the opening, closing, high and low of the period. In this article, we'll explore the main types of Japanese candlestick, such as the Doji, Hammer, Reverse Hammer and Engulfing, and their use in trading.

What is a Japanese candle?

A Japanese candle consists of two main components:

1. The body The difference between the opening and closing price.
2. Wicks The lines on either side of the body, representing respectively the lowest and highest prices reached during the period.

Depending on the direction of price movement, candles may be bullish (usually green or white) or bearish (red or black).

Main types of Japanese candles and their interpretation

1. The Doji:

   • Description : The Doji is formed when the opening and closing prices are very close to each other, creating a small body with long strands.
   • Interpretation : The Doji represents a balance between buyers and sellers. It can indicate indecision in the market. When it appears after a strong trend, it can signal a potential reversal or pause in the current trend.

   Practical example:
   If a Doji appears after a prolonged uptrend, this could indicate that buyers are losing their dominance and a bearish reversal could be on the way.

2. The Hammer:

   • Description : A Hammer is a candle with a small body and a long lower wick. The closing price is close to the opening, and the lower wick represents an attempt to lower the price, but which ended in a rebound.
   • Interpretation : The Hammer is generally a bullish reversal signal, especially if it appears after a downtrend. It shows that sellers have tried to push prices lower, but that buyers have intervened to bring prices back up.

   Practical example:
   If a Hammer appears after a downtrend, it may signal that sellers have lost their power and a bullish recovery could be underway.

3. Inverted Hammer:

   • Description : The Reverse Hammer has a small body at the bottom of the candle, with a long wick at the top. It resembles the Hammer, but the shadow is above the body rather than below it.
   • Interpretation : The reverse Hammer is also a bullish reversal signal, similar to the Hammer. However, it needs to be confirmed by a subsequent bullish candle. This pattern indicates that, although sellers tried to push prices down during the session, buyers finally took control.

   Practical example:
   If an inverted Hummer forms after a downtrend, this may signal that buyers are beginning to gain the upper hand, although confirmation of a bullish candle is required.

4. Engulfing:

   • Description : Engulfing occurs when a candle, usually a large one, completely encompasses the previous candle. The Bullish Engulfing is a bullish candle that encompasses a previous bearish candle, while the Bearish Engulfing is a bearish candle which encompasses a previous bullish candle.
   • Interpretation :
     • Bullish Engulfing : It indicates a bullish reversal, with buyers taking control after a downward movement.
     • Bearish Engulfing It signals a bearish reversal, with sellers taking control after a bullish move.

   Practical example:

   • Bullish Engulfing If a bullish candle completely envelops a bearish candle after a downtrend, this may signal an upward turnaround.
   • Bearish Engulfing If a bearish candle encompasses a bullish candle after an uptrend, this may indicate a downward reversal.

Using Japanese candles in trading

Japanese candlesticks can be used in many ways to optimize your trading strategies:

1. Identifying reversal points :

   • Patterns such as the Doji, Hammer and Engulfing are classic reversal signals that can help you identify potential trend reversals.

2. Understanding Market Sentiments:

   • Interpreting candles allows you to understand the general sentiment of buyers and sellers. A large candle body with little wicking shows strong conviction in the direction of the trend.

3. Confirm Other Indicator Signals :

   • Use Japanese candlesticks to confirm or refute signals generated by other technical indicators. For example, a Hammer after a downtrend could be confirmed by an RSI below 30, indicating an oversold condition.

Practical trading example

Suppose you're analyzing the EUR/USD chart. Here's how you could use Japanese candlesticks to make decisions:

1. Hammer:

   • After a downtrend, a Hammer appears. You could consider this a buy signal in anticipation of a bullish reversal, especially if confirmed by other indicators.

2. Doji:

   • After a strong uptrend, a Doji appears. This could indicate indecision in the market, and you watch for confirmation of a reversal with a subsequent bearish candle.

3. Engulfing bullish :

   • Bullish Engulfing occurs after a downtrend. This encourages you to consider a long position in anticipation of a bullish reversal.

Conclusion

Japanese candlesticks are powerful tools for identifying trend reversals and understanding market sentiment. By learning to recognize key patterns such as the Doji, Hammer, Reverse Hammer and Engulfing, you can improve your trading decisions and optimize your strategies. Using them in combination with other technical indicators allows you to make more informed decisions and better manage risk.

We hope this article has given you a better understanding of the formation and interpretation of Japanese candles. If you have any questions or would like to share your experiences, don't hesitate to join us on social networks with the hashtag #xenesy and identifying @xenesy_project. Happy trading!