Japanese Candlestick Trading
Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That’s right, rice.
Traders be hustin’ back then also. To rock ice, trader traded rice.
A Westerner by the name of Steve Nison “discovered” this secret technique called “Japanese candlesticks,” learning it from a fellow Japanese broker.
Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it.Slowly, this secret technique grew in popularity in the ’90s.
To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret.
Steve Nison is Mr. Candlestick.
What are Japanese candlesticks?
The best way to explain is by using a picture:
Japanese candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes ….whatever you want!
They are used to describe the price action during the given time frame.
Japanese candlesticks are formed using the open, high, low, and close of the chosen time period.
- If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
- If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
- The hollow or filled section of the candlestick is called the “real body” or body.
- The thin lines poking above and below the body display the high/low range and are called shadows.
- The top of the upper shadow is the “high“.
- The bottom of the lower shadow is the “low“.
Japanese Candlestick Anatomy
Let’s break down the different parts of a Japanese candlestick.
Just like humans, candlesticks have different body sizes. And when it comes to forex trading, there’s nothing naughtier than checking out the bodies of candlesticks!
Long bodies indicate strong buying or selling.
The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control. Short bodies imply very little buying or selling activity. In trading lingo, bulls mean buyers and bears mean sellers.
Long white Japanese candlesticks show strong buying pressure.
The longer the white candlestick, the further the close is above the open.
This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls were kicking the bears’ butts big time!Long black (filled) candlesticks show strong selling pressure.
The longer the black Japanese candlestick, the further the close is below the open.
This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.
The upper and lower shadows on Japanese candlesticks provide important clues about the trading session.
Upper shadows signify the session high.
Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Japanese candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a Japanese candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher.
But for one reason or another, sellers came in and drove prices back DOWN to end the session back near its open price.
If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower.
But for one reason or another, buyers came in and drove prices back UP to end the session back near its open price.
Basic Japanese Candlestick Patterns
Japanese candlesticks with a long upper shadow, long lower shadow, and small real bodies are called spinning tops. The color of the real body is not very important.
The Spinning Top pattern indicates the indecision between the buyers and sellers.
The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.
Neither buyers nor sellers could gain the upper hand, and the result was a standoff.
- If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
- If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.
Marubozu means there are no shadows from the bodies.
The word “marubozu ” translates to “bald head” or “shaved head” in Japanese, means it has no shadow or wick.
Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.
A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.This means that the candle opened at its lowest price and closed at its highest price.
This is a very bullish candle as it shows that buyers were in control of the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.
This means that the candle opened at its highest price and closed at its lowest price.
This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.
Depending on where a marubozu is located and what color it is, here are few guidelines:
- If a White Marubozu forms at the end of an uptrend, a continuation is likely.
- If a White Marubozu forms at the end of a downtrend, a reversal is likely.
- If a Black Marubozu forms at the end of a downtrend, a continuation is likely.
- If a Black Marubozu forms at the end of an uptrend, a reversal is likely.
Doji candlesticks have the same open and close price or at least their bodies are extremely short. A Doji should have a very small body that appears as a thin line.
Doji candles suggest indecision or a struggle for turf positioning between buyers and sellers.
Prices move above and below the open price during the session, but close at or very near the open price.
Neither buyers nor sellers were able to gain control and the result was essentially a draw.
The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross, or plus sign.
The word “Doji” refers to both the singular and plural form.
If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.
In order for the price to continue rising, more buyers are needed but there aren’t any more! Sellers are licking their chops and are looking to come in and drive the price back down.
If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weakening.
In order for the price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.
While the decline is sputtering due to a lack of new sellers, further buying strength is required to confirm any reversal.
Single Candlestick Patterns
When these types of candlesticks appear on a chart, they can signal potential market reversals.
Here are the four basic single Japanese candlestick patterns
Hammer and Hanging Man
The Hammer and Hanging Man look exactly alike but have totally different meanings depending on past price action.
Both have cute little bodies (black or white), long lower shadows, and short or absent upper shadows.
The Hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.When the price is falling, hammers signal that the bottom is near and the price will start rising again.
The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.
More bullish confirmation is needed before it’s safe to pull the trigger when there is a hammer form in a downtrend. A typical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the Hammer.
Recognition Criteria for a Hammer:
- The long shadow is about two or three times of the real body.
- Little or no upper shadow.
- The real body is at the upper end of the trading range.
- The color of the real body is not important.
The Hanging Man is a bearish reversal pattern that can also mark a top or strong resistance level.
When the price is rising, the formation of a Hanging Man indicates that sellers are beginning to outnumber buyers.
The long lower shadow shows that sellers pushed prices lower during the session.
Buyers were able to push the price back up some but only near the open.
This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price.
Recognition Criteria for a Hanging Man:
- A long lower shadow which is about two or three times of the real body.
- Little or no upper shadow.
- The real body is at the upper end of the trading range.
- The color of the body is not important, though a black body is more bearish than a white body.
Inverted Hammer and Shooting Star
The Inverted Hammer and Shooting Star also look identical. The only difference between them is whether you’re in a downtrend or uptrend.
An Inverted Hammer is a bullish reversal candlestick.
A Shooting Star is a bearish reversal candlestick.
Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and small or absent lower shadows.
The Inverted Hammer occurs when the price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.
However, sellers saw what the buyers were doing, said “Oh heck no!” and attempted to push the price back down.
Fortunately, the buyers had eaten enough of their Wheaties for breakfast and still managed to close the session near the open.
Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold.
And if there are no more sellers, who are left? Buyers.
The Shooting Star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when the price has been rising.
Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom.
This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left because they’ve all been overpowered.
Dual Candlestick Patterns
DUAL candlestick patterns is better than single candlestick patterns
To identify dual Japanese candlestick patterns, some specific formations that consist of TWO candlesticks in total will needed to be identified.
There are two types of Engulfing candles: Bullish Engulfing and Bearish Engulfing.
The Bullish Engulfing pattern is a two candlestick reversal pattern that signals a strong up move may occur.It happens when a bearish candle is immediately followed by a larger bullish candle.
This second candle “engulfs” the bearish candle. This means buyers are flexing their muscles and that there could be a strong up move after a recent downtrend or a period of consolidation.
On the other hand, the Bearish Engulfing pattern is the opposite of the bullish pattern.This type of candlestick pattern occurs when the bullish candle is immediately followed by a bearish candle that completely “engulfs” it.
This means that sellers overpowered the buyers and that a strong move down could happen.
Tweezer Bottoms and Tops
Tweezer patterns are two candlestick reversal patterns.
This type of candlestick pattern is usually spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.
There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.
The most effective Tweezers have the following characteristics:
The first candlestick is the same as the overall trend. If the price is moving up, then the first candle should be bullish.
The second candlestick is opposite the overall trend. If the price is moving up, then the second candle should be bearish.
The shadows of the candlesticks should be of equal (or near-equal) length.
Tweezer Tops should have the same highs, while Tweezer Bottoms should have the same lows.
Triple Candlestick Patterns
Triple Candlestick Patterns
help traders determine how the price is likely to behave next.
Some three candlestick patterns are reversal patterns, which signal the end of the current trend and the start of a new trend in the opposite direction, and other three candlestick patterns are continuation patterns, which signal a pause and then the continuation of the current trend.
Evening and Morning Stars
The Morning Star and the Evening Star are triple candlestick patterns that can be used to find at the end of a trend.
They are reversal patterns that can be recognized through three characteristics.
When using the Evening Star Pattern, 1. The first candlestick is a bullish candle, which is part of a recent uptrend, 2. The second candle has a small body, indicating that there could be some indecision in the market. This candle can be either bullish or bearish, 3. The third candlestick acts as a confirmation that a reversal is in place, as the candle closes beyond the midpoint of the first candle.
Three White Soldiers and Black Crows
The Three White Soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signaling a reversal has occurred.
This type of triple candlestick pattern is considered as one of the most potent in-yo-face bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.The first of the “three soldiers” is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.
For the Three White Soldiers pattern to be considered valid, the second candlestick should be bigger than the previous candle’s body.
Also, the second candlestick should close near its high, leaving a small or non-existent upper wick.
For the Three White Soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.
The Three Black Crows candlestick pattern is just the opposite of the Three White Soldiers.
Remember, candlesticks are useless on their own, and you must always consider the market environment and what the price is telling you.