Japanese Candlestick Structure

Japanese candlestick structure has one tremendous advantage over the conventional bar. A regular bar is just a vertical line, whereas the candlestick has a rectangular “real body,” making it literally bigger. When the close is higher than the open, the real body is white. When the close is lower than the open, the real body is back. A series of bodies all in one color has an immediate visual impact.

A candlestick bar emphasizes the open and the close rather than the high and the low, as in regular bars. The candlestick consists of a rectangle named the real body. The high and low are depicted by vertical lines projecting from the top and bottom of the real body. These are named shadows, although you will also see other names, like wick (as in candlewick) and tail.

The top of the real body is either the open or the close, and you know immediately whether the sentiment was positive or negative because if the real body is white, the close was above the open. A black candle means the close was lower than the open. When you see a series of white candles, you know that this means the close is consistently higher than the open, and conversely, a series of black bars implies an ongoing negative sentiment.

• As noted in the lesson on the Candlestick Chart, you may also see the bars colored green and red or some other combination of colors. Some writers call the white candlestick “hollow” and the black candlestick “filled.”

As you can see on the two figures below, a black candlestick and a white one are identical in every way except the open and close are reversed:

Size Matters

The bigger the real body, the more buying or selling pressure. A short candlestick means not much action either way. A small real body implies a lack of directional conviction by traders. A candlestick named the doji has the open and close the same or nearly the same, signifying indecisiveness.

The length of the shadows may matter as well. The upper shadow reflects the high of the period, and the lower shadow reflects the low of the period. Short shadows indicate that the trading action was clustered between the open and close. The absence of any upper shadow means the price closed at the high, and that always means strong bullishness and probably a next bar that favors being long. Similarly, the absence of any lower shadow means the price closed at the low, and that is always a pointer to a lower open and probably a lower low.

A long upper shadow means that bulls tried to get a rally going but failed. The currency closed well under the high. Similarly, a candlestick with a long lower shadow shows that bears failed. They got a lower low but failed to get the currency to close there. Long shadows are especially useful in Forex for exactly this reason — to show which side, so to speak, is losing.

The chart below shows a "fight" between the bulls and bears. First, we see both a long upper shadow and a long lower shadow on a black candlestick. This suggests a battle between bulls and bears, which was ultimately resolved in favor of bears. After a sharp sell-off, the downtrend halted, and a candle with a long lower shadow appeared. It hints that the selling power of the bears is exhausted. The candle is still black — the close is under the open — but the move is going to pause. If you had been a seller on this move, you might want to exit here. Note that the long lower shadow does not necessarily mean the downtrend is over. It may resume after the pause (or retrace upward). The long lower shadow does not tell us what comes next, just that this particular series is ending. After meandering for a few hours, prices resolved to move higher. Yet the candle with a long upper shadow suggests that the power of bulls is limited. Note that the candle was still white, suggesting a bullish bias. Indeed, the next candle was also white. But prices have been struggling to move higher ever since the candle with a long upper shadow appeared.