Complete Guide: How to Interpret Japanese Candles in Trading

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Japanese candlesticks are a fundamental tool for technical analysis in financial markets. Mastering their reading can make a significant difference in your trading decisions.

Basic Components of Japanese Candles

In most current trading platforms, the candles follow a standard color code:

  • Green candles: Indicate a bullish trend, where the price has increased during the analyzed period.
  • Red candles: Indicate a bearish trend, where the price has decreased.

Structure of Japanese Candles

Each Japanese candle is composed of several parts that provide valuable information:

Green candle (bullish):

  • The upper end of the real body represents the closing price
  • The lower end of the body represents the opening price
  • The line that extends above the body is known as upper shadow and shows the highest price reached.
  • The line below the body is called lower shadow and marks the minimum price of the period.

Red candle (bearish):

  • The upper end of the body represents the opening price
  • The lower end indicates the closing price
  • Shadows work in the same way as in green candles

Basic Patterns of Japanese Candlesticks

Some basic patterns that every trader should know:

  • Doji: A candle with a very small body where the opening and closing prices are nearly equal. Indicates indecision in the market.
  • Hammer: A candle with a small body and a long lower shadow. It appears in bearish trends and can indicate a possible change in direction.

Understanding these basic elements will allow you to better interpret market movements and make more informed decisions in your trading operations.

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