JAPANESE CANDLESTICK
What is a Japanese Candlestick?
While we briefly covered candlestick charting analysis in the previous lesson, we'll now dig
in a little and discuss them more in detail. Let's do a quick review first.
What is 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.
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.
Okay, so what the heck are forex candlesticks?
The best way to explain is by using a picture:
Candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes -
whatever you want! Candlesticks are used to describe the price action during the given
time frame.
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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.
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• 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".
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Long white 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 are kicking the bears'
butts big time!
Long black (filled) candlesticks show strong selling pressure. The longer the black
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.
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Mysterious Shadows
The upper and lower shadows on 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.
Candlesticks with short shadows indicate that most of the trading action was confined near
the open and close.
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If a 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 candlestick has a long lower shadow and short upper shadow, this means that sellers
flashed their washboard abs and forced 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.
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BASIC CANDLESTICK PATTERNS
1. Spinning Tops
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 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.
2. Marubozu
Sounds like some kind of voodoo magic, huh? "I will cast the evil spell of the Marubozu on
you!" Fortunately, that's not what it means. Marubozu means there are no shadows from
the bodies. Depending on whether the candlestick's body is filled or hollow, the high and
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low are the same as its open or close. Check out the two types of Marubozus in the picture
below.
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 is a very bullish candle as
it shows that buyers were in control 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 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.
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3. Doji
Doji candlesticks have the same open and close price or at least their bodies are
extremely short. The 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.
There are four special types of Doji candlesticks. The length of the upper and lower
shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus
sign. The word "Doji" refers to both the singular and plural form.
When a Doji forms on your chart, pay special attention to the preceding candlesticks.
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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 price
to continue rising, more buyers are needed but there aren't anymore! 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 weak. In order for 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 lack of new sellers, further buying strength is
required to confirm any reversal. Look for a white candlestick to close above the long black
candlestick's open.
In the next following sections, we will take a look at specific candlestick formations and
what they are telling us. Hopefully, by the end of this lesson on candlesticks, you would
know how to recognize candlestick patterns and make sound trading decisions based on
them.
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LONE RANGERS - SINGLE CANDLESTICK
PATTERNS
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1. 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 price is falling, hammers signal that the bottom is near and 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.
Just because you see a hammer form in a downtrend doesn't mean you automatically place
a buy order! More bullish confirmation is needed before it's safe to pull the trigger.
A good confirmation example would be to wait for a white candlestick to close above the
open of the candlestick on the left side of the hammer.
Recognition Criteria:
• 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.
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The hanging man is a bearish reversal pattern that can also mark a top or strong
resistance level. When 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:
• 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.
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2. 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. Both candlesticks have petite little
bodies (filled or hollow), long upper shadows, and small or absent lower shadows.
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The inverted hammer occurs when 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 is left?
Buyers.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer
but occurs when 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 murdered.
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DOUBLE TROUBLE - DUAL CANDLESTICK
PATTERNS
1. Engulfing Candles
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The bullish engulfing pattern is a two candle stick pattern that signals a strong up move
may be coming. 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 pattern occurs when 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.
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2. Tweezer Bottoms and Tops
The tweezers are dual candlestick reversal patterns. This type of candlestick pattern could
usually be spotted after an extended up trend or downtrend, indicating that a reversal will
soon occur.
Notice how the candlestick formation looks just like a pair of tweezers!
Amazing!
The most effective tweezers have the following characteristics:
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• The first candle is the same as the overall trend. If price is moving up, then the first
candle should be bullish.
• The second candle is opposite the overall trend. If price is moving up, then the
second candle should be bearish.
• The shadows of the candles should be of equal length. Tweezer tops should have the
same highs, while tweezer bottoms should have the same lows.
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THREE'S NOT A CROWD - TRIPLE
CANDLESTICK PATTERNS
1. Evening and Morning Stars
The morning star and the evening star are triple candlestick patterns that you can usually
find at the end of a trend. They are reversal patterns that can be recognized through these
three characteristics:
1. The first stick 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 candle acts as a confirmation that a reversal is in place, as the candle
closes beyond the midpoint of the first candle.
2. Three White Soldiers and Black Crows
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The three white soldiers pattern is formed when three long bullish candles follow a
downtrend, signaling a reversal has occurred. This type of 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 pattern to be considered valid, the second candle should be bigger than the
previous candle's body. Also, the second candle should close near its high, leaving a small
or non-existent upper wick.
For the three white soldiers pattern to be completed, the last candle 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.
It is formed when three bearish candles follow a strong uptrend, indicating that a reversal is
in the works.
The second candle's body should be bigger than the first candle and should close at or very
near its low. Finally, the third candle should be the same size or larger than the second
candle's body with a very short or no lower shadow.
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3. Three Inside Up and Down
The three inside up candlestick formation is a trend-reversal pattern that is found at the
bottom of a downtrend. It indicates that the downtrend is possibly over and that a new
uptrend has started. For a valid three inside up candlestick formation, look for these
properties:
1. The first candle should be found at the bottom of a downtrend and is characterized
by a long bearish candlestick.
2. The second candle should at least make it up all the way up to the midpoint of the
first candle.
3. The third candle needs to close above the first candle's high to confirm that buyers
have overpowered the strength of the downtrend.
Conversely, the three inside down candlestick formation is found at the top of an
uptrend. It means that the uptrend is possibly over and that a new downtrend has started.
A three inside down candle stick formation needs have the following characteristics:
1. The first candle should be found at the top of an uptrend and is characterized by a
long bullish candlestick.
2. The second candle should make it up all the way down the midpoint of the first
candle.
3. The third candle needs to close below the first candle's low to confirm that sellers
have overpowered the strength of the uptrend.
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JAPANESE CANDLESTICKS CHEAT SHEET
Did you click here first? If you did, stop reading right now and go through the entire
Japanese Candlesticks Lesson first!
If you're REALLY done with those, here's quick one page reference cheat sheet for single,
dual, and triple candlestick formations to easily identify what kind of pattern you are
looking at whenever you are trading.
Go ahead and bookmark this page... No need to be shy!
Number of Bars Name Bullish or Bearish? What It Looks Like?
Single
Spinning Top Neutral
Doji Neutral
White Marubozu Bullish
Black Marubozu Bearish
Hammer Bullish
Hanging Man Bearish
Inverted Hammer Bullish
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Shooting Star Bearish
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Number of Bars Name Bullish or Bearish? What it Looks Like?
Bullish Engulfing Bullish
Bearish Engulfing Bearish
Double
Tweezer Tops Bearish
Tweezer Bottoms Bullish
Triple
Morning Star Bullish
Evening Star Bearish
Three White Soldiers Bullish
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Three Black Crows Bearish
Three Inside Up Bullish
Three Inside Down Bearish
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SUMMARY: JAPANESE CANDLESTICKS
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• 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".
Long bodies indicate strong buying or selling. The longer the body is, the more intense the
buying or selling pressure.
Short bodies imply very little buying or selling activity. In street forex lingo, bulls mean
buyers and bears mean sellers.
Upper shadows signify the session high.
Lower shadows signify the session low.
There are many types of candlestick patterns, but they can be categorized into how many
bars make up the candlestick pattern. There are single, dual, and triple candlestick
formations. The most common types of candlestick patterns are the following:
Number of
Candlestick Pattern
Bars
Spinning Tops, Dojis, Marubozu, Inverted Hammer, Hanging Man,
Single
Shooting Star
Double Bullish and Bearish Engulfing, Tweezer Tops and Bottoms
Morning and Evening Stars, Three Black Crows and Three White
Triple
Soldiers, Three Inside Up and Down
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Just refer to the Candlestick Cheat Sheet for a quick reference on what these candlestick
patterns mean.
Combine candlestick analysis with support and resistance levels for best results.
And finally, here are some words of wisdom.
Just because candlesticks hint at a reversal or continuation, it doesn't mean it will happen
for sure! You must always consider market conditions and what price action is telling you.
This is the forex market and nothing is set in stone!
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GOOD LUCK AND HAPPY TRADING
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