To be a successful trader, you need reliable and accurate data that can be processed and acted upon quickly. Japanese Candlesticks have become the industry standard because they are easier to learn and interpret in comparison to bar charts, for example. Whether you are interested in the stock market, Forex market, or some other market, candlestick patters lead to a form of technical analysis whereby market turning points can be discerned.
Candlestick Basics
Each candlestick is formed using the opening price, the closing price, the high, and the low for a particular period of time. If the closing price is below the opening price, it is represented by a filled in black candlestick. When the closing price is above the opening price, a hollow, white candlestick is depicted. The hollow or filled in area is called the body. Thin lines protrude above and below the body indicating the high and low prices and are called shadows.
When the candlestick is black, the opening price is at the top; when the candlestick is white, the opening price is at the bottom.
Candlestick Formation
The various shapes of individual candlesticks will be indicative of basic information such that:
• A filled in body indicates the sellers, or bears, are exerting pressure on the market
• A hollow body means the buyers, the bulls, are in control
• A long body represents strong selling or buying pressure
• A short body indicates little price movement and consolidation
• Short shadows indicate most of the trading activity occurred close to the opening or closing price
• Long shadows show prices were extended well beyond the opening or closing price at some point during the period
Candlestick Charting
Charting refers to the comparison of individual candlesticks over a period of time in order to show a stock’s momentum. By the analysis of candlestick patterns, a trader is attempting to see a bullish, bearish, reversal, or neutral trend. Although an individual candlestick can offer some general information, it is the relationship of two or three consecutive candlesticks that provides the most instructive guidance.
Individual Candlestick Positioning
In general, a long white body indicates a bullish trend where buyers are exerting primary control. Conversely, a long black body is indicative of control by sellers and a bearish movement. Where the opening and closing prices are the same or only slightly different, a figure that is called a doji is formed. The body of a doji is in essence a straight line or very close to one with varying lengths of shadows. Based on the lengths of the shadows, a doji looks like a cross, an inverted cross, or a plus sign. A doji is often considered to indicate indecision in the market and a time when neither the bulls nor the bears are able to establish their dominance.
Patterns
Patterns are established by observing two or three consecutive individual candlesticks. There are literally hundreds of identified candlestick patterns that traders employ with such names as:
• Engulfing pattern
• Harami
• Dark cloud cover
• Abandon baby
• Evening star
• Hanging man
• Three outside down
• Two crows
• Morning star
• Rising three method
Although seemingly confusing at first, one of the great benefits of using Japanese candlesticks is that the charts are easy to read. With some practice, discernable patterns become readily apparent.
Acting on the Patterns
As originally designed, Japanese candlesticks were intended as a tool to aid in price analysis and not as a stand-alone trade signal. Becoming proficient with candlestick patterns will almost certainly make you a better trader, but the most success is earned by those who employ an independent system to verify what the candlesticks are indicating.