In the 1700′s a Japanese man named Munehisa Homma, a trader in the Osaka rice futures market, developed a method of technical analysis to analyze the price of rice contracts known as candlestick charting. Homma used Sakata’s Five Methods, patterns derived from rules used by local traders from his hometown of Sakata, as the foundation for his Candlestick Charting analysis.
Candlestick charts display the high, low, open, and close for a security each day over a specified period of time, in a format similar to a bar chart, but in a manner that extenuates the relationship between the opening and closing prices. A narrow line (shadow or wick) shows the day’s price range. A wider body marks the area between the open and the close, referred to as real body. If the close is above the open, the body is white or green (not filled); if the close is below the open, the body is black or red (filled). Steve Nison is credited with popularizing candlestick charting in the west and is seen as a leading expert on their interpretation.
What is a Japanese Candlestick?
Candlesticks are formed using the open, high, low, and close of a particular time period
What is Candlestick Pattern 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.
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.
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.
- 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:
Single Bar Candlestick Pattern:
Spinning Tops, Dojis, Marubozu, Inverted Hammer, Hanging Man, Shooting Star.
Double Bars Candlestick Pattern:
Bullish and Bearish Engulfing, Tweezer Tops and Bottoms.
Triple Bars Candlestick Pattern:
Morning and Evening Stars, Three Black Crows and Three White Soldiers, Three Inside Up and Down.
|Number of Bars||Name||Bullish or Bearish?||What It Looks Like?|
|Number of Bars||Name||Bullish or Bearish?||What it Looks Like?|
|Three White Soldiers||Bullish|
|Three Black Crows||Bearish|
|Three Inside Up||Bullish|
|Three Inside Down||Bearish|
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.
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