How to Use Japanese Candlestick Chart Signals to Find Profitable Trades

by Ruby Martes ; Updated July 27, 2017
Technical analysts use past trading behavior to try to predict future price movements.

The two basic methods investors use to try to predict future stock market prices are fundamental analysis and technical analysis. Fundamental analysts looks at the underlying value of a company. Technical analysts looks for patterns in the historic price and volume of stock trades. Japanese candlestick charts, also called candlestick or candle charts, are a popular tool for technical analysts. The charts contain a lot of information in a compact form, displaying a stock's opening, closing, high and low prices in a way that is easy to take in at a glance.

Step 1

Read a candlestick chart by looking at the bars and lines. The bars, called bodies, show the opening and closing prices for your selected time period. When the stock's closing price was higher than its opening price, the top of the body shows the closing price, the bottom shows the opening price, and the inside of the body will be white. When the opening price was higher than the closing, the top of the body will be the opening price, the bottom the closing price, and the inside of the body will be black. The lines (also called wicks, tails or shadows) extending above and below the body show the highest and lowest prices for the time period.

Step 2

Interpret the bodies (bars) on a chart by looking at their length and color. Long white bars show there has been considerably more buying than selling, and long black bars show the reverse. Short bars show consolidation.

Step 3

Interpret the wicks (lines) on the chart by looking at their length. Short wicks show that most of the trades were within the range of the opening and closing prices. Long wicks show that trading extended well outside of that range.

Step 4

Look for patterns in the chart that extend over time. For example, if a stock price is in a long downward trend, a long white candle body, indicating aggressive buying, may be a signal that the trend is starting to reverse.

Tips

  • Some charts use green, instead of white, for up periods, and red, instead of black, for down periods.

About the Author

Ruby Martes has been writing professionally since 1985, specializing in pop culture, quitting smoking and odd bits of trivia. Martes has a Bachelor of Arts in psychology from the University of California, Berkeley, a Master of Arts in English/creative writing from San Francisco State and a Juris Doctor from University of California, Hastings, where she was a law journal editor.

Photo Credits

  • Spencer Platt/Getty Images News/Getty Images
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