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May 18, 2021

How to Read a Japanese Candlestick Chart

There are many different ways to view price movements in the financial markets and they will each serve their own purpose. There isn’t necessarily one correct or best approach.

However, there is a most popular approach, and these days that tends to be using Japanese candlestick charts, otherwise known as candlestick charts or simply candle charts.

This is also the charting approach we use with the Duomo Method. If you want to learn more about the Duomo Method, check out our free training to get started.

Let’s break down what a candlestick chart is showing us.

Time Periods

Each individual candle represents a set period of time. For example, if you’re looking at a one-hour chart, each candle will represent the price movements during a period of one hour. If you’re looking at a daily chart, each candle will represent one day.

You can set candlesticks to display any period of time you want, but the most common time periods are candles showing 1 minute, 5 minutes, 15 minutes, 30 minutes, 1 hour, 4 hours, 1 day and 1 week. 

In this 1-hour Japanese candlestick chart for WTI oil, each candle represents a time period of 1 hour.

The time period you choose will depend on the style of trading you use and the time horizon of your analysis and trades. But that’s not something we’ll cover in this article.

What the Candles Show

There are two main parts to the candle: the body and the wick.

The candle body

The candle body is showing us the opening price at the start of that time period and the closing price at the end of that time period. 

If it is a bullish candle, it will show that the closing price is above the opening price. This means the price moved up during that period of time. Whereas, a bearish candle will show the closing price being below the opening price, meaning the price moved down during that period of time.

The way we can tell if the candle is a bullish or bearish candle will be from the colour of the candle. The typical colour scheme is to use green for bullish candles and red for bearish candles.

Therefore, if we see a red candle, we know the top of the candle body was the opening price and with a green candle we will know that the bottom of the candle was the opening price. These colours can be changed to any combination you want, but it is important you always remember which colour represents which type of candle.

The Candle Wick

Although the candle body shows us how the price moved from the opening price to the closing price, it doesn’t necessarily show us the price movements that happened during that period of time. In most cases, the price won’t just move entirely in one direction, it will probably move in both directions during the time period.

If those price movements happen within the opening and closing price, those movements will be contained within the candle body. However, if the price moved outside the opening and closing prices during the period of time, this will be represented with the candle wick. 

A candle wick above the candle body is showing the movements the price made above the open or closing price, depending on whether it was a bullish or bearish candle.

The candle wick below the candle body is showing the movements the price made below the open or closing price, depending on whether it was a bullish or bearish candle.

Summary

Essentially, these candles will be showing us the opening, closing, high and low prices during that period of time. Therefore, this gives us information about the full range of movements the price made during that period of time rather than simply where it started and ended.

This information allows us to get better insights about how the market is behaving and what price levels may or may not be significant. In particular, for the Duomo Method, these candles help us to identify significant levels and figure out when it could be the right time to trade them.

If you want to start learning more about trading and the Duomo Method, check out our free training to get started today.


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