Japanese candles

Japanese candlesticks are one of the most popular methods of analyzing prices in financial markets. They are a graphical representation of price activity over a period of time.

Each Japanese candlestick has two main components - the body of the candlestick and its shadows. The body of a candlestick shows the difference between the opening and closing price of an asset in a certain period of time. If the body of a candlestick is full or shaded, it usually means that the close price is lower than the open price, and it can indicate a decline in price. If the body of the candlestick is unfilled or left transparent, it usually means that the closing price is higher than the opening price, and it can indicate an increase in price.

Japanese candlesticks can be used to identify various patterns and signals which help predict future price movements. For example, there are various candlestick patterns such as "Hammer," "Evening Star," "Bearish Takeover" and others which can indicate a possible trend change.

Using Japanese candlesticks in price analysis can help traders make informed decisions about entering or exiting trades. However, it is important for novice traders to realize that Japanese candlestick analysis requires practice and experience. It is advisable to study the different candlestick patterns, their meanings and their application in combination with other analysis tools.

The history of Japanese candlesticks originated in Japan in the 17th century. At that time, drawing price charts became popular among Japanese drawers, who were called "Munehishi". It was they who first created the basis for what we today call Japanese candlesticks.

An important contribution to the development of Japanese candlesticks was made by a drawer named Homma Munehisa, who lived in the 18th century. He did a lot of research and observations in the financial markets, using price charts, and developed a technique for analysis based on candlestick formations. His work became the basis for the development of Japanese candlesticks as a tool for price analysis.

One of Munehisa's main goals was to understand the psychology of the market and the behavior of traders. He realized that traders' emotions and their reactions to price changes can influence market movements. Munehisa used candlestick charts to visualize price activity and create patterns that could help predict future trends.

Over time, Japanese candlesticks gained widespread recognition and use not only in Japan, but all over the world. The technique of analyzing Japanese candlesticks was introduced in the West in the 1980s, when computer programs for displaying and analyzing candlestick charts became available.

Today, the Japanese candlesticks are one of the main tools of technical analysis in the financial markets. They allow traders and investors to analyze price activity, determine trends and make decisions based on patterns and signals which are formed on candlestick charts.

The history of Japanese candlesticks testifies to their effectiveness and practicality in analyzing price activity. Understanding this tool and applying it can help traders make more informed decisions in the financial markets.

He is credited with developing the candlestick charting method, which quickly gained popularity in Japan and subsequently spread around the world.

In the 1990s, the popularity of Japanese candlesticks increased significantly thanks to a book by Steve Neeson, who introduced the technique to a Western audience. Today, Japanese candlesticks are widely used in analysis and are a popular tool among traders and investors in various financial markets.

Elements of a Japanese candlestick

Candlesticks on a chart are visually distinguished between bullish (rising price) and bearish (falling price) periods.

Bullish candles are usually depicted in white or green and indicate periods where the closing price is higher than the opening price.

Bearish candles, on the other hand, are colored black or red and indicate that the closing price is lower than the opening price.

Reading Japanese candlesticks is an important skill that helps traders analyze price activity in financial markets. Here are some simple steps to help you get started with reading Japanese candlesticks:

1. Identify the basic elements of a candle: Every Japanese candle consists of a body and shadows. The body of a candle is a rectangular shape and shows the difference between the opening and closing price over a period of time. The shadows of a candlestick are lines coming out of the body of the candlestick and show the price extremes of that period.
2. Learn candlestick color values: depending on your chosen chart, candlesticks may be painted in different colors. If the body of the candlestick is full or colored, it usually means that the closing price is lower than the opening price, and this can indicate a decline in price. If the body of the candlestick remains transparent or unfilled, it usually means that the closing price is higher than the opening price, and this may indicate an increase in price.
3. Pay attention to the length of the shadows: the length of candlestick shadows can give you information about market volatility and the strength of buyers or sellers. If the upper shadow is longer, it could indicate strong resistance to the price level, and if the lower shadow is longer, it could indicate strong support for the price level.
4. Study Candlestick Patterns and Signals: There are various patterns and signals that can occur on candlestick charts. Some of these include "Hammer," "Evening Star," "Bearish Takeover," and others. Learn about the different patterns and their meanings so you can recognize them on charts.
5. Use other analysis tools: Reading Japanese candlesticks is best combined with other analysis tools such as trend lines, support and resistance, indicators and others. This will help you get a fuller picture of price activity and make more informed decisions.

It is important to understand that reading Japanese candlesticks requires practice and experience. It is advisable to study different candlestick patterns, analyze their meanings and apply them in combination with other analysis tools for more accurate results. Gradually, you will develop your Japanese candlestick reading skills and use them in your trading in the financial markets.

Japanese candlesticks have different shapes and patterns, each of which can report certain information about price activity in the market. Here are a few basic types of Japanese candlesticks and their meanings:

Hammer: A hammer looks like a candle with a small body and a long lower shadow. It often indicates a potential reversal of an uptrend. The Hammer is hot after the price has declined and is an indication that buyers are beginning to control the market and the price may start to move higher.

Evening Star: The Evening Star is a three-candle pattern. It starts with a large white candle, followed by a candle with a small body and a high upper shadow, and then ends with a large black candle. This pattern indicates a possible reversal of the uptrend and signals a possible price decrease.

Bearish Engulfing: A bearish engulfing occurs when a large black candle engulfs the previous small white candle. It is a reverse reversal signal and may indicate a possible drop in price.

Doji: A doji is a candle with a very small body, with its opening and closing almost the same. This pattern indicates that the balance between buyers and sellers is about to change. Doji can be a reversal signal or indicate a possible sideways price movement.

Shooting Star: A shooting star has a long upper shadow and a small body. It appears after an uptrend and can signal a possible reversal and decrease in price.

These are just some of the many types of Japanese candlesticks that can appear on price activity charts. Studying these patterns and their meanings will help you better understand how to read Japanese candlesticks and make more informed trading decisions in the financial markets.

Single candlestick patterns

These are some of the easiest patterns to see on a chart. They are formed in just one trading period. Often, these single candlesticks serve as the basis for more complex and longer patterns.

Wiggle

Unlike most candlestick patterns, it does not matter whether the candle is black (red) or white (green) - only the presence of a small body and a long wick are important.

When a "wiggle" is formed on the chart, there is a kind of tug-of-war between buyers and sellers. However, bears and bulls balance each other, so there is no significant price movement.

As a rule, traders perceive "waves" as a sign of weakening of the current trend. If such a candle appears after a long bullish growth, it may indicate that the positive sentiment in the market is beginning to fade. At the same time, if a wavy candlestick is formed after a downtrend, it may mean that bullish sentiment is beginning to gain strength.

Marubozu

Marubozu comes from the Japanese word for "bald." This term describes a candle without wicks.

A white (green) marubozu opens at the lowest level and closes at the highest level. White (red) marubozu opens at the highest level and closes at the lowest level.

If we visualize price movement within a white (green) marubozu, there will be no price action above or below the opening and closing levels.
Thus, a white (green) "bald" candle is an indicator of strong bullish sentiment. The bulls are pushing the price up and the bears are offering little or no resistance.

When this happens within an uptrend, traders take it as a sign of continued growth. If this movement occurs after a downtrend, it may indicate a possible reversal.

Black (red) marubozu, on the other hand, show complete bear dominance. This indicates that the bears have controlled the entire trading period, which may indicate a continuation of the downtrend or a reversal of the uptrend.

Doji

In a doji pattern, the opening and closing prices are equal or nearly equal, so the body of the pattern looks like a very thin line, usually less than 5% of the total range of price movement over the period hidden in the candle.
As in a wavy pattern, this may indicate that the bulls and bears have balanced each other out by the end of the session.

There are four main types of dodgie to consider:

1. Long-legged dodges have a long wick both above and below the body.
2. Grave dodges have a tall wick above the body and no wick below the body.
3. Dragonfly doji have a long wick under the body and virtually no wick above it.
4. Four-pronged dojis have no wick at all.

Dojis are often seen as a signal of a possible reversal. If such a pattern is formed after a long uptrend, it may mean that the market is about to turn down. After a bearish movement, it may indicate that the sellers are exhausted and that the bulls are about to take over.

Hammer and Hanging Man

Individually, such candles are exactly the same, but it all depends on what trend preceded them.
Both candlesticks are characterized by small bodies, long lower shadows and no upper shadows, although in practice it is allowed to have short upper shadows.

The Hammer is a bullish reversal pattern formed in the context of a downtrend. Traders often take the hammer as a signal that the market has reached the "bottom" and an upward movement is about to begin.

The hammer can be recognized by the long lower wick under the relatively short body, above which the wick is almost absent. The body should be two to three times shorter than the lower wick. This indicates that the market made a new low during the session, but then rebounded and closed much higher. Thus, despite heavy selling pressure, buyers were able to push the bears back before the close.

Although bearish sentiment is waning, it does not necessarily mean an imminent reversal. Therefore, most traders wait for confirmation before opening a position based on the hammer - usually a strong upward movement in the next period.

The Hanged Man is a pattern indicating a possible bearish reversal. The appearance of this candlestick against the background of an uptrend may indicate that the market has encountered a strong resistance level and that sellers are beginning to dominate buyers.

The long lower shadow shows that the bears were actively trying to bring the price down. Buyers intervened but were only able to close the price near the opening level without much success.

Inverted hammer and shooting star

An inverted hammer appears in the context of a downtrend and signals a potential bullish reversal. Externally, an inverted hammer has a long upper shadow and a small body at the bottom of the candle, while the lower shadow is either absent or very short. This candlestick shape shows that buyers tried to raise the price during the trading session, but ultimately failed to hold their positions. Nevertheless, the fact that the price rose during the session indicates that the sellers' pressure may be easing and that the market sentiment is beginning to change. If a candle with a higher close appears after an inverted hammer, it confirms a reversal signal and strengthens confidence in the beginning of the uptrend.

A shooting star, on the other hand, is a bearish reversal pattern and appears after an uptrend. It looks like an inverted hammer, but forms at the top of an uptrend. A shooting star also has a long upper shadow and a small body at the bottom of the candle with a lower shadow that is either absent or very short. The long upper shadow shows that buyers were trying to continue to drive the price up, but sellers took over and sold the price down towards the end of the session. The appearance of a shooting star signals that the uptrend is weakening and a downtrend may be starting. If a candlestick with a lower close appears after a shooting star, it confirms a bearish reversal signal and strengthens confidence in the beginning of a downtrend.

Double candlestick patterns

Acquisition

There are two types of engulfment patterns: bullish engulfment and bearish engulfment.
A bullish engulf occurs after a downtrend and signals the possible beginning of an upward movement. Externally, this pattern consists of two candles: the first candle is small and bearish, and the second candle is large and bullish. The second candle completely engulfs the body of the first candle, which means that its opening price is lower and its closing price is higher than the previous bearish candle. This shows that buyers have taken control of the market by overriding the previous selling. The appearance of a bullish engulf may indicate that the downtrend has ended and the uptrend has begun.

A bearish engulf, on the other hand, appears after an uptrend and indicates the possible beginning of a downtrend. This pattern also consists of two candles: the first candle is small and bullish, while the second candle is large and bearish. The second candle completely engulfs the body of the first candle, which means that its opening price is higher and its closing price is lower than the previous bullish candle. This indicates that the sellers have taken over from the buyers, overriding the previous buying. The appearance of a bearish engulf can signal the end of an uptrend and the beginning of a downtrend.

Both types of engulfment indicate a change in market sentiment and a possible change in price direction. However, like other candlestick patterns, a takeover requires confirmation by subsequent candlesticks or additional tools to signal a reversal.

Harami

The name "harami" comes from the Japanese word meaning "pregnant".
The harami pattern can be either bullish or bearish. A bullish harami pattern appears after a downtrend and signals a possible upward reversal. It consists of a large bearish candle followed by a small bullish candle. The body of the small candle is completely inside the body of the previous large candle. This indicates that the sellers' pressure is weakening and the control may be transferred to the buyers.

A bearish Harami, on the other hand, occurs after an uptrend and indicates a possible downward reversal. It consists of a large bullish candle followed by a small bearish candle. The body of the small candle is also completely inside the body of the previous large candle. This pattern indicates a weakening of buying pressure and the possibility of control being taken over by sellers.

The harami pattern often indicates market indecision and a potential change in trend direction.

Triple candlestick patterns

Morning and Evening Star

"Morning Star" is another reversal pattern. This pattern consists of three candlesticks and is a combination of bullish and bearish signals that indicate a weakening of the previous downtrend and a potential reversal.

The Morning Star pattern includes the following three candlesticks:

• First candle: a long bearish candle that confirms the existing downtrend. This candlestick shows strong selling pressure and the continuation of the price decline.
• Second candle: a small candle (usually a doji), which can be bullish or bearish, but the main thing is that it closes below the first candle. This candle indicates indecision in the market as the price is fluctuating in a narrow range. It is important that the body of the second candle is small, which indicates a balance between sellers and buyers.
• Third candle: a long bullish candle that closes inside the body of the first bearish candle. This candle confirms the beginning of the uptrend and shows that buyers have taken control of the market, reversing previous losses.

The Morning Star pattern indicates a weakening downtrend and a potential upward reversal. The appearance of this pattern indicates that sellers are losing strength and buyers are beginning to dominate the market.

"Evening Star" is also a reversal pattern. It consists of three candles and is a combination of bullish and bearish signals, indicating a weakening of the current uptrend and a potential reversal to the downside.

The Evening Star pattern includes the following three candlesticks:

• First candle: a long bullish candle that confirms the existing uptrend. This candlestick shows strong buying pressure and a continuation of the price rise.
• Second candle: a small candle (usually a doji), which can be bullish or bearish, but the main thing is that it closes above the first candle.
• Third candle: a long bearish candle that closes inside the body of the first bullish candle. This candle confirms the beginning of the downtrend and shows that the sellers have taken control of the market, overtopping the previous gains.

The Evening Star pattern indicates a weakening of the uptrend and a potential downward reversal. The appearance of this pattern indicates that buyers are losing strength and sellers are beginning to dominate the market.

Three white soldiers and three black crows

The Three White Soldiers pattern occurs after a long downtrend and a small consolidation phase. Traders consider it as one of the most obvious signals of the end of the bear market.

"Three White Soldiers" includes the following candles:

• A green candle appearing after a downtrend.
• A second green candle with a larger body than the first candle and almost no upper wick.
• A third green candle with a body that is at least equal to the body of the second candle, and almost no wick.

The "Three Black Crows" pattern is the opposite of the "Three White Soldiers" pattern. It appears after an uptrend and consists of three consecutive long red candles, which is interpreted as a strong signal of the end of the bull market.

The second candle should have a short or missing bottom wick, and the third candle should have almost no wick.

Trading strategies based on candlestick patterns are a popular tool for traders in financial markets. These strategies are based on analyzing price activity charts and using different candlestick patterns to predict future price movements. Here are some popular trading strategies based on candlestick patterns:

Inverted Candlestick Pattern Trading: This strategy is based on finding inverted candlestick patterns such as the Hammer, Hanging Man, Shooting Star and others. When this pattern appears on the chart, traders can make decisions about whether to enter in the direction indicated by the candlestick pattern.

Long Candlestick Patterns: This strategy is based on looking for long candlestick patterns such as the Marubozu and the Long Legs. When such a pattern appears on the chart, traders can make decisions to enter and hold a position in the direction indicated by the candlestick pattern.

Trading based on a candlestick pattern: This strategy is based on looking for specific candlestick patterns such as the Inner Bar, Matryoshka, Triple Close and others. When such a pattern appears on the chart, traders can make entry decisions according to the rules of the candlestick pattern.

Candlestick Rebound Trading: This strategy is based upon looking for candlestick patterns that indicate a pullback in price from the previous trend. For instance, a Double Top or Double Bottom candlestick pattern can indicate a potential pullback in price, and traders can decide to enter based on that pullback.

These are just a few examples of trading strategies based on candlestick patterns. It is important to remember that these strategies should be used in conjunction with other tools and market analysis to make more informed decisions.

Trend Following

Trend Following (trend following): This strategy is based on finding and trading in the direction of a trend that is set in the market. When a trend is clearly seen on a chart of price activity, traders will look to enter a position in the direction of the trend. For example, if a steady uptrend can be seen on the chart, traders may look for opportunities to enter a long position and hold it until the trend ends or reversal signals emerge. The main idea behind this strategy is to catch long price movements in the direction of the trend.

The Counter Trend trading strategy

The Counter Trend strategy is based on the idea of finding possible reversal points in the direction opposite to the current trend. When price reaches extreme levels and signals of trend weakness, traders may look to enter a position waiting for a reversal. For example, if price reaches strong support or resistance levels on the chart and shows rebound signals, traders may consider entering a position in the opposite direction to the current trend.

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Japanese candlesticks are a powerful tool for analyzing price activity in the market. They provide traders with a visual representation of price movements and can help in determining the trend, reversal and continuation signals.

However, it is important to understand that it takes some training and practice to use Japanese candlesticks effectively. Traders should be able to read and interpret various candlestick patterns, as well as use them in combination with other market analysis tools.

Trading by candlestick patterns has its advantages, such as ease of reading, the ability to identify trends and reversal signals. However, they also have their limitations, including the possibility of false signals and complexity of interpretation.

Overall, Japanese candlesticks are a valuable tool for traders that can help them make informed decisions in the market. When used properly and combined with other analysis methods and strategies, they can be a useful tool in trading the financial markets.

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