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Tag: candlestick charts

  • Reversal Candlestick Patterns

    Reversal Candlestick Patterns

     

    Change is the law of life. And those who look only to the past or the present are certain to miss the future.
    – John F. Kennedy

    What is the Reversal Candlestick Patterns?

    Reversal patterns mean the formation of candlesticks which indicate the end of the existing trend (uptrend or downtrend). When such formation appears in a downtrend, it indicates a bullish reversal or end of selling spree and onset of buying spell. Steve Nison, the man who has who has created the popularity of candlestick patterns to the western world, has mentioned seven reversal patterns that are more influential than others. In his book Japanese Candlestick Charting Techniques, he mentioned a few distinct reversal patterns.

    The Most Important Reversal Pattern:
    Head and Shoulders & Inverse Head and Shoulders. Double Tops and Bottoms.

    Below are the some example of Reversal Candlestick Patterns:

    • Long Days

    The long day represents a large price move from open to close. Long represents the length of the candle body. What qualifies a candle body to be considered long? That is a question that has to be answered related to the chart being analyzed. The recent price action of a stock determines Whether a long candle has been formed. Analysis of the previous two or three weeks of trading should be a current representative sample of the price action.

    Long Days

    • Short Days

    Short days can be interpreted by the same analytical process as used with the long candles. There is a large percentage of tradingdays that do not fall into either of these two categories.

    Short Days

    • Black Marubozu

    The long black body with no shadows at either end is known as a Black Marubozu. It is considered a weak indicator. It is oftenidentified in a bearish continuation or bullish reversal pattern, especially ifit occurs during a downtrend. A long black candle could represent the final sell-off, making it an alert to a bullish reversal setting up. The Japanese often call it the Major Yin or Marubozu of Yin.

    Black Marubozu

    • White Marubozu

    The White Marubozu (shown in Figure 2.5) is a long white body with noshadows on either end. This is an extremely strong pattern. Consider howit is formed. It opens on the low and immediately heads up. It continues upward until it closes, on its high. Counter to the Black Marubozu, it is oftenthe first part of a bullish continuation pattern or bearish reversal pattern. Itis called a Major Yang or Marubozu of Yang.

    White Marubozu

    • Closing Marubozu

    The Closing Marubozu  has no shadow at its closing end. A white body does not have a shadow at the top. A black body doesnot have a shadow at the bottom. In both cases, these are strong signals correspondingto the direction that they each represent.

    Closing Marubozu

    • Opening Marubozu

    The Opening Marubozu  has no shadows extending from the open price end of the body. A white body would not have a shadow at the bottom end; the black candle would not have a shadow at its top end. Though these are strong signals, they are not as strong as the Closing Marubozu.

    Opening Marubozu

     

  • MOVING AVERAGE

    MOVING AVERAGE

     

    Definition:

                  “ A moving average is simply the average value of data over a specified time period, and it’s used to figure out whether the price of a stock or a commodity is trending up or down. Although simple to construct, moving averages are dynamic tools, because you can choose which data points and time periods to use to build them. For instance, you can choose to use the open, high, low, close or midpoint of a trading range and then study that moving average over a time period, ranging from tick data to monthly price data or longer.”

              Moving Average (MA) is a stock indicator that is commonly used in technical analysis. Technical Analysis is more important than Fundamental Analysis. Moving Average is one of the most popular techniques. moving averages that are used in timing a financial market. These averages are employed to detect the direction of the stock price trend and identify turning points in the trend in real time.

                      Moving Average smooth the price data to form a trend- following Indicator. They do not predict price direction, but rather define the current direction with a lag. Moving Average is primarily the summary of momentum & trend. Moving average reduces the noise in the price and also helps to follow trends.

    Popular Time Period Of Moving Average:

    1. 10 Period MA
    2. 20 Period MA
    3. 50 Period MA
    4. 200 Period MA

    Moving Average COMBINATION:

    This is the main calculation

    Sr.No. DAILY  WEEKLY
    1 10 SMA 2 SMA
    2  50 SMA 10 SMA
    3 100 SMA 20 SMA
    4 200 SAM

    MOVING AVERAGE SETUP FOR:

    DAILY INCOME TRADING (DIT)

    1. I put 10 EMA, 21/20 SMA & 50 SMA on the daily chart.
    2. If 10 below 20/21 below 50 I consider that stock is trading in the down trend & I focus on short trades. 
    3. If 50 below 20/21 below 10 I consider that stock is trading in the up trend & I focus on long traders.
    4. Apply your strategy & take your trade accordingly.

    TYPES OF MOVING AVERAGE:

    The most popular type of moving averages are Simple moving average & Exponential moving average. These moving average uses for identifying the trend of the market.

    a. SIMPLE MOVING AVERAGE

                       SMA is the easiest moving average to construct. The Simple Moving Average (SMA) is calculated by adding the price of an instrument over a number of time periods and then dividing the sum by the number of time periods. The SMA is basically the average price of the given time period, with equal weighting given to the price of each period. Most moving averages are based on closing prices

    CALCULATING SIMPLE MOVING AVERAGE

                                  If you plotted a 5 period simple moving average on 1hour chart, you would add up the closing prices for the last 5 hours, then divide that number by 5. 

    Example: 

    A 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5. 10+ 11 + 12 + 13 + 14 = 60 (60 / 5) = 12

    b. Exponential moving average

                              Exponential Moving Average can be specified in two ways- as a percent based EMA or as a period based EMA. A percent based EMA has a percentage as its single parameter. A period based EMA has parameters that represent the duration of the EMA. 

    CALCULATING EXPONENTIAL MOVING AVERAGE

    EMA = K * (Current Price – Previous EMA) + Previous EMA

    K: The weighting factor the EMA

    K = 2/(n+1)

    Where:

    n = the selected time period

     

  • CANDLESTICK SIGNALS

    CANDLESTICK SIGNALS

    1.The Doji

    Criteria:

    •  The open and the close are the same or nearly the same.
    •  The length of the shadow should not be excessively long, especially when viewed at the end of a bullish trend.

    Signal Enhancements:

    1. A gap away from the previous day’s close sets up for a stronger reversal move.
    2. Large volume on the signal day increases the chances that a blowoff day has occurred, although it is not a necessity.
    3. It is more effective after a long candle body, usually an exaggerated daily move compared to the normal daily trading range seen in the majority of the trend.
    https://www.youtube.com/watch?v=YWMcGyD2a4I&t=1s

    2. Bullish Engulfing

                         

    Criteria:

    • The body of the second day completely engulfs the body of the first day. Shadows are not a consideration.
    •  Prices have been in a definable uptrend, even if it has been short term.
    • The body of the second candle is the opposite color of the first candle,the first candle being the color of the previous trend. The exception to this rule is when the engulfed body is a Doji or an extremely small body.

    Signal Enhancements:

    1. A large body engulfing a small body. The previous day was showing that the trend was running out of steam. The large body shows that the new direction has started with good force.
    2. When the Engulfing Pattern occurs after a fast move down, there will be less supply of stock to slow down the reversal move. A fast move makes a stock price over-extended and increases the potential for profit taking.
    3. Large volume on the engulfing day increases the chances that a blowoff day has occurred.
    4. The engulfing body engulfing more than one previous body demonstrates power in the reversal.
    5. If the engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
    6. The greater the open gaps down from the previous close, the greater the probability of a strong reversal.

    3. Bearish Engulfing

    Criteria:

    • The body of the second day completely engulfs the body of the first day.Shadows are not a consideration.
    • Prices have been in a definable uptrend, even if it has been short term.
    • The body of the second candle is the opposite color of the first candle,the first candle being the color of the previous trend. The exception to this rule is when the engulfed body is a Doji or an extremely small body.

    Signal Enhancements:

    1. A large body engulfing a small body. The previous day was showing that the trend was running out of steam. The large body shows that the new trend was running out of steam. The large body shows that the new.
    2. When the Engulfing Pattern occurs after a fast spike up, there will be less supply of stock to slow down the reversal move. A fast move makes a stock price over-extended and increases the potential for profit taking and a meaningful pullback.
    3. Large volume on the engulfing day increases the chances that a blowoff day has occurred.
    4. The engulfing body engulfing more than one previous body demonstrates power in the reversal.
    5. If the engulfing body engulfs the body and the shadows of the previous day, the reversal has a greater probability of working.
    6. The greater the open gaps up from the previous close, the greater the probability of a strong reversal.
    https://www.youtube.com/watch?v=KkKanyv_VOQ&t=192s

    4. Hammer

                            

    Criteria:

    •  The lower shadow should be at least two times the length of the body.
    •  The real body is at the upper end of the trading range. The color of the body is not important although a white body should have slightly more bullish implications.
    • There should be no upper shadow or a very small upper shadow.
    •  The following day needs to confirm the Hammer signal with a strong bullish day.

    Signal Enhancements:

    1. The longer the lower shadow, the higher the potential of a reversal occurring.
    2. A gap down from the previous day’s close sets up for a stronger reversal move provided the day after the Hammer signal opens higher.
    3. Large volume on the Hammer day increases the chances that a blowoff day has occurred.

    5. Hanging Man

             

    Criteria:

    • The upper shadow should be at least two times the length of the body.
    •  The real body is at the upper end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.
    • There should be no upper shadow or a very small upper shadow.
    • The following day needs to confirm the Hanging Man signal with a blackcandle or, better yet, a gap down with a lower close.

    Signal Enhancements:

    1. The longer the lower shadow, the higher the potential of a reversal occurring.
    2. A gap up from the previous day’s close sets up for a stronger reversal move provided the day after the Hanging Man signal trades lower.
    3. Large volume on the signal day increases the chances that a blowoff day has occurred, although it is not a necessity.

    6. Piercing Candle

                          

    Criteria:

    • The body of the first candle is black; the body of the second candle is white.
    • The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
    • The second day opens lower than the trading of the prior day.
    • The white candle closes more than halfway up the black candle.

    Signal Enhancements:

    1. The longer the black candle and the white candle, the more forceful the reversal.
    2. The greater the gap down from the previous day’s close, the more pronounced the reversal.
    3. The higher the white candle closes into the black candle, the stronger the reversal.
    4. Large volume during these two trading days is a significant confirmation.

    7.Dark Cloud Cover

                             

    Criteria:

    •  The body of the first candle is white; the body of the second candle is black.
    • The uptrend has been evident for a good period. A long white candle occurs at the top of the trend.
    • The second day opens higher than the trading of the prior day.
    • The black candle closes more than halfway down the white candle.

    Signal Enhancements:

    1. The longer the white candle and the black candle, the more forceful the reversal.
    2. The higher the gap up from the previous day’s close, the more pronounced the reversal.
    3. The lower the black candle closes into the white candle, the stronger the reversal.
    4. Large volume during these two trading days is a significant confirmation.

    8. Bullish Harami

                        

    Criteria:

    • The body of the first candle is black; the body of the second candle is white.
    • The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
    • The second day opens higher than the close of the previous day and closes lower than the open of the prior day.
    • Unlike the Western Inside Day, just the body needs to remain in the previous day’s body, whereas the Inside Day requires both the body and the shadows to remain inside the previous day’s body.
    • For a reversal signal, further confirmation is required to indicate that the trend is now moving up.

    Signal Enhancements:

    1. The longer the black candle and the white candle, the more forceful the reversal.
    2. The higher the white candle closes up on the black candle, the more convincing the signal that a reversal has occurred despite the size of the white candle.

    9. Bearish Harami

                         

    Criteria:

    • The body of the first candle is white; the body of the second candle is black.
    • The uptrend has been apparent. A long white candle occurs at the end of the trend.
    • The second day opens lower than the close of the previous day and closes higher than the open of the prior day.
    • For a reversal signal, confirmation is needed. The next day should show weakness.

    Signal Enhancements:

    1. The longer the white candle and the black candle, the more forceful the reversal.
    2. The lower the black candle closes down on the white candle, the more convincing that a reversal has occurred, despite the size of the black candle.

    10.Morning Star

     

    Criteria:

    • The downtrend has been apparent.
    • The body of the first candle is black, continuing the current trend. The second candle is an indecision formation.
    • The third day shows evidence that the bulls have stepped in. That candle should close at least halfway up the black candle.

    Signal Enhancements:

    1. The longer the black candle and the white candle, the more forceful the reversal.
    2. The more indecision that the star day illustrates, the better probabilities that a reversal will occur.
    3. A gap between the first day and the second day adds to the probability that a reversal is occurring.
    4. A gap before and after the star day is even more desirable.
    5. The magnitude, that the third day comes up into the black candle of the first day, indicates the strength of the reversal.

    11.Evening Star

                        

    Criteria:

    • The uptrend has been apparent.
    • The body of the first candle is white, continuing the current trend. The second candle is an indecision formation.
    • The third day shows evidence that the bears have stepped in. That candle should close at least halfway down the white candle.

    Signal Enhancements:

    1. The longer the white candle and the black candle, the more forceful the reversal.
    2. The more indecision that the star day illustrates, the better probabilities that a reversal will occur.
    3. A gap between the first day and the second day adds to the probability that a reversal is occurring.
    4. A gap before and after the star day is even more desirable. The magnitude, that the third day comes down into the white candle of the first day, indicates the strength of the reversal.

    12. Kicker

          

    Criteria:

    • The first day’s open and the second day’s open are the same. The price movement is in opposite directions from the opening price.
    • The trend has no relevance in a kicker situation.
    • The signal is usually formed by surprise news before or after market hours.
    • The price never retraces into the previous day’s trading range.

    Signal Enhancements:

    1. The longer the candles, the more dramatic the price reversal.
    2. Opening from yesterday’s close to yesterday’s open already is a gap. However, gapping away from the previous day’s open further enhances the reversal.

    13. Shooting Star

                       

    Criteria:

    • The upper shadow should be at least two times the length of the body.
    • The real body is at the lower end of the trading range. The color of the body is not important although a black body should have slightly more bearish implications.
    • There should be no lower shadow or a small lower shadow.
    • The following day needs to confirm the Shooting Star signal with a black candle or, better yet, a gap down with a lower close.

    Signal Enhancements:

    1. The longer the upper shadow, the higher the potential of a reversal occurring.
    2. A gap up from the previous day’s close sets up for a stronger reversal move.
    3. The day after the Shooting Star signal opens lower.
    4. Large volume on the Shooting Star day increases the chances that a blowoff day has occurred, although it is not a necessity.

    14. Inverted Hammers

                  

    Criteria:

    • The upper shadow should be at least two times the length of the body.
    • 2. The real body is at the lower end of the trading range. The color of the body is not important, although a white body should have slightly more bullish implications.
    • There should be no lower shadow or a very small lower shadow.
    • The following day needs to confirm the Inverted Hammer signal with a strong bullish day.

    Signal Enhancements:

    1. The longer the upper shadow, the higher the potential of a reversal occurring.
    2. A gap down from the previous day’s close sets up for a stronger reversal move provided.
    3. The day after the hammer signal opens higher.
    4. Large volume on the Reverse Hammer day increases the chances that a blowoff day has occurred.
    https://www.youtube.com/watch?v=q2BvvyL0z8c

    15. Tri Star

    Criteria:

    • All three days are Dojis.
    • The middle day gaps above or below the first and third day. The length of the shadow should not be excessively long, especially when viewed at the end of a bullish trend.

    Signal Enhancements:

    1. The greater the gap, away from the previous day’s close, the more it sets  up for a stronger reversal move.
    2. Large volume on one of the signal days increases the chances that a significant reversal is taking place.

    16. Three Black Crows

                      

    Criteria:

    • Three long black bodies occur, all of nearly equal length.
    • The prior trend should have been up.
    • Each day opens within the body of the previous day.
    •  Each day closes near its low.

    17. Two Crow

                         

    Criteria:

    • A long white candle continues the uptrend.
    • The real body of the next day is black while gapping up and not filling the gap.
    • The third day opens within the second day’s body and closes within the white candle’s body. This produces a black candle that fills in the gap.

    Signal Enhancements:

    1. If the third day was to close more than halfway down the white candle, it would form an Evening Star pattern.

    18. UpSide Gap Two Crows

    Criteria:

    • A long white candle continues the uptrend.
    • The real body of the next day is black while gapping up and not filling the gap.
    • The third day opens higher than the second day’s open and closes below the second day’s close. This produces a black candle that completely engulfs the small black candle.
    • The close of the third day is still above the close of the last white candle.

    Signal Enhancements:

    1. If the third day were to close within the white candle, it would become Two Crows.

    19. Counterattack Lines

                 

    Criteria:

    1. The first Candlestick body should continue the prevailing trend.
    2. The second Candlestick gaps open continuing the trend.
    3. The real body of the second day closes at the close of the first day.
    4. The body of the second day is the opposite color of the first day’s.
    5. Both days should be long candle days.

    Signal Enhancements:

    1. The longer the bodies, the more significant the reversal pattern.

    20. Belt Hold

              

    Criteria:

    • The Candlestick body should be the opposite color of the prevailing trend.
    • It significantly gaps open, continuing the trend.
    • The real body of the Candlestick has no shadow at the open end. The open is the high or low of that trend.
    • The length of the body should be a long body. The greater the length,the more significant the reversal signal.

    Signal Enhancements:

    1. The longer the body, the more significant the reversal pattern.

    21. Unique Three River Bottom

                     Criteria:

    • The Candlestick body of the first day is a long black candle, consistent with the prevailing trend.
    • The second day does a Harami/Hammer. It also has a black body.
    • The second day’s shadow has set a new low.
    • The third day opens lower, but not below the lowest point of the previous day. It closes higher but below yesterday’s close.

    Signal Enhancements:

    1. The longer the shadow of the second day, the probability of a successful reversal becomes greater.

     

    22. Breakaways

     Criteria:

    • The first day is a long-body day and has the color of the existing trend.
    • The second day gaps away from the previous close. It has the same color as the first day candle.
    • Days three and four have closes that continue the trend.
    • The last day is an opposite-color day that closes in the gap area between day one and day two.

    23. Three Inside Up & Three Inside Down                            

    Criteria:

    • The Harami pattern is the overriding signal component of this pattern.
    • The harami body should be the opposite color of the long candle day.
    • Day three has a close that is higher than the open of day one. Or lower than day one in the bearish indicator.

    24. Three Stars In The South

                   

    Criteria:

    • The first black candle day has a lower shadow that indicates buying stepping in—almost a Hammer but not quite.
    • The second day is like the first but on a smaller scale.
    • Day three should be a Marubozu with no shadows. It is within the previous day’s trading range.

    25. Three White Soldiers

    Criteria:

    • Each consecutive long candle closes with a higher close.
    • The second and third Candlesticks open in the previous day’s body.
    • The opens should be within the top half of the previous day’s body.

    26. Advance Block

                

    Criteria:

    • Each white candle occurs with higher closes.
    • The opens occur in the previous day’s body.
    • The bodies are getting smaller, and/or the upper shadows are getting longer.

    27. Deliberation

    Criteria:

    • The first two white candles are relatively equal long candles.
    • The third day is a small body.
    • The small body opened at or very near the previous day’s close. Or it may have gapped up slightly.

    28. Concealing Baby Swallow

     Criteria:

    • Two large Black Marubozus make up the beginning of this pattern.
    • The third day is a Reverse Hammer formation. It gaps down from the previous day’s close.
    • The final day completely engulfs the third day, including the shadow.

    29. Stick Sandwich

             

    Criteria:

    • A downtrend is concluded with a large black candle followed by a white candle. The white candle opens above the black candle close and closes above the black candle’s open.
    • The final day completely engulfs the white candle and closes at the same level as the previous black candle.

    30. Homing Pigeon

       Criteria:

    • The body of the first candle is black; the body of the second candle is black.
    • The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
    • The second day opens higher than the close of the previous day and closes lower than the open but above the closing price of the prior day.
    • Unlike the Western Inside Day, just the body needs to remain in the previous day’s body, whereas the Inside Day requires both the body and the shadows to remain inside the previous day’s body.
    • For a reversal signal, further confirmation is required to indicate that the trend is moving up.

    Signal Enhancements:

    1. The higher the second candle closes up on the first black candle, the more convincing it is that a reversal has occurred.

    31. Ladder Bottom

                 

    Criteria:

    • Like the Three Black Crows pattern, the beginning of the signal has three black candle days, each with lower opens and closes of the previous day.
    • The fourth day resembles a reverse hammer, opening, then trading up during the day before closing on its low.
    • The final day opens above the open of the previous day open, a gap up and upward continuation for the rest the day, a Kicker-type pattern. It finally closes above the trading range of the previous three days.

    32. Matching Low

    Criteria:

    • The body of the first candle is black; the body of the second candle is black.
    • The downtrend has been evident for a good period. A long black candle occurs at the end of the trend.
    • The second day opens higher than the close of the previous day and closes at the same close as the prior day.
    • For a reversal signal, further confirmation is required to indicate that the trend is moving up.

    33. Upside Tasuki Gap

    Criteria:

    • An uptrend is in progress. A gap occurs between two candles of the same color.
    • The color of the first two candles is the same as the prevailing trend.
    • The third day, an opposite color candlestick opens within the previous candle and closes below the previous open.
    • The third day close does not fill the gap between the two white candles.
    • The last two candles, opposite colors, are usually about the same size.

    34. Downside Tasuki Gap

    Criteria:

    • A downtrend is in progress. A gap occurs between two candles of the same color.
    • The color of the first two candles is the same as the prevailing trend.
    • The third day, an opposite color Candlestick opens within the previous candle and closes below the previous open.
    • The third day close does not fill the gap between the two black candles.
    • The last two candles, opposite colors, are usually about the same size.

    35. On Neck Line 

                 

    Criteria:

    •  A long black candle forms in a downtrend.
    • The next day gaps down from the previous day’s close; however, the body is usually smaller than one seen in the Meeting Line pattern.
    • The second day closes at the low of the previous day.

    36. In Neck Line 

    Criteria:

    • A long black candle forms in a downtrend.
    • The next day gaps down from the previous day’s close; however, the body is usually smaller than one seen in the Meeting Line pattern.
    • The second day closes at the close or just slightly above the close of the previous day.

    37. Thrusting

    Criteria:

    • A long black candle forms in a downtrend.
    • The next day gaps down from the previous day’s close; however, the body is usually bigger than the ones found in the On Neck and In Neck patterns.
    • The second day closes just slightly below the midpoint of the previous day’s candle.

    38. Rising Three Method

    Criteria:

    • An uptrend is in progress. A long white candle forms.
    • A group of small-bodied candles follow, preferably black bodies.
    • The close of any of the pullback days does not close lower than the open of the big white candle.
    • The final day opens up into the body of the last pullback day and proceeds to close above the close of the first big white candle day.

    39. Falling Three Method

                       

    Criteria:

    • A downtrend is in progress. A long black candle forms.
    • A group of small-bodied candles follows, preferably white bodied.
    • The close of any of the uptrend days does not close higher than the open of the big white candle.
    • The final day opens up into the body of the last uptrend day and proceeds to close below the close of the first big black candle day.

    40. Side By Side white Lines

                                              

    Criteria:

    • An uptrend is in progress. A gap occurs between two candles of the same color.
    • The color of the first two candles is the same as the prevailing trend.
    • The third day, a candle opens at the same or near the open price of the previous day.
    • The third day closes near the close of the previous day.

    41. Separating Lines

    Criteria:

    • An uptrend is in progress. Then a day occurs that is the opposite color of the current trend.
    • The second day opens at the open of the previous day.
    • The second day should open on its low for the day and proceed higher.

                 

    42. Mat Hold

    Criteria:

    • An uptrend is in progress. A long white candle forms.
    • A gap up day that closes lower than its open creates a small black candle.
    • The next two days form small candles somewhat like the Rising Three Method.
    • The final day gaps up and closes above the trading ranges of the previous four days.

    43. Three Line Strike

             

    Criteria:

    • Three White Soldiers, three white candles, are continuing an uptrend.
    •  The fourth day opens higher, but then pulls back to close below the open of the first white candle.

    Refered from book  Candlestick Trading

  • Study of Candlestick Chart

    Study of Candlestick Chart

     

    “The Beginning Is Most Important.”

                Candlestick is the most popular & most usable chart in trading. Even most of the successful traders also advise to use this charts for trade. Candlestick chart is invented by MUNEHISA HOMMA.                            

     This charts were developed in the 18th century by Munehisa Homma, a Japanese rice trader. He is considered as the father of the candlestick chart. He is one of  the most successful trader in History. The Candlestick trading Bible is one of the most powerful trading systems in history. This trading system is based on Japanese candlestick patterns in combination with technical analysis. Learning Japanese candlestick is like learning a new language. We have to understand the psychology behind the candle formation, understand the candle pattern & most important thing is to understand the trends.

    CANDLESTICKS BODY

         Candlesticks have different colors and body size. 

      The most trading platforms were using White & Black color refers to Bullish & Bearish candlestick charts. But, at present it has been upgraded with colorful charts where white candle is denoted by Green Color & Black candle is denoted by Red color.  Filled part of the candlestick is called the Real Body. Thin lines poking above & below the body are called Shadows/Tail.       

                  If the candle closes above the open price, it indicates the market forms a bullish candlestick. Bullish candles always display as Green color. And if the candle closes below the open price, it indicates the market forms a bearish candlestick. Bearish candles always display as Red color.

    But the color doesn’t matters, you can use whatever color you want.

    Long v/s Short

                               Long bodies of candles shows strong buying & selling pressure. Bullish long candle indicates that buyers are more stronger than sellers and they are taking control of the market during this period of time. Conversely, a bearish long candle indicates that sellers are stronger than buyers & they are taking control of the market during this period of time.

    Short & small bodies indicate a little buying & selling activity.Upper & lower shadows give us important information about the trading session. Candlestick with long shadows show that trading action occurred well past the open & close. Japanese candlesticks with short shadows indicates that most of the trading actions are confined near the open & close.

             If a candlestick has a longer upper shadow, and short lower shadow, this means that buyers flexed their muscles and bid price higher. But for one reason or another, sellers comes in and drove the price back down to end the session back near its open price.

             If a Japanese candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced the price lower. But for one reason or another a buyer comes in and drove prices back up to end the session back near its open price.

     CANDLESTICK PATTERNS

    Candlestick patterns are one of the most powerful trading concepts, they are simple, easy to identify, & very profitable setups. Candlestick patterns are the language of the market. Here are some of the candlestick patterns that will help us in the market:

    1. THE DOJI CANDLESTICK PATTERN

    Doji is the most important Japanese Candlestick Pattern. When this candlestick forms, it tells us that the market Opens & Close at the same price which means that there is equality & indecision between buyers & sellers there is no one in control of the market. If the closing & opening prices are same, that means candle is giving us a single, that market is not able to decide which direction to take. The above chart shows how the market has changed the direction after the formation of the Doji candle pattern. If Doji forms in uptrend it gives a signal, that the buyers are failing to keep the price up & sellers are pushing the price back to the opening price. When Doji form in downtrend that indicates the market is ready to go up side & it gives a reversal signal.  

     

    2.THE DRAGONFLY DOJI PATTERN  

    Dragonfly Doji is a Bullish candlestick Pattern. Dragonfly Doji is formed when the open, high & close are the same & it has no upper shadow. An important identification of dragonfly doji is its long lower shadow. Indecision & trend reversal are indicators of the dragonfly Doji. The long lower tail suggests that the force of supply & demand are nearing a balance & that the direction of the trend may be nearing a major turning point.

      The above chart shows how the downtrend market changes the direction of the market toward uptrend. The formation of dragonfly Doji with long lower tails shows us that there is a high buying pressure in the area. The war between Bull & Bear, attempted by the bear towards pushing price down, but here buyers are stronger than sellers.

    3.THE GRAVESTONE DOJI

     The gravestone doji is the Bearish version of the dragonfly doji. It is a bearish reversal candlestick which mostly occurs at the top of uptrends. The formation of the long upper tail is an indication that the market is testing a powerful supply or resistance area.

    The image above is a perfect gravestone Doji. This pattern indicates that while buyers were able to push prices well above the open. Later in the day, sellers overwhelmed the market pushing the price back down. This is interpreted as a sign that bulls are losing their momentum and the market is ready for a reversal.

    4.THE BEARISH ENGULFING BAR CANDLESTICK PATTERN

    The bearish engulfing is one of the most important candlestick patterns. Engulfing bar is formed when it fully engulfs the previous candle.

      The first candlestick shows that the bulls were in charge of the market, while the second shows that bearish pressure pushed the market price lower. The second period will open higher than the previous day but finish significantly lower.

      The engulfing bar can engulf more than one previous candle, but to be considered an engulfing bar, at least one candle must be fully consumed. When this pattern occurs at the end of an Uptrend, this indicates that buyers are engulfed by sellers which signals a trend Reversal.

    The pattern is also a sign for those in a long position to consider closing their trade. 

    5.THE BULLISH ENGULFING BAR PATTERN

     A bullish engulfing pattern is the opposite of a bearish engulfing pattern. Many traders use this candlestick pattern to identify price reversals and continuations to support their trading strategies.

       The bullish engulfing bar consists of two candlesticks, the first one is the small body, & the second is the engulfing candle. When a bullish engulfing candle forms at the end of downtrend the reversal is much more powerful as it represents a capitulation bottom. The color of the body is not important, what’s important is that the smaller one is totally engulfed by the second candlestick.

    6.MORNING STAR CANDLESTICK

          The Morning Star Pattern is considered as a BULLISH REVERSAL PATTERN. A morning star candlestick pattern can successfully predict or explain trends in price movements in the case of equity, currency trading or financial derivatives. This pattern occurs at the bottom of Downtrend near a support level, it is interpreted as a powerful trend Reversal Signal. The first candlestick is bearish. The second candle is small & this can be Bullish Or bearish. Second one produces indecision in the market, second candle could be a DOJI or any other CANDLE. The Third candle is a bullish candlestick that gapped up on the open & closed above midpoint of the body of the first day, this candlestick holds a significant trend reversal signal.

    7.THE EVENING STAR PATTERN

       The Evening Star Pattern is the opposite of the Morning star pattern. The evening star pattern is considered as a Bearish Reversal Pattern. This pattern occurs at the top of an Uptrend. The First candle is a Bullish candle. The second candle is a small candlestick, it can be bullish or bearish or it can be a DOJI or any other Candles. The third candle is a large bearish candle. In general the evening star pattern is the bearish version of the morning star pattern. Third candlestick gaping lower than the previous candlestick indicating a confirmation of the reversal & the beginning of new trend down.

    8.HAMMER (BIN BAR)

      The hammer is a reversal candlestick pattern when it occurs at the bottom of a Downtrend. Long lower shadow that indicates a bullish rejection from buyers & their intention to push the market.

     Understand the psychology behind the formation of patterns , here sellers forcefully push the price down but that time of period buyers are more powerful than sellers which result in trend reversal.

    9.SHOOTING STAR  (BEARISH PIN BAR)

                           

     Shooting star is the Bearish version of the hammer. This candle is characterized by a small body. And long upper shadow. Shadow should be twice the length of the real body. This pattern occurs in an uptrend. It indicates a bearish reversal pattern.

     It is one of the most powerful signals.

    10.HARAMI PATTERN ( INSIDE BAR)

       Harami pattern (Pregnant In Japanese) is considered as a Reversal & Continuation pattern, & it consists of two candlesticks. The first candle is the large candle, it is called the mother candle, followed by a smaller candle which is called the baby. Harami pattern to be valid, the second candle should close outside the previous one. This candlestick is considered as a Bearish Reversal Signal when it occurs at the top of an uptrend, and it is Bullish Signal when it occurs at the bottom of a Downtrend. Smaller body is totally covered by the previous mother candle. Don’t bother yourself with colors, the most important is that the smaller body closes inside of the first bigger.

    11.TWEEZERS TOPS & BOTTOMS

        The tweezers top formation is considered as a Bearish Reversal Pattern seen at the top of an Uptrend. The tweezers bottom formation is interpreted as a Bullish Reversal Pattern seen at the bottom of a Downtrend. The first one is a bullish candlestick followed by a bearish candlestick. And the tweezer bottom formation consists of two candlesticks as well. The tweezer bottom happens during a Downtrend.

    Note:

    The candlestick pattern is more workable in higher time frame (weekly, daily & 4hr.) compare to lower time frame. When candlestick pattern is form in the chart, than wait for confirmation & follow up.

     

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