In 1991, Steve Nison released a book called, Japanese Candlestick Charting Techniques. The book recounts what Nison has learned from a Japanese broker. The shape of the chart patterns resemble candlesticks and have been refined for generations. Taking that information, Nison brings to the West and is now considered the leading expert on using Candlestick to analyze the stock market and forex market. These candlesticks are capable of foretelling market turning points and helping to decrease market risk. If you want to implement them into your strategies, here’s what you need to know.
What Can They Provide
To begin with, Candlestick charts can be used by those who are day traders, swing traders, investors, active investors, and premier financial institutions. They are easy to understand as they also share the same data that also creates a bar chart, plus they show the opening price. Candlestick charts are able to send out reverse signals quickly helping you decide whether to enter or exit the market.
Additionally, Candlestick charts can also show both the trend and underpinning the move compared to the bar chart. Western charting analysis is enhanced by Candlestick charts as they can provide you timing and trading benefits. As mentioned before, Candlesticks can be used for various markets including stock, Forex, futures, and commodity markets.
How to Read Candlestick Charts
To read a Candlestick chart, you first need to memorize the three main elements of a candle, the body, the color, and the wick. The body refers to the market’s opening and closing levels, the wick shows the high/low range and the color shows the movement’s direction within the period. An increasing candlestick is called a bullish candlestick and a decreasing candlestick is called a bearish candlestick.
Charts commonly show green and red as their colors, an upwards movement is indicated in green while the downwards movement is in red. Green candles usually have the top of the body closed and the bottom is open. Red candles do the opposite of green candles, open-top, closed bottom. Following the body, the wick comes next. The top wick is the highest point the market has hit within that time period. The bottom wick is the opposite, it is the lowest point the market has hit in that period.
You also need to know if the wick is longer than the body. For example, if the wick is longer than the body, this means that the period has shown a high level of volatility. If there are no signs of a wick then that means that the opening and/or closing price was also in the high/low range.
Candlestick Patterns Examples
There are also three types of candlestick patterns: single, double, and triple. They are based on the number of sticks that make up the pattern and show the length of the period with the single pattern being the shortest and the triple pattern being the longest.
Spinning Tops — These are formed when the candle has a narrow body and long wicks on the top and bottom. This means that the market had little difference between the opening and closing prices in a very high and low trading range.
Marubozu — Meaning “bald” in Japanese, this means that there is no wick in a candlestick. Based on that information, a green or red Marubozu opened and closed at its highest/lowest price.
Doji — This pattern indicates that both the opening and closing prices are equal with the body appearing with a very thin line. There are four types of Dojis to look out for, the Long-legged, the Gravestone, the Dragonfly, and the Four-Price. The Long-legged has a long wick both above and below the body. The Gravestone only has a long wick above the body. The Dragonfly only has a long wick below the body. And the Four-Price has no wick in either top or bottom.
Engulfing — This pattern shows when a candlestick is followed by a larger candlestick going the opposite direction. For example, a green candlestick engulfing pattern has a red candlestick come afterward. This can indicate that a negative opinion is forming and a major move down is on its way.
Harami — Basically, this pattern is the complete opposite of the engulfing pattern. A candlestick is followed by another smaller candlestick going the opposite direction. So when a red candlestick is followed by a larger green candlestick, that means that a downtrend is about to begin. Fun fact, the word harami translates to pregnant in Japanese as the pattern as some people believe that the pattern resembles a pregnant person.
Tweezers — In this candlestick pattern, you will see two identical patterns (looking like a tweezer) going in the opposite direction following a bear or bull market. Reading this pattern should indicate that an upcoming reversal is on the way. The first candle should match the previous trend and the second candle should be identical albeit with a different color. So if the pattern is a downtrend, the red candle should have a short body with a tall wick with the green candle follow suit.
Morning Star — This triple candlestick pattern occurs during an extensive downward movement. The market hits a point of indecision before it begins to recover. Among each stick, there is a red candle with a large body, another red candle in the shape of a spinning top, and a green candle with a tall body.
The pattern should read out like this, the large red candle represents the downward trend. Then a short red candle should tell you that the bulls are entering a session. Finally, the large green candle should tell you that a reversal is starting.
Evening Star — This is the opposite of the morning star. This occurs when the market hits the point of indecision during an upward movement before it begins to retrace. So with that in mind, there should be a large green candle, followed by a green candle with a spinning top, then a large red candle ending it.
Three White Soldiers — This pattern will tell you that the bear market is complete and will appear after an extended downtrend and small consolidation. This pattern consists of three green candles that read like this. The first candle is shown after a downward move, the second candle with a bigger body and a small upper wick, and the third candle with the same large body as the second candle but with no wick at all.
Now that you know what these Candlesticks do, you can add them to your market analysis tools in order to help support your investing/trading decisions. Implementing these candlesticks will help you stand out in whatever market you desire to enter whether you are a trader or an investor. You have the freedom to choose single, double, or triple pattern sticks. While we haven’t been able to show all of the patterns, they should at least give you an idea of how Candlestick works. Dive in deeper and enhance your skills.
Steve Nison is considered the pioneer of Japanese Candlestick analysis in America. According to Mr. Nison, combining Japanese Candlestick Analysis with Technical Analysis, Fundamental Analysis and Western Charting Theories can add a powerful tool to your trading/investing toolbox.
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Candlecharts.com. (2020, October 05). Comprehensive Candlestick Patterns Guide. Retrieved December 08, 2020, from https://candlecharts.com/candlestick-training/candlestick-patterns/
Candlecharts.com. (2020, September 12). How To Read Candlestick Charts. Retrieved December 08, 2020, from https://candlecharts.com/candlestick-training/candles-101/
Foot, P. (2020, June 15). Japanese Candlestick Trading Guide. Retrieved December 08, 2020, from https://www.ig.com/us/trading-strategies/japanese-candlestick-trading-guide-200615
Originally published at https://blog.zivolve.com on January 23, 2021.