Japanese Candlestick Patterns
Invented by a successful 17th century
Japanese rice trader to
predicted rice prices. Candlesticks were
introduced into modern technical
analysis by Steve Nison in Japanese
Candlestick Charting Techniques.
Candlesticks contain the same data as a
normal bar chart . In addition, each
candle depict the relationship
between opening and closing prices. The
narrow section ( wicks) represent the range of prices
traded during the period (high to low) while the broad
mid-section represents the opening and closing prices for
the period.
Candlesticks provide the ability to
visualize
trend, strength or weakness and predict continuation or
reversal signals that may not be
apparent on a bar chart.
- If the close is higher than the open, the
mid-section is white, green or blue
- If the close is lower than the open, the
mid-section is black or red.
Basic Candlesticks:
The shadow is the wick of the candle. It depicts
the the trading range outside of the body. Technicians refer to a candlestick as having a
tall shadow or a long tail.
- A tall shadow indicates resistance;
- A long tail signals support.
The long white line is a sign that buyers are firmly in
control - a bullish candlestick.
A long black line shows that sellers are in
control - definitely bearish.
Marubozu are even stronger bull or bear signals than
long lines as they
show that buyers/sellers have remained in control from the
open to the close -- there are no intra-day resersal.
The Doji candlestick occurs when the open and closing
price are equal.
An open and close in the middle of the candlestick
signal indecision. Long-legged dojis, when they occur after
small candlesticks, indicate a surge in volatility and warn
of a potential trend change. 4 Price dojis, where the high
and low are equal, are normally only seen on thinly traded
stocks.
The dragonfly occurs when the open and close are near the
top of the candlestick and signals reversal after a
down-trend:
control has shifted from sellers to buyers.
The hammer is not as strong as the
dragonfly candlestick,
but also signals reversal after a down-trend:
control has shifted from sellers to buyers. The
shadow of the
candlestick should be at least twice the height of the body.
A gravestone is identified by open and close near the
bottom of the trading range. The candlestick is the converse
of a hammer and signals reversal when it occurs after an
up-trend.
A hammer that occurs
after an up trend is called a 'hanging man' and is a bearish
signal.
A Dark Cloud pattern encountered after an up-trend is a
reversal signal, warning of "rainy days" ahead.
The Piercing Line is the opposite of the Dark Cloud
pattern and is a reversal signal if it appears after a
down-trend.
Engulfing patterns are where the body of the second
candlestick 'engulfs' the first. They often follow or
complete doji,
hammer or
gravestone patterns and
signal reversal in the short-term trend.
Stars are similar to
gaps. A long body followed by a much shorter candlestick
with a short body, where the bodies must not overlap --
though their shadows may.
The Morning Star pattern signals a bullish reversal after
a down-trend. The first candlestick has a long black body.
The second candlestick gaps down from the first (the bodies
display a gap, but the shadows may still overlap) and is
more bullish if hollow. The next candlestick has a long
white body which closes in the top half of the body of the
first candlestick.
The Evening Star pattern is opposite to
Morning Star and is
a reversal signal at the end of an up-trend. The pattern is
more bearish if the second candlestick is filled rather than
hollow.
A Doji Star is weaker than the
Morning or
Evening Star: the
doji represents indecision.
The doji star requires confirmation from the next
candlestick closing in the bottom half of the body of the
first candlestick.
With a Shooting Star, the body on the second candlestick
must be near the low -- at the bottom end of the trading
range -- and the upper
shadow must be taller. This is also a weaker reversal
signal than the Morning
or Evening Star.
The pattern requires confirmation from the next candlestick
closing below half-way on the body of the first.
A Harami formation indicates loss of momentum and often
warns of reversal after a strong trend. Harami means
'pregnant' which is quite descriptive. The second
candlestick must be contained within the body of the first,
though the shadows may
protrude slightly.
The Rising Method consists of two strong white
lines bracketing 3 or
4 small declining black candlesticks. The final white line
forms a new closing high. The pattern is definitely bullish.
The bearish Falling Method consists of two long black
lines bracketing 3 or
4 small ascending white candlesticks, the second black line
forming a new closing low.
While candlesticks may offer useful pointers as to
short-term direction, trading on the strength of candlestick
signals alone is not advisable. Jack Schwager in
Technical Analysis conducted fairly extensive tests with
candlesticks over a number of markets with disappointing
results.
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