Today, I would like to touch upon Japanese candlestick analysis because it is quite widespread in the market and can be called a separate type of analysis. It was created as early as the 18th century in Japan by a rice merchant Munehisa Honma (Sokyu Honma).
Some history
In the 18th century, the Honma family traded rice and owned vast rice fields. In 1750, after the father of the family passed away, the capital went into the hands of Munehisa, who was, surprisingly, the youngest child in the family.
The Honma family lived in a town called Sakata, which was a large port and one of large centres of rice trade. At the moment when Munehisa inherited his father's business, a rice exchange market opened in Santa, which later changed the lives of Munehisa and his family.
For many years Munehisa used to trade at the rice exchange market and earned a fortune. With time, family business moved to Osaka and Edo (modern Tokyo).
One of Munehisa's records was making about 100 successful trades in a row!
Japanese candlesticks: graphic analysis
Munehisa Honma studied the market deeply for 15 years and concluded that the main part of exchange trading was the psychological state of the trader that was the clue to the formation of rice prices.
This is how Honma devised his method of representing 4 prices at once, not just 1 price as before. As the main prices, he took Open, High, Low, and Close over a certain timeframe, say, an hour.
This is how Japanese Candlesticks with their bodies and shadows were created. After they were designed and put in practice for tech analysis of rice trade, certain laws and patterns were noticed. Some of them will be discussed below.
Doji
This must be the most popular type of Japanese candlesticks for graphic analysis. It is peculiar because the Close and Open prices coincide, i.e. the candlestick has virtually no body.
This candlestick type forecasts an upcoming market reversal but only for those instruments for which it is rare. If Doji appears frequently on the chart, it loses power and cannot be called a trustworthy signal.
The longer shadows such a pattern has, the stronger is the signal for reversal that it gives. For example, if the upper shadow is longer than the lower one, this is a bearish signal, i.e. the market will soon reverse downwards. If Close and Open prices are right in the middle of the candlestick, this pattern is called Rickshaw.
Marubozu
This type of candlestick is the opposite to Doji: its Open and Close prices coincide with the High and Low depending on whether the candlestick is bullish or bearish.
A white candlestick symbolizes positive market moods, i.e. shows that growth will continue. A black candlestick speaks about bearish market moods and further declining. Thus, Marubozu is a Japanese candlestick signalling about trend continuation.
Spinner
This type of candlestick has a small body and small shadows. They signal about consolidation in the market. In other words, this means that the trader should abstain from trades in the instrument.
The types of candlesticks enumerated above are the simplest and most widespread. More details are in the RoboForex Blog, particularly in Candlestick Analysis: 24 Main Candlestick Patterns.
By Dmitriy Gurkovskiy, Chief Analyst At RoboForex