Analysis Features
We won’t talk about the structure of the Japanese candlestick. To do this, you can read the article mentioned above. Let's get straight to a more interesting topic - the features of Japanese candlesticks.
For a more accurate analysis, it’s important to choose the correct timeframe. The lower it is, the more market noise and false signals you will encounter.
- The minimum timeframe for an accurate signal is a 4-hour chart. Although it is more preferable to analyze patterns on a daily timeframe.
- If you are a low-frequency trader and want to predict the long-term trend, switch to a weekly or even monthly chart.
There are a few more important points to consider:
- The most reliable signals are provided by patterns with gaps.
- Before entering a trade, wait till the next candle confirms the signal. If the candlestick closes in the opposite direction, the pattern has not worked.
- Pattern formation is not a 100% guarantee. After the appearance of any pattern, the chart might move in another direction or go flat. This is usually caused by the market makers. When the number of active traders reaches a certain amount, they pour in money to the market and force the chart to go in the direction they want.
Japanese Candlesticks and Trend
The ability to predict market behavior is possible as at different stages of the trend, as a rule, the market forms different types of candlesticks. It is the candle bodies that carry the main information. Candle shadows are of secondary importance. Although, I don’t recommend completely losing sight of them.
A certain structure of the candle might indicate the following:
- The trend is mostly formed from candles with a long body and short shadows. A large body indicates the superiority of buyers over sellers in a bullish trend and sellers over buyers in a bearish trend.
- The longest body candlesticks form at the beginning and end of a trend. So, if you have an open position following a trend, then the appearance of candles with a very long body might signal the imminent end of that trend. Be careful and get ready to close your trade.
- Short body and long shadows indicate a possible market reversal. Moreover, the longer one of these shadows, the higher the chance of a trend change.
- If there are many candles in the market with relatively small bodies and shadows, then the market will most likely move sideways. If you are trading in a market like this, try to set tighter Stop Losses.
These are the main features of the Japanese charts analysis. In the next article, we’ll talk about the psychology and mood of candlesticks. Don’t miss it. Once you understand how this chart type works in detail, you will make fairly accurate predictions based solely on a price action.