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| Japanese Candlestick Basics | |
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Basics Formations |
| Basics | |
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Description Japanese candlestick and western bar charts are constructed from the exact same data, which is the opening, closing, high and low for the day. Candlestick theory places a greater emphasis on price action, in order to determine if the bears or the bulls won for a certain time frame. Therefore, it is believed that reversal or continuation signals can be recognized earlier than with traditional technical analysis. The rectangular section of the candlestick is called the body, which represents the area between the opening and closing price. When the closing price is greater than the opening price then the body is white and the body is black when the closing price is less than the opening price. The lines above and below the body represent the high and low price, these lines are called the shadows. |
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Candlestick Forms Candlesticks can take many forms; some have wide bodies, small bodies, no bodies and long or short shadows above or below the body or both. Candlesticks are very visual. For instance, it is very clear by looking at a long white candle that the bulls are in charge of that time period since the session opened at the low and closed at the high. |
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Spinning Tops Small body candlesticks are called Spinning Tops and candlesticks with no bodies are referred to as Doji. If the opening and closing price are the same then the candlestick is called a Doji and it looks like its western bar counterpart. Spinning tops and Doji represent indecision, the bulls or bears could did not win the battle. |
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Doji Candlesticks with little or no bodies are referred to as Doji. If the opening and closing price are the same then the Doji looks like its western bar counterpart. Spinning tops and Doji represent indecision; the bulls or bears could not win the battle. It is interpreted that as real bodies become smaller, the prior momentum is diminishing. Doji imply that a reversal is near. |
| Formations | ||
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| Hammer and Hanging Man | |
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Hammer and Hanging Man Before we get into Hammers and Hanging Mans we must first define another candlestick formation called Umbrella lines. Candles with small real bodies and long lower shadows are called umbrella lines. This formation can be bullish or bearish depending on the prior trend. |
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Hammer When an umbrella line emerges after a downtrend a hammer pattern has formed. This is a bullish reversal pattern but confirmation is needed before a trade is entered. Above average volume for the bar that forms the hammer is another indication that a reversal may be forming. Hammers may mark bottoms or support areas too. |
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Hanging Man When an umbrella line emerges after an uptrend a hanging man pattern has formed. This is a bearish reversal pattern but confirmation is needed before a trade is entered. Above average volume for the bar that forms the hanging man is another indication that a reversal may be forming. Hanging mans may mark tops or resistance areas too. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Stars | |
Stars Stars are another type of reversal patterns. A star is a candle with a small real body that gaps above or below the preceding large body candle. The two real bodies do not overlap. |
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Morning Star The morning star is a bullish reversal pattern and is comprised of three candles. The first candle is a large black body, which is interpreted as the bears being in control. The second candle has a small body that has gapped down from the prior candle. This is interpreted as the bears are losing momentum since it is a small body. The last candle of this pattern is a large white candle that retraces deeply into the first candles body. This shows that the bulls have taken charge. |
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Evening Star The evening star is the bearish version of the morning star. The first candle is a large white body, which is interpreted as the bulls being in control. The second candle has a small body that has gapped up from the prior candle. This is interpreted as the bulls are losing momentum since it is a small body. The last candle of this pattern is a large black candle that retraces deeply into the first candles body. This shows that the bears have taken charge. Some aspects that may increase the odds of this formation would be:
Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Three White Soldiers | |
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Three White Soldiers The three white soldiers is formed with three consecutively ascending long white candlesticks. It is a bullish reversal pattern. The three candles should have closes at or near their highs. It is best to have each of their openings pierce into the prior candles. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Three Black Crows | |
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Hammer and Hanging Man The three black crows is formed with three declining consecutive long black candlesticks. It is a bearish reversal pattern. The three candles should have closes at or near their lows. It is best to have each of their openings pierce into the prior candles. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Harami | |
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Bullish Harami The bullish harami is a two candlestick pattern that is preceded by a downward move. The first has a large body and the second a small body (spinning top) that is totally encompassed by the first. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. |
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Bullish Harami Cross If the small candlestick is a doji, the chances of a reversal increase. Then the formation is called a bullish Harami Cross. |
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Bearish Harami The bearish harami is a two candlestick pattern that is preceded by an upward move. The first has a large body and the second a small body (spinning top) that is totally encompassed by the first. No matter what the color of the first candlestick, the smaller the body of the second candlestick is, the more likely the reversal. |
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Bearish Harami Cross If the small candlestick is a doji, the chances of a reversal increase. Then the formation is a bearish Harami Cross. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Bullish and Bearish Engulfing | |
Bullish and Bearish Engulfing The engulfing pattern is a combination of multiple candle lines. It is a major reversal signal. |
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Bullish Engulfing A bullish engulfing pattern is formed when a security is going lower and the next candle opens lower than the previous candles close and closes higher than the previous candle open. The previous candle must have a black body. The interpretation of the candles are that the bears where in control at the open but the bulls won at the end of the day and overcame the prior candles bears. Heavy or above average volume on the second candle is another sign that this may be a valid turning point. |
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Bearish Engulfing A bearish engulfing pattern is formed when a security is going higher and the next candle opens higher than the previous candles close and closes lower than the previous candle open. The previous candle must have a white body. The interpretation of the candles are that the bulls where in control at the open but the bears won at the end of the day and overcame the prior candles bulls. Heavy or above average volume on the second candle is another sign that this may be a valid turning point. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |
| Rising and Falling Three | |
Rising and Falling Three This is a continuation formation so once a rising or falling three pattern has formed the preceding trend should continue. |
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Rising Three In an uptrend the forming of a long white candle starts this pattern. Three small declining candles whose range does not surpass that of the first long white candle should follow this candle ideally. There can be two or more than three candles of any color. The final candle that confirms this pattern is a long white real body candle that closes above the first day's close. It would be best if this candle gaps above the previous candle. |
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Falling Three This is the bearish equivalent to the rising three. In a downtrend the forming of a long black candle starts this pattern. Three small ascending candles whose range does not surpass that of the first long black candle should follow this candle ideally. There can be two or more than three candles of any color. The final candle that confirms this pattern is a long black real body candle that closes below the first day's close. It would be best if this candle gaps below the previous candle. Refer to Nison, Japanese Candlestick Charting Techniques 2nd Edition More Info |