A Japanese candlestick sheds light on a chart. It’s a unique price plotting technique that helps identify the price movement of a currency pair, enabling you to better understand price movement.
Technically, they can be considered much like a technical indicator as they are built up of information about price. However, their power really comes in helping traders spot patterns that potentially relate to underlying orders in the market and the current market sentiment.
With candlesticks, you can more quickly identify various types of price action that can predict trend reversals or continuations. Also, if you use candlesticks in combination with other technical analysis tools, the candlestick patterns can be a very useful way to pick entries and exits. Essentially, candlesticks allow traders to quickly show the strength of recent market movements.
Candlesticks are so commonplace in modern-day trading (they’re pretty much used on all platforms as standard) that it might surprise many who look at them day-in-day-out to learn that they were actually developed 300 years ago by Japanese rice traders, and that they were introduced to the western world by Steve Nison.
And while the world may be a vastly different place and the world of trading a whole different ball game, little has changed about the make-up of a candlestick, as our diagrams below show.
There are actually two ways to use Japanese candlesticks. The first way is to read the display of data in the individual candlestick. The second method is the pattern identification process of using candlesticks in particular combinations.