Image Source: PexelsToday, we delve into the intricate world of Japanese Candlestick Formations, often regarded as the cornerstone of technical analysis in financial markets. Many traders consider these formations as the sign language of the market and rightly so because these candlestick patterns convey the market sentiments through vital information about the psychology of buyers and sellers. By discerning these patterns on price charts, traders gain insights into potential market reversals, continuations, and trend strength.So, let’s discuss Japanese candlestick formations and how you can quickly identify and trade them on any chart.First things first, here’s a quick look at how to read candlesticks charts…

Understanding Candlestick Anatomy 
Candlesticks are used to identify chart patterns. These patterns help traders in setting up a trade by giving them insights about the entry, stop loss, and exit levels.The patterns are formed by grouping two or more candles in a certain sequence, although some powerful trading signals can be identified by just a single candlestick pattern. So, candlesticks can be broken down into single and multiple candlestick patterns.Strength is represented by a green or bullish candle and weakness by a red or bearish candle.A general rule of thumb is to look for a prior period while reading candlesticks. So, if you are looking at a bullish pattern, the prior trend should be bearish. And likewise, if you’re looking for a bearish pattern, the prior trend should be bullish.Below is a quick “cheat sheet” showing five types of bullish and bearish candlestick formations.

Candlestick Formations
 Source: Market Traders InstituteWhile this cheat sheet offers a glimpse into common bullish and bearish formations, it’s essential to explore a broader array of candlestick patterns too. From simple single-candle patterns like the Hammer and Doji to complex multi-candle formations such as the Three Black Crows and Evening Star, understanding the nuances of each pattern empowers traders to make more precise predictions and execute well-informed trades.With that in mind, let’s get talking about Japanese candlestick formations…

Japanese Candlestick Formations
Well, the concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader, and therefore we get the name Japanese candlestick charts and Japanese candlestick formations. (Source: Wikipedia)A Japanese candlestick represents the time that each candle takes to form. This is referred to as a time frame. Each candlestick here tells you the open, high, low, and close (or OHLC) price during the time frame for that candle. Here’s a look…

Candlestick Reading
Source: AdobeStockThe bold part of the candlestick is called the body, which represents the open and close of the period. So, if the chart is a 30-minute chart, each candlestick body will show the opening price for that 1 hour period and the closing price for the 30-minute period.The wicks on the top and the bottom of the body show the highest and lowest price reached during that 30-minute period.Moreover, Japanese candlestick formations occur on all candlestick charts and can give us an idea on where the market may go next.When you spot these patterns on a chart, there’s a good chance that the market is going to react based upon that pattern. After all, the market has always moved in patterns and it always will. And that gives traders the opportunity to potentially profit from it.Here’s how you can identify these patterns real quick…

Identifying Formations
The best way to go about spotting candlestick formations is to know them by memory. You can do that by reviewing the above “cheat sheet” and practicing how to find those formations on your charts.Alternatively, if you’re on the 
SmartTrader trading platform
, an easier way to identify these patterns is to click on the ‘Candlestick Tools’ button above the chart, which allows you to activate all the bullish / bearish candlestick formations and gives you all the formations that meet the formula on your selected chart.Just go to Candlestick Tools and select all the formations that you want to be displayed on your chart. For example, if you’re looking for bullish formations, you can select any or all of these formations: Bullish Engulfing, Bullish Shooting Star, Bullish Morning Stars, Bullish Piercing Line, etc.Here’s how the formations would be highlighted on the chart:

Candlesticks Highlighting Bullish Formations
Source: SmartTraderAll the highlighted candles on the chart above show us various bullish candlestick formations. Now, if you want to look up which pattern a particular candle is representing, just click on that candle and it will show you the pattern that is in play.

Trading Candlesticks
Once this is done, one way to trade these candlesticks is to spot them at the bottom of retracement.That means identifying the green candlesticks that are at the lowest levels during a given time and setting a trade on them for higher levels. So, once you spot a green candlestick from where the trend on the chart is reversing, you can place a trade for higher levels (as the pattern is indicating an uptrend).The opposite goes for red candlesticks. Here you will identify the red candlesticks that are at the highest levels and set a trade on them for lower levels.A simple strategy to trade candlesticks could be to place an order when a candlestick closes so that you know which formation it is representing. For example, if you want to place a buy order, you can do so at the closing price of the body where the stop loss could be 10 PIPS below the previous candlestick’s low. The target price here can be set up in a 1:1 risk-reward ratio. Which means, you can set your target price higher by the same level that you have set your stop loss from the buy price.So, that was a simple way in which you can identify Japanese candlestick formations as well as trade them on any chart.Whether you’re a novice trader seeking to gain a foothold in the markets or a seasoned professional looking to refine your skills, Japanese candlestick analysis could offer a wealth of opportunities for growth and mastery in the market.Do check it out the next time you’re on your charts!More By This Author:Is The Gold Standard Making A Comeback With BRICS?U.S. Debt Ceiling And Insights To Navigate Forex ShiftsVIX Index Insights And Pro Strategy To Trade Forex Markets