Your first impression of this trading technique may be that you will need to be naked to complete any trade; whilst this is an option, it is not a necessity! In fact, trading naked means that you will use price charts and market movement charts, but, that you will not use any indicators or signals to help you assess when to trade.
If you are only relying on market information then the Japanese candlestick can be an incredibly useful way of assessing the information on front of you and deciding the best way to trade. The Japanese candlestick is called this because it actually looks like exactly like its name suggests.. Each of the lines in the chart represents part of the price movements; price highs and lows are displayed along with the opening and closing prices for the time slot you are studying; this can range from one hour to one day.
Bear or Bull
If your candlestick shows a final price for a given period which is less than the starting price then you have a good indication that it is currently a bear market; i.e. a dropping market. The start and finish prices are represented by the body of the candlestick, whilst there will be two wicks. The top one shows the highest price for the period, the bottom one shows the lowest.
The Pin Bar
This candlestick is seen as a very strong candlestick and an excellent opportunity to make several successful trades. The clearest sign of a market which is rapidly and strongly climbing is through the indicator showing a long wick at the bottom and a small wick at the top. This shows that although the market has gone down it has since risen and finished at a level higher than it started at. In the best candlesticks there will be a tiny wick on the top; this indicates a strong upward movement in the price, although the closing point was not quite the highest price of the day. This tells you that the price is likely to go higher on the next trading day. In contrast, a bearish candlestick will look the other way round, with a very short lower wick and a high possibility of the price decreasing further.
This type of candle has very long wicks on both sides and a very small main body. The information shown will tell you that the asset has stayed at roughly the same opening and closing price for the given period.
The upper and lower wicks are likely to be very similar lengths but if they are not then it will still count as a Doji providing the opening and closing price are very similar. This type of candle shows that the market is currently showing variability; there is not a positive upward or downward movement; prices may fluctuate but the end position is relatively similar to the start. This can make it very difficult to know which direction to place your trades as the price will continue to fluctuate; up and down.
When the market is clearly moving in one direction then the Marubozu candle is an exceptionally effective tool at demonstrating that the market is definitively bearish or bullish. The typical candle has an elongated body with a very small wick at both the top and the bottom. The candlestick will show that the price of your asset is moving strongly in one direction and is likely to continue to do so. Marubozu candles are likely to appear at the beginning and the end of a price rise or fall, on a chart they will appear as a straight line showing a big drop or rise in price and this should help you decide when to trade. As soon as you see a bullish Marubozu candle you should purchase trades in an upward price direction; once the bearish candle appears move to a downward price trade.
The Japanese candlestick is not a definitive tool for assessing the market. Although a strong market position can be reflected by the candlestick and can result in successful trades; there are times when other market factors and influences can quickly change an expected trend.
There are several other candlestick variations and it is important to understand the ones you are using and how to react when you see two or more candlesticks together. They are not one hundred percent accurate, as with any market indicator it is best to use them in conjunction with other signals to ensure you understand what the whole market is doing, not just your specific asset.
It may be of interest for you to know that, although candlesticks have only recently been seen a valid tool for market traders, they were, in fact, were first used in the 18th century by rice traders in Japan. In fact, this indicator has now become so popular it is seen on almost all types of market graphs. In effect the candlestick allows you to understand what the majority of people in the market are doing; you will then be able to trade successfully with the flow.