Japanese Candlesticks

Japanese Candlestick charting is a technique used to forecast price behavior in financial markets. The development of candlesticks credit goes to Homma, who was a renowned rice trader from the town of Sakata. After many years of trading the original ideas were modified and developed into a new system of candlestick charting that we use today as an analytical tool by technical traders.

Japanese Candlesticks are similar to bar charts. These charts are made using four pieces of data, which is high, low, opening and closing prices. They are best in combination with any other technical indicators and can be used in any time frame.

Japanese Candlesticks gives you the clear picture of price action from which a trader can see and compare relationship between the high and low as well as open and close.

A Candlestick can be described with three parts, upper shadow, real body and lower shadow.

Upper Shadow: indicates the high for the period.

Real Body: the height of the real body indicates the difference between the period’s open and close.

Lower Shadow: indicates the period’s low.

If the real body is white then the chances of close was higher than the open, which tells us that the period was “UP”. If the real body is black then the chances of close was lower than the open, which tells us that the period was “DOWN”.

In some cases there is no real body and the opening and closing prices are same. These types of Candlesticks are known as doji.

There are three major patterns in Japanese Candlesticks:

Bullish Candlestick Patterns: A bullish pattern is a reversal pattern which shows up after a pullback.

The Bullish Hammer Pattern: The Bullish Hammer Pattern is candlesticks which have small real bodies at the top and long lower shadows. This pattern does not have any upper shadow at all. This occurs during the downtrend of the market and is called as Hammer.

Piercing Pattern: The Piercing Pattern is also a reversal and a two candle pattern formed during the downtrend of market. In this pattern it has black real body in the first day and a long white body in second day. This pattern indicates that the downtrend may take a reverse and traders can take profit on long trades.

The Bullish Engulfing Pattern: The Bullish Engulfing Pattern has two candles which are formed at the end of downtrend. This pattern shows you that a small black candlestick is covered or engulfed by a large white candlestick. The small candlesticks denote the previous day’s prices. A trader should wait till the completion of second candle to verify this pattern.

Morning Star Pattern: The Morning Star is the signal of bottom reversal and a three candle pattern. The first Japanese candlestick is a long black body, second is a small real body gaps like a star (which can either be black or white) and the third candlestick is white that shows the market turned bullish.

Bearish Candlestick Patterns: A bearish pattern is also a reversal pattern which shows after a rally.

Bearish Engulfing Pattern: The Bearish Engulfing Pattern has two candlesticks and is formed at the end of an up-trending market. This pattern is opposite to bullish pattern. The small white bodyis engulfed by black real body. This is an indication of future trend of bears.

Dark Cloud Cover Pattern: The Dark Cloud Cover Pattern is two candlestick pattern formed at the end of uptrend. In this pattern a strong white real body is seen in the first day. The black body is seen on the second day that opens higher than the previous day’s price.

Shooting Star Pattern: The Shooting Star Pattern is one candlestick pattern formed during an uptrend. This pattern has upper shadow longer than the real body and no lower shadow. The Shooting Star is in the form of an Inverted Hammer. This opens the trades higher and then closes near its open.

Evening Star Pattern: The Evening Star is three candlesticks pattern. It is directly opposite to Morning Star Pattern and is formed during the uptrend of market.

Windows Pattern: A Windows pattern gives you a very strong indication of market reaction. Windows patterns helps you recognize the trend which is likely to continue. They are equivalent to gaps up or gaps down on bar charts.

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