Everything you need to know about candlestick charts and trading strategy

Japanese candlestick charts help you to design effective trading strategies. Find out everything there is to know in this guide!

Investors rely on various types of charts to predict market trends. Japanese candlesticks are among the most popular indicators. This is mainly due to their shapes and colors, which are associated with different meanings. This makes it easier to make decisions about opening and closing positions.

What is a candlestick chart when it comes to trading ? 

A candlestick represents a point on a Japanese candlestick chart. A green candle indicates an upward movement, while a red candle indicates a downward movement. These signals can be seen in units of time ranging from one minute to one day. 

Each candlestick represents 4 levels that the price of the asset has reached during the unit of time in question: the lowest price, the highest price, the opening price and the closing price.

What is a candlestick chart ? 

A candlestick chart shows the evolution of an asset's price over time, enabling you to identify trends and define your trading strategies. This type of chart can be used for all markets, including stocks, Forex, commodities, cryptos, indices, ETFs, CFDs and commodities. 

The type of Japanese candlestick chart depends on the unit of time it is based on. 

How to read a candlestick chart

To analyze a candlestick chart, look at the color, body and wick of each candle, which reflect specific market movements. The color of the candle reflects the direction of the price movement. For example, it is green when the market price is higher at the close than at the open. 

The candle will be red if the closing price has reached a lower level than the opening price, enabling the trader to deduce that the market is trending upwards or downwards within the given time unit. 

On a Japanese candlestick chart, the last candle represents the current market trend. Its color can change between green and red when the end of the analysis period is reached.

On the other hand, the body of the candle is used to determine the gap between the opening and closing price of the market. When the color of the candle is green, the opening price is represented by the base of its body. Thus, the closing price is represented by the top of the candle. 

In the case of a red candle, the opening price is at the top and the closing price is at the bottom. The volume of the body of the candle then reflects the volume of trades made during the period. Thus, a large candle means that traders have been buying and selling a lot of assets. Conversely, a small candle indicates a period of consolidation in the market for that asset.

Trading with fractals 

In addition to Japanese candlestick charts, traders also use fractals to analyze the market and make the right decisions. Fractals are technical indicators that are mainly used to predict the direction of the market. 

A fractal is used to recognize specific situations, such as turning points. This figure is automatically generated on the chart if a particular pattern is detected in the price evolution.

A bearish fractal consists of 5 candles and shows when the price ran into trouble. This is indicated by an upward pointing arrow at the peak. In contrast, the bullish fractal indicates the period when the price was unable to fall. This is characterized by an arrow pointing to the low.