Why Japanese Candlestick is Widely Used by Traders
The term “Japanese candlestick” is a Western creation, despite its name, and the credit for popularizing this charting method goes to financial analyst Steve Nison. Nison introduced Japanese candlestick charts to the Western world through his 1991 book, “Japanese Candlestick Charting Techniques.”
The technique itself, however, has its origins in Japan, dating back to the 18th century. It is believed to have been developed by Japanese rice trader Munehisa Homma, often regarded as the father of candlestick charting. Homma used these patterns to analyze and predict price movements in the rice market.
The term “candlestick” is derived from the shape of the individual chart elements, resembling candles with a body and wick. Each candlestick represents the price movement during a specific time period and consists of a rectangular-shaped body and two thin lines, known as wicks or shadows, extending from the top and bottom of the body.
Why Japanese Candlestick Charts are Widely Used by Traders?
Japanese candlestick charts are widely embraced by traders for several reasons, owing to the following advantages:
Visual Representation of Price Action:
Candlestick charts visually represent price action, simplifying the interpretation of market movements by encapsulating information about opening, closing, high, and low prices for a specific time period within each candlestick.
Clear Market Sentiment Presentation:
Candlesticks effectively convey market sentiment, allowing quick identification of bullish, bearish, or indecisive market conditions based on the shape and color of the candlesticks.
Patterns and Reversal Signals Recognition:
Candlestick charts aid in recognizing chart patterns and reversal signals, enabling traders to identify potential trend reversals or continuation patterns, facilitating informed trading decisions.
Integration with Technical Analysis:
Candlestick patterns seamlessly integrate with other technical analysis tools, offering traders the ability to combine them with indicators like moving averages, trendlines, and support/resistance levels for more robust trading signals.
Candlestick charts can be applied to various timeframes, allowing analysis of short-term intraday movements or longer-term trends using the same principles.
Ease of Interpretation:
Candlestick charts are user-friendly and accessible to traders with varying levels of experience due to their visual nature and simplicity.
Traders often analyze combinations of candlesticks to gain comprehensive insights into market dynamics, strengthening their conviction behind specific trading decisions.
Candlestick charts have historical significance, originating in Japan in the 18th century, contributing to their credibility and popularity among traders over centuries.
Effective in Multiple Markets:
Candlestick charts are not limited to the forex market; they are effective in analyzing price movements across various financial markets, including stocks, commodities, and cryptocurrencies.
Availability in Trading Platforms:
Most modern trading platforms offer candlestick charts as a default charting option, making them easily accessible and customizable for traders.
In summary, Japanese candlestick charts are effective in visually conveying price information, interpreting market sentiment, and providing valuable insights into potential trend reversals and continuations. Their ease of use, integration with technical analysis, and historical significance contribute to their enduring popularity among traders worldwide.
Hi, I am Nikesh Mehta, owner and writer of this site. I’m an analytics professional and also love writing on finance and related industry. I’ve done online course in Financial Markets and Investment Strategy from Indian School of Business. I can be reached at [email protected].