Japanese Candlestick Patterns - Steemit Crypto Academy Season 5 - Homework Post for Task 10
Cover Image created on Canva
a) Explain the Japanese candlestick chart? (Original screenshot required).
b) In your own words, explain why the Japanese Candlestick chart is the most used in the financial market.
c) Describe a bullish and a bearish candle. Also, explain its anatomy. (Original screenshot required)
Explain the Japanese candlestick chart? (Original screenshot required).
The fluctuation in price of a commodity in the market is determined by the emotional sentiments between buyers and sellers. The price of such commodity tends to increase when the buyers dominate the market and tends to decrease when sellers dominate the market. These consistent rise and fall in commodity price can be represented graphically using the Japanese candlestick chart. This technique got its name according to its origin and structure. It has formed the basis of technical analysis in trading and it has been applied in variety of scenario that requires the understanding and monitoring of the fluctuations in market Price of an asset.
The first application of this tool was at inception when used by a Japanese rice trader to monitor the variability of the price of rice during its contemporary market. These tool has since then been widely adopted by traders of different commodities including stocks and cryptocurrency.
The basic structure of a Japanese candlestick consist of a central Body and its shadow. The extent of the Body and Shadow is determined by four point on the candlestick. These includes the Open, Close, High and Low. The Open indicates the price at the beginning of the period while the Close indicates the price at the end of the period. For example, if a candlestick represents one hour (the period) then the price at the beginning of every hour becomes the Open price while the price at the termination of each hour is the Close price of the corresponding candlestick. The range between the Open and Close forms the body and this look similar to a bar in appearance.
The _**High**_ is highest price reached during the period of the candlestick while the lowest price at which the commodity is sold/bought during that period forms the _**Low**_. The distance between the top of the candle bar and the _**High**_ forms the Upper Shadow while the distance between the bottom of the bar and the _**Low**_ forms the Lower Shadow. The shadow can also be interchangeably referred to as Wick. Hence, The _High, Low, Open, Low, Upper Shadow and Lower Shadow_ forms the anatomy of the Japanese Candlestick. The candlesticks appear in different forms such as engulfing candlestick, Doji , hammer candlestick. These candlesticks can appear collectively to form patterns such as the Morning star or evening patterns or end up forming highs and lows to form an uptrend or downtrend.
TradingView
The consecutive strokes of these candle bars as well as occurrence of patterns and trends forms the Japanese Candlestick chart and it progressively shows the behaviour of price in the market overtime.
In your own words, explain why the Japanese Candlestick chart is the most used in the financial market.
The significance of the Japanese Candlestick is to give a pictorial and graphical visualization of the price behavior in the market. It has proved a good relevance in the financial market as it provides an accurate information about the price movement per specified period of time. It helps traders to understand the magnitude, strength and relative volume of supply and demand in the market. This definitely improves their decision making in trading and exchanging of commodities. Quite a number of trading strategy has been drafted around the Japanese candlestick chart which has transformed into profit for trader. It is also widely being used alongside with other technical indicators moving average, Relative strength index, Donchian Channel etc. to execute trading strategies.
The Japanese candlestick displays an easy to read market structure and defines functions such as market trend, resistance, support and reversal phenomenon. For example, candlesticks such as Engulfing, Doji, Hammer, Hamari candlesticks as well as morning star pattern or evening star pattern appearing at the support or resistance level might indicate a trend reversal in the market. It is also widely accepted for its colorful display of information. By default, one can easily recognize a bullish or bearish candle by the green and red color respectively.
Describe a bullish and a bearish candle. Also, explain its anatomy. (Original screenshot required)
The bullish or Bearish candle is determined by the position of the Open and Close of a candle. Although this can be easily identified on a chart with the color indication automation. That is, a bullish candle will appear Green while a bearish candle will appear Red. However, there is a background technicality that identifies a candle as a bullish or bearish one.
Recall, I already explained the structural features of a candlestick such as Open and Close. The gap between these levels forms the body (Bullish or Bearish) of the candle. The Bullish candle has its Close higher than its open. This means the closing price for that period is higher than the opening price. The Bullish candle can appear as a typical candle bar, a dragonfly Doji or a bullish hammer candlestick.
TradingView
Similarly, the Bearish candlestick has its Close lower than its Open. This means the closing price for that period falls lower than the opening price. The bearish candle can appear as a typical candle bar, a Gravestone Doji or a bearish hammer candlestick.
Conclusion
The Japanese candlestick has been widely adopted as a technical analysis tool in understanding market demand and supply behaviour. This is due its functional features that is reader friendly and accuracy in displaying market price movement. This tool has been employed in variety of trading and it continually proves effective relevance up till date. It is being used in combination with other technical tools such as Trendline and indicators that satisfactorily communicate ideas to traders. The Japanese candlestick has been used by traders to formulate profitable trading strategies as well as making good decisions on when to enter, hodl or exit the market.
Best Regards!!
