Introduction to Japanese Candlestick
No wonder Japanese candlestick is the most popular types of charting used in forex market analysis. Japanese candlestick chart is regarded as the best one than any other charting system because it provides uslot of information about the market’s moves. Candlesticks charts are really informative. A candlestick consists of four clearly defined price levels. They are- open, high, low and Close. The vertical cylindrical shaped like part is called the real body. Generally when the closing price of the candle is higher than the opening price it is called a bullish candle and when the closing price is below the opening price it is called a bearish candle.
In a bullish candle the lower end of the body is opening price and similarly the upper end of the body is a closing price. In a bearish candle the upper end of the body is an opening price and the lower end of the body is the closing price. High is the highest price reached during a particular time and low is the lowest price reached on anygiven time frame. The real body part of the candle is the price range on the particular day. The thin vertical lines below and above the real body are called lower shadow and upper shadow respectively.
Basic Candlestick Patterns
Doji is an indecisive candlestick. In a doji opening and closing price are around the same levels or at least their real bodies are very small. A doji has a short body like the one shown in the above picture. Doji is the result of competition between the buyers and sellers. The price makes certain highs/lows during the market sessions but close very near to the opening price. Doji formation is the condition of neutrality.
Marubozu is a candlestick which doesn’t have any shadows. A bullish Marubozu’s high price and closing price is the same whilst the opening price and the low is also the same. Similarly a bearish Marubozu’s opening price and high price is same whereas its closing price and the low price also the same.
- Spinning Tops
Spinning tops have small real bodies and long upper and lower shadows. This pattern is observed in the market when the direction of the market is neither up nor down. The small real bodies indicate small price advance/declinein a given time period.The extended shadows show both buyers and sellers fought hard but at the end nobody won big.
If this pattern is detected in an up trending market it could mean that there are not much buyers left and there is high probability of reversal. If a spinning top is formed during a down trending market it could mean that there are not much sellers left and there is high probability of reversal.
Hammer and Hanging Man
Hammer and hanging man are reversal candle stick pattern. Hammer and hanging man look very similar but the information they generate in the market arenot the same. Hammer and hanging man have little bodies with long lower shadows with short or absent upper shadows.
The hammer is a bullish reversal pattern that is formed during a downtrend. Formation of a hammer during a down trend could mean that the reversal is near and the price will start to advance higher again. The longer lower shadow in a hammer means that the sellers took the price down but were unable tokeep the price lower.More buyers entered the market andthe price advanced to close above the opening.
However, seeing a hammer in a downtrend market doesn’t necessarily mean that we immediately open position in the market. Other confirmations are required.
The hanging man is a bearish reversal candlestick pattern. It is formed in a rising market.It indicates that the sellers are outnumbering the buyers.
- Inverted Hammer and Shooting Star
The inverted hammer and shooting star look exactly the same but both have different meaning in the market
Inverted hammer is simply the inverted form of the hammer we discussed above. Both the hammer indicates the bullish possibilities of the price. Similarly when a hanging man is inverted, a shooting star is obtained. It is also a bearish reversal candlestick pattern.
- Engulfing Candles
The bullish engulfing candle stick pattern consists of a two candles in which the first bearish candle is engulfed by the large bullish candle which is formed immediately after a bearish candle. Seeing this price action means buyers are stronger than sellers so probably the price will rise.
Similarly, Bearish engulfing candle stick pattern consists of a two candles in which the first bullish candle is engulfed by the large bearish candle which is formed immediately after a bearish candle. This price action means sellers are stronger than buyers so probably the price will fall.
- Tweezer Bottoms and Tops
Tweezers are reversal candle stick patterns. Such candlestick patterns are normally detected after an extend uptrend or downtrend indicating that a reversal is likely to take place. In a tweezer pattern the direction of the first candle is same as the overall direction of the trend. for example if the trend is down the first candle of the tweezer should be a bearish candle. The second candle of a tweezer should be opposite of the current trend i.e. the current trend is down so the second candle of the tweezer should be a bullish candle. The shadows of the both candles should be equal in length.
- Evening and Morning Stars
The morning star and the evening star candlestick pattern consist of three candlesticks. These candlestick patterns can be found at the end of the trend. They are reversal patterns and they have following characteristics:
- In a downtrend, the first candlestick is bearish and in an uptrend the first candle is bullish.
- The second candle is a comparatively smaller in size or it can be a doji or it can be a small bullish or bearish candle.
- The third candle is a confirmation that the direction has reversed.
- Three White Soldiers and Black Crows
Three white soldiers pattern consists of three bullish candles in a falling market. This signals the reversal of the down trend. This type of candlestick pattern is considered as sure signal of the bullish move specifically when such pattern occurs after an extended downtrend and the short period of flat price consolidations. The three bullish candles of three white soldiers’ patterns are called the reversal candles since these candles imply the end of the downtrend or the end of the consolidation. This pattern becomes more valid when the second candlestick is bigger than the first candle’s body. This pattern is considered to be complete when the third candlestick is at least the same size as the second candle.
Another pattern is three black crows. It is exactly the opposite of the three white soldiers. It is seen when three bearish candles are formed in a strong up trending market. Like in the three white soldier candlestick patterns, the second candle’s body should be bigger than the first one and the third should be the same size or bigger than the second candle’s body.
- Three Inside Up and Down
The three inside up candlestick pattern is a reversal pattern that is formed at the end of a downtrend. This triple candlestick pattern usually signals that the downtrend is probably over and the new uptrend is on the way. Valid three inside up candlestick pattern can be recognized by following characteristics:
- The first candlestick should be formed at the end (bottom) of the downtrend.
- The first candle should be a bearish candle.
- The second candle should at least rise above to the mid point of the first candle.
- The third candlestick should exceed above the high of the first candle to confirm that the buyers are back in the market.
On the flip side, the three inside down candlestick pattern is formed at the end (top) of an uptrend. It usually means that the uptrend is probably over and the new sellers are back to push the price lower. A valid three inside down candlestick pattern can be recognized by the following characteristics:
- The first candle is usually formed at the end (top) of the uptrend.
- The first candle should be a bullish candle.
- The second candle should at least fall below the mid point of the first candle.
- The third candlestick should exceed below the low of the first candle to confirm that the sellers are back in the market.
Summary of the Japanese Candlestick patterns and their behavior
|Number of Candlesticks||Candlestick Patterns||Bullish or Bearish?|
|Number of Bars||Candlestick Name||Bullish or Bearish?|
|Three White Soldiers||Bullish|
|Three Black Crows||Bearish|
|Three Inside Up||Bullish|
|Three Inside Down||Bearish|
These are the very basics of Japanese candlestick patterns. When these tools are used with great care the results can be very rewarding.