Today, I will tell you about Japanese Candlestick. Are you wondering where the name is coming from?
Candlestick charts are known to be used in the trade of rice by Japanese traders several centuries ago.
The man who introduced this secret technique called ‘’Japanese Candlestick’’ to the Western world is Steve Nison with his Japanese Candlestick Charting Techniques book.
According to Steve Nison, the candlestick chart was first seen in the 1850s. The creation and development of the candlestick chart are based on a legendary brass broker called Homma in the province of Sakata.
His original ideas have probably been edited and developed over the years, eventually becoming the candlestick chart we use today.
Thanks to Steve Nison, and as a result of his long work, the candlestick charts remain not a mystery now.
Candlesticks became popular because they give more information visually than regular bars.
Let’s dive in and discuss the Japanese Candlestick more in detail.
- What are Japanese Candlesticks?
- Japanese Candlestick Structure
- Basic Japanese Candlestick Patterns
- Single Candlestick Patterns
- Dual Candlestick Patterns
- Triple Candlestick Patterns
- Japanese Candlestick Cheat Sheet
- Conclusion: Japanese Candlesticks
What are Japanese Candlesticks?
Japanese candlesticks are patterns that used to describe the price movement throughout the given time period.
You can use Japanese candlesticks for any time period. One day, one hour, 30 minutes etc.
The candlestick charts are most often used in technical analysis of equity and currency price patterns. Candlesticks usually consist of the body (black/white or green/red) and an upper and a lower shadow (wick).
The space between the open and the close is called the real body, and price trips above and below the real body are shadows (wicks).
As you can see in the picture:
- When the close is above the open, the Candlestick is drawn as hollow. (usually displayed as white)
- When the close is below the open, the Candlestick is drawn as filled. (usually displayed as black)
- The hollow or filled part of the candlestick is the “real body” or body.
- The price trips above and below the real body are called ‘’shadows’’ or wicks.
- The top of the upper shadow is the “high”.
- The bottom of the lower shadow is the “low”.
Japanese Candlestick Structure
Japanese candlesticks have different body sizes. It is essential to know the candlesticks for forex trading.
Long bodies signify strong buying or selling. The longer the real body, the more buying or selling pressure. At the same time, this means that buyers or sellers were more powerful and took control.
The long white candlestick shows a strong buying pressure. The long white candlestick will show a closing price above the opening price in the future.
These indicators show that prices are open to close in a meaningful way. And also show the pressure of buyers.
The long-black body candlestick shows a strong selling pressure. A candlestick with a long black body shows a closing below the opening price.
These prices show a significant drop from the opening and the sellers are aggressive.
In forex jargon, bulls mean buyers and bears mean sellers.
On the contrary, short-bodied candlestick represents very little buying or selling action.
I told the price trips above and below the real body are called shadows. Let’s talk about more.
The upper and lower shadows on Japanese candlesticks provide valuable information about the trading session.
The upper shadows represent the higher session and the lower shadows represent the lower session.
Candlesticks with long shadows show that trading is good at open and close. Japanese candlesticks with short shadows show that most of the trading transactions confined around open and close.
If there are a long upper shadow and a short lower shadow on a Japanese candlestick, it indicates that buyers are dominant and are bidding at high prices.
However, sellers pull prices down from their highest value and create a weak closing with a long upper shadow.
Conversely, if there are a long lower shadow and a short upper shadow on a Japanese candlestick, it indicates that sellers are dominant and are pushing the price lower.
However, with the emergence of the buyers, the prices increase towards the end of the session and a strong closing with a long lower shadow is provided.
Basic Japanese Candlestick Patterns
In this section of the post, I will talk about the basic Japanese candlestick patterns. We will go step by step to learn all. Don’t worry they are not as complicated as they look. Let’s start with the first one.
If Japanese candlesticks have a long upper shadow, long lower shadow and small real bodies they are called spinning tops. What about the color of the real body? Actually, it is not very important.
This pattern shows the instability between the sellers and buyers. The meaning of the small body (whether hollow or filled) is little movement from open to close. In addition, the shadows show that both sellers and buyers were struggling, but no one could win.
Despite the little changes in the opening and closing of the session, there have been significant increases and decreases in the price movements.
Neither the sellers or the buyers can gain superiority, and the result is a deadlock.
- When there is a spinning top during an uptrend, this generally indicates that there are no more buyers and there may be a reversal of the direction.
- When there is a spinning top during a downtrend, this generally indicates that there are no more sellers and there may be a reversal of the direction.
The Japanese candlesticks that don’t have shadows are called Marubozu. The result of that the candlesticks consist of just real bodies.
Depending on whether the candlesticks’ body is hollow or filled, the high and low are the same as its open or close.
You can see the picture below the Marubozus brothers.
A white Marubozu consists of a long white real body with no shadows. The open price is equal to the low price and the close price is equal to the high price.
This candlestick is very bullish and it shows that buyers have the control the entire session. It generally means a bullish continuity or a bullish reversal pattern.
A black Marubozu consists of a long black real body with no shadows. The open price is equal to the high and the close price is equal to the low price.
However, this candlestick is very bearish and it shows that sellers have the control the entire session. It generally means a bearish continuity or a bearish reversal.
Doji is a special candlestick version. Doji candlesticks have the same open and close price together that the real body is quite short.
A doji looks like a ‘’+’’ sign. The prices move below and above the open price during the trading action, but close at or very near the open price. It is a deadlock between sellers and buyers – nobody won.
Doji candlesticks have four special types.
Upper and lower shadows can have different length and as a result of this forex, candlestick looks like a cross, inverted cross or plus sign.
The word Doji refers to both the plural and singular.
When a Doji occurs on your chart, pay particular attention to the previously candlesticks.
It may be a signal of the buyers are becoming weaker when a Doji occurs after a long hollow candlestick (like white Marubozus).
It may be a signal of the sellers are becoming weaker when a Doji occurs after a long filled candlestick (like black Marubozus).
In the following parts, I will mention specific Japanese candlestick patterns and what they are telling us.
Single Candlestick Patterns
You are going to learn how to benefit single candlestick patterns during potential trading reversals. In this section, we are going to handle four basic single Japanese candlestick patterns.
Hanging Man and Hammer
The hanging man and hammer look like the same but they have entirely different meanings depending on past price movements.
Both have little bodies (filled or hollow), long lower shadows, and short or absent upper shadows.
The hanging man is a bearish reversal pattern which signals the possible end of the rise. It can also mark a top or strong resistance level.
When the price rises, the formation of a hanging man indicates that the sellers are becoming more than the buyers.
The long lower shadow means that the sellers pushed the prices lower during the trading action. Buyers achieved to push the price back up little but only near the open.
How can you recognize the Hanging Man?
- If there is a long lower shadow which is about two or three times bigger of the real body
- If there is little or no upper shadow
- If the real body is at the upper end of the trading range
- If the color of the body is not important, though a filled body is more bearish than a hollow body.
Say ‘’Nice to meet you’’ to the Hanging Man!
The hammer is a bullish reversal pattern which means the price moved lower after the open but then close at near to the open but still below it.
When the price falls, the formation of a hammer indicates that the bottom is near and the price will increase again.
The long lower shadow means that the sellers pushed the prices lower during the trading action. But buyers achieved to overcome the pressure and the price closed near the open.
How can you recognize the Hammer?
- If there is a long lower shadow which is about two or three times bigger of the real body
- If there is little or no upper shadow
- If the real body is at the lower end of the trading range
- The color of the real body is not important.
Say also to the Hammer ‘’Nice to meet you’’!
Shooting Star and Inverted Hammer
The shooting star and inverted hammer also look like same. But, there is a big difference between them and it is whether you are in an uptrend or downtrend.
A shooting star is a bearish reversal candlestick and an inverted hammer is a bullish reversal candlestick.
Both have little bodies (filled or hollow), long upper shadows, and short or absent lower shadows.
This shows that buyers tried to push the price up, but sellers came and beat them. This is an absolute bearish sign cause of there are no more buyers left.
No more buyers? Then, let’s look at the sellers!
The inverted hammer is a bullish reversal pattern which consists when the price has been falling. The shape of inverter hammer shows the price opened at its high, fell, but got back to the top.
This shows that sellers tried to push the price down, but buyers came and beat them. This is an absolute bullish sign cause of there are no more buyers left.
So, we can continue with another section as there is no buyer and seller.
Dual Candlestick Patterns
I’m starting to tell you the dual candlestick patterns immediately without further ado.
There are two types of engulfing patterns. These are bullish and bearish of course.
A bullish engulfing candle is a dual candlestick pattern, which might signal an upcoming uptrend. It happens when a larger bullish candle immediately follows a bearish candle.
This indicator is an uptrend because bulls show more power than bears. The change in power with the bulls indicates a reversal of momentum that will likely continue into the future.
The name of this pattern probably comes from that the bullish candle ‘’engulfs’’ the bearish candle that came before it.
On the other way, the bearish engulfing pattern is the opposite of the bullish pattern. It might signal an upcoming downtrend. It happens when a larger bearish candle immediately follows a bullish candle.
This indicator is a downtrend because bears show more power than bulls. The change in power with the bears indicates a reversal of momentum that will likely continue into the future.
Tweezer Bottoms and Tops
Tweezer bottoms and tops are another types of dual candlestick pattern. They indicate a reversal will occur after an extended uptrend or downtrend soon.
A tweezer bottom follows an extended downtrend and signals an uptrend. The first candlestick for a tweezer bottom is a bearish candle with a length shadow below. The second one is a bullish candlestick with an equal length body and shadow and shares the same low as the first one.
A tweezer top is the opposite of tweezer bottom as it follows an extended uptrend and signals a downtrend. The tweezer top pattern has a bullish candle with a shadow on top, and a bearish candle with a shadow on top following it. Similar to the tweezer bottom, the bodies and shadows must share the same high, low, open and close.
Triple Candlestick Patterns
Morning Stars and Evening Stars
The first type of triple candlestick pattern is morning and evening stars. Both morning and evening stars can be found at the end of a trend. They can signal a reversal in momentum.
A morning star occurs first with a bearish candle with a long body, a doji (a small body with long shadows on bottom and top) and a bullish candlestick that should at least pass the halfway point of the first bearish candle.
The evening star is similar to the morning star but it occurs during an uptrend and signals a reversal downwards.
- The first candlestick is a bullish candle with a long body.
- The second one is a doji, which signals indecision.
- The third one in the pattern is the bearish candlestick that should at least pass the halfway point of the first bullish candle.
Three White Soldiers and Black Crows
The three white soldiers and black crows are another types of three-candlestick pattern. The white soldiers and black crows are used to confirm a trend.
The three white soldiers pattern appears when three long bullish candles follow a downtrend.
- The first candlestick of the chart pattern must be a bullish candlestick with a long body.
- The second one is also bullish but this candlestick must have a bigger body size than the first candlestick.
- Also, the second candlestick should close near its high, leaving a small or non-existent upper wick. And the last candlestick is another bullish that must be equal or bigger body size than the second one.
You can use this chart pattern to confirm the start of a new uptrend.
The three black crows chart pattern is just the opposite of the three white soldiers chart pattern.
There are three bearish candles instead of three bullish candles with the three white soldiers.
Also, the three black crows pattern must come after an extended uptrend and consolidation for it to confirm a new downtrend.
- The first candlestick of the chart pattern must be a bearish candlestick with a long body.
- The second candle must have a bigger body than the first candle and must close at or very near its low.
- Finally, the third candle must be the same size or larger than the second candle’s body with a very short or no lower shadow.
Three Inside Up and Down
The last type of triple candlestick patterns is the three inside up and down. Both signal the reversal of a trend.
The three inside up pattern is a trend-reversal pattern that consists after a recent downtrend and signals for a reversal to an uptrend.
- The first candle of the chart pattern must be a bearish candle with a long body.
- The second one is a bullish candle that should pass at least the midpoint of the first candle.
- The third and the last candle is also a bullish candle that should pass at least the high of the first bearish candle.
Inversely, the three inside down pattern is the opposite of the three inside up pattern.
The three inside down pattern is a trend-reversal pattern that consists after a recent uptrend and signals for a reversal to a downtrend.
- The first candlestick of the pattern must be a bullish candle with a long body.
- The second one is a bearish candle that should pass at least the midpoint of the first bullish candle.
- The third and the last candlestick is also a bearish candle that should pass at least the low of the first bullish candle.
Japanese Candlestick Cheat Sheet
I am giving this Japanese candlestick cheat sheet to help you to understand the Japanese candlesticks easier.
Conclusion: Japanese Candlesticks
This post is one of the most detailed guides about Japanese Candlesticks that you can find the internet. I hope it will be helpful for your trading. See you in the next post!