The Anatomy of a Japanese Candlestick

In this blog post, I'll continue to explain how Japanese candlesticks work. As a forex trader, it's essential that you understand how this works. Soon I'll show you how you can trade the forex market by using the wealth of information available in each candle at a mere glance.

At first glance, candles tell you which team won the period's tug-of-war.  That is, a candle will tell you whether the bulls succeeded in getting the market to close at a higher price than it opened, or the bears succeeded in getting the market to close at a lower price than it opened.

You can identify the game's winner by its candle – specifically, whether its body is filled in or not.

Looking more closely, the candle offers additional information.  Not only will it reveal whether prices closed lower or high than they opened, but it will also give you an idea of the period's high and low prices.

The high and the low prices are revealed in the candles upper and lower wicks.  If the candle has a very long upper wick, for example, then prices went very high during that period's trading but returned back to a much lower close.  If the candle has a very long lower wick, then the opposite is true.

Take a look at Figures 1 and 2, which reiterate the anatomy of a bullish candle and a bearish candle:

A candle, then, can tell you a lot about the trading activity that occurred in a given period (again, candles can represent periods of one minute, five minutes, fifteen minutes, one hour, one day, one week, etc.).

The benefit of candles over bars or lines is precisely that – that each candle reveals so much information about a period's trading in a very clear, succinct way.

For example, imagine that you are looking at a chart displaying one minute candles.  Looking at the chart, you can easily identify minutes where the bulls won (unfilled, outlined in blue) and where the bears won (filled and outlined in red).

You can see from the length of the upper and lower wicks how high and low prices went during the session, and you can see the distance between the session's opening and closing prices.  All this information is summarizing what is actually going on within that one minute period.  Within that period prices are going up and down, higher and lower, moving in a bunch of vertical lines.

If you were looking simply at those lines (as you would be if you were looking at a line chart) it would be very hard to break apart the one minute sessions and determine whether the bulls or the bears won, how high and low prices went, and at what price the market closed an opened during that one minute.  Instead, this nice little candle figures all of that out for you and presents it to you in a very readable, friendly way.

What About Bar Charts?

Bar charts have benefits similar to candles, in that they represent the trading activity during a given period in a very succinct, readable way.  A bar represents price movement with a vertical line (compared to the candle, which represents price movement with the candle body and wick).

The top of the bar's vertical line indicates the high price during that trading period (just as the top of the candle's upper wick indicates a high).  The bottom of the bar's vertical line indicates the low price during that trading period (just as the bottom of the candle's lower wick represents a low).

On a bar chart, the period's opening and closing prices are displayed by horizontal ticks jutting out from the bar's vertical line.  The ticks jutting out to the left represent the opening price, while the ticks jutting out to the right represent the closing price.

The downside to bar charts is that you have to look much closer to determine whether the market closed higher than it opened (bulls won) or closed lower than it opened (bears won); because, on a bar chart the open and close are marked by lines jutting out from the bar's body to the right or the left.  The fact that a candle is filled or unfilled depending on which team won the session makes it much easier to read and understand at a glance.

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