A Brief History of Japanese Candlestick Charting Patterns.
Candlestick charts originated in Japan during the 18th century. Since
no defined currency standard existed in Japan during this time rice
represented a medium of exchange. Various feudal lords deposited rice in
warehouses in Osaka and would then sell or trade the coupon receipts,
thus rice become the first futures market. In the 1700s legendary
Japanese rice trader Homma Munehisa studied all aspects of rice trading
from the fundamentals to market psychology.
Homma subsequently dominated the Japanese rice markets and built a
huge fortune. His trading techniques and principles eventually evolved
into the candlestick methodology which was then used by Japanese
technical analysts when the Japanese stock market began in the 1870s.
The method was picked up by famed market technician Charles Dow ( DOW THEORY HERE ) around
1900 and remains arguably the most popular form of technical analysis
chart in use by today’s traders of financial instruments.
• Why use Candlestick Charts?
Candlestick charts
show the same information as bar charts but in a graphical format that
provides a more detailed and accurate representation of price action.
Candlestick charts visually display the supply and demand situation
by showing who is winning the battle between the bulls and the bears. ( Trading the Bullish Hammer Candle )
Candlestick charts reveal another dimension of the given period’s
price action by pictorially displaying the force (or lack of force)
behind each price bar’s movement.
Candlestick formations make all single bar and multi-bar patterns
significantly easier to spot in real time, thus increasing your chances
of catching high probability trade setups. In addition, because
candlestick charts use the same data as bar charts (open, high, low, and
close), all Western technical signals used on a bar chart can easily be
applied to a candlestick chart.
Candlestick charts offer everything bar charts do and more, using
them is a win-win situation because you can use all the trading signals
normally used on bar charts with the added clarity and additional
signals generated by candlesticks. Candlesticks charts are more fun to look at.
• The Anatomy of a Candle
Candlesticks have a central portion that displays the price distance
between the open and the close. This area is known as the real body or
simply the body.
The price distance between the open and the high for the period being
analyzed is called the upper shadow, sometimes referred to as an “upper
wick” as well. The highest price paid for a particular period is the
marked by the high of the upper shadow.
The price distance between the close and the low for the period being
analyzed is called the lower shadow, sometimes referred to as a “lower
wick”.
The real body displays the opening and closing price of the security
being traded. Closing prices have added significance because they
determine the conviction of the bulls or bears. If the security closed
higher than it opened, the real body is white or unfilled, with the
opening price at the bottom of the real body and the closing price at
the top. If the security closed lower than it opened, the real body is
black, with the opening price at the top and the closing price ( PRICE ACTION TIPS ) at the
bottom. Depending on the price action for the period being analyzed a
candlestick might not have a body or a wick.
To better highlight or visualize price movements, modern candlestick
charts (especially those displayed digitally) often replace the black or
white of the candlestick real body with colors such as red (for a lower
closing) and blue or green (for a higher closing).
Bullish Candle
Signals uptrend movement, they occur in different lengths; the longer the body, the more significant the price increase
Signals downtrend movement, they occur in different lengths; the longer the body, the more significant the price decrease.
These candles provide a bullish signal, the lower shadow must be at least the size of the real body; the longer the lower shadow the more reliable the signal.
These candles provide a bearish signal, the upper shadow must be at least the size of the real body; the longer the upper shadow the more reliable the signal.
The hammer is a bullish signal that occurs during a downtrend. The lower shadow should be at least twice the length of the real-body. Hammers have little or no upper shadow. When a hammer occurs during an uptrend it is known as a “hanging man” and is a bearish signal. Because of the bullish long lower shadow however, this pattern needs bearish confirmation by a close under the hanging man’s real body.
This candle has a long upper shadow with little, ( Trading the Shooting Star ) or no lower shadow, and a small real body near the lows of the session that develops during or after and uptrend.
The Harami is a two-candlestick pattern in which a small real body forms within the prior session’s larger real body.
The Doji is a candlestick in which the session’s open and close are the same, or almost the same. There are a few different varieties of Dojis, depending on where the opening and closing are in relation to the bar’s range.
The Dragonfly Doji has a long lower shadow, the open, high, and close are at or very near the session’s high. This pattern often signals reversal of downtrend.
Gravestone doji
The Gravestone Doji has a long upper
shadow, the open, low, and close are at or very near the session’s low.
This pattern often signals reversal of an uptrend.
This candle has a very long upper or lower shadow and a small real body. If the opening and closing price are the same the candle has no real body and is then called a Long-Legged Doji. The first picture is a high wave candle the second is a Long-Legged Doji.
The bullish engulfing pattern consists of large white real body that engulfs a small black real body in a downtrend. The bearish ENGULFING PATERN occurs when the bears overwhelm the bulls and is reflected by a long black real body engulfing a small white real body in an uptrend.
Spinning tops are simply candles with small real bodies.
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