Japanese Candlesticks

Japanese candlesticks are one the most popular and oldest method of technical analysis. Many traders use candlesticks in FOREX and stocks. As of today, most of trading platforms have such a section as "Japanese candlesticks". This type of chart has become a key chart instrument for trading in financial markets.

What is the secret of success of Japanese candlesticks?

Firstly, it is that the instruments of candlesticks are so versatile that can be used with any of the western technical instruments.

Secondly, Japanese candlesticks can give signals earlier than other tools of technical analysis and sometimes such signals that the western instruments cannot give at all.

Thirdly, it is wide use for analysis of investment, hedging; futures, options, stocks and currency trading.

Fourthly, it is beauty and figurative of terminology for figure description (see below).

In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.
candle chart Fig 1

The advantage of candlestick chart is that a candlestick's color shows who won - the bulls or bears. A long white body indicates that the bulls control the market but a long black body shows that the bears are in possession of the market. "Close" of a long white candlestick is always higher than "Open" but "Open" is always higher than "Close" in a long black candlestick. candle chart Fig 2

Each candlestick provides an easy-to-decipher picture of price action. Immediately a trader can see compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure.

A candlestick in which Open and Close are virtually equal is called Doji. In sideways trend this candlestick doesn't give any signals. However, in upward trend it gives a signal about possible trend reversal. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff. Neither bulls nor bears were able to gain control and a turning point could be developing. candle chart Fig 3

Bullish candlesticks and their patterns.
Hammer
Description: the candlestick with very long lower shadow and small body (black or white) under the upper boundary. The longer lower shadow, the more important signal given by the candlestick. (Fig 4) candle chart Fig 4

Bullish Engulfing
Description: the market was in a downward trend, the white body completely engulfs the previous day's body. In order to be sure that the engulfing is true, there must be a downward trend (Fig 5). candle chart Fig 5

Morning Star
Description: A three day bullish reversal pattern consisting of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.(Fig 6) candle chart Fig 6

Bearish stars and their patterns.
Hanging Man
Description: long lower shadow and short body (white or black) under the upper part of the candlestick. This candlestick forms during an upward trend. (Fig 7) candle chart Fig 7

Shooting Star
Description: long upper shadow and short body (white or black) above the lower part of the candlestick. This pattern can appear during an uptrend. (Fig 8) candle chart Fig 8

Bearish Engulfing
Description: the market was in an uptrend, the black body completely engulfs the previous day's body. In order to be sure that the engulfing is true, there must be an uptrend (Fig 9). candle chart Fig 9

Black Clouds
Description: a bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day. (Fig 10) candle chart Fig 10

Evening Star
Description: a bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day. (Fig 11) candle chart Fig 11