What is a Japanese candlestick?
A Japanese candlestick is a type of price chart that shows the opening, closing, high and low price points for each given period. It was invented by Japanese rice merchants centuries ago, and popularised among Western traders by a broker called Steve Nison in the 1990s.
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Today, Japanese candlestick charts are the most popular way to quickly analyse price action, particularly with technical traders. They offer much more information visually than traditional line charts, showing a market's highest point, lowest point, opening price and closing price at a glance.
High Low Open Close (HLOC) charts display a similar level of detail to candlesticks – but traders tend to favour the latter, finding them easier to analyse quickly than HLOC. It's worth trying out both and seeing which works best for you.
As well as using them to track previous price movements, technical traders look for Japanese candlestick patterns for clues on where a market’s headed next. They do this by looking for recognisable shapes that often lead to continuations or reversals.
Candlesticks can be used to examine price action over any timeframe, from one second up to an entire year.
Find out more about the different types of charts in IG Academy
How to read Japanese candlestick patterns
To read Japanese candlestick patterns, you'll need to familiarise yourself with three elements on each candle: its colour, its body and its wick. Its colour tells you the direction of movement within the period, its body displays the market's opening and closing levels and its wick shows the high/low range.
· On most charts today, green candlesticks indicate upward movement and red ones a move down. However, occasionally white (up) and black (down) is used instead
· On a green candle, the top of the body is the close and the bottom is the open. On a red one, the opposite is true
· On both red and green sticks, the top of the wick (sometimes called the shadow) is the highest point that the market has hit within the period – and the bottom is the lowest
A short red body with a high upper wick, meanwhile, indicates that bulls pushed a market’s price higher, but were beaten back by bears before close. And if there’s no wick at all, you know that the open or closing price was also the high/low.
Some patterns are taken as indications of probable future movement by technical traders. The theory here is straightforward – these patterns reveal particular behaviour that has often led to specific outcomes in the past.
There are three types of candlestick pattern: single, double and triple. This is based on the number of sticks that make up the pattern.
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