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History of Candlesticks
Candlesticks have been around a lot longer than anything similar in the western world.
The Japanese were looking at charts as far back as the 17th century, whereas the earliest known charts in the US appeared in the late 19th century.
Rice trading had been established in Japan in 1654, with gold, silver and rape seed oil following soon after.
Rice markets dominated Japan at this time and the commodity became, it seems, more important than hard currency.
Munehisa Honma (aka Sokyu Honma), a Japanese rice trader born in the early 1700s, is widely credited as being one of the early exponents of tracking price action.
He understood basic supply and demand dynamics, but also identified the fact that emotion played a part in the setting of price.
He wanted to track the emotion of the market players, and this work became the basis of candlestick analysis.
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He was extremely well respected, to the point of being promoted to samurai status.
The Japanese did an extremely good job of keeping candlesticks quiet from the western world, right up until the 1980s, when suddenly there was a large cross-pollination of banks and financial institutions around the world.
This is when westerners suddenly got wind of these mystical charts. Obviously, this was also about the time that charting in general suddenly became a lot easier, due to the widespread use of the pc.
In the late 1980s several western analysts became interested in candlesticks. In the UK Michael Feeny, who was then head of TA in London for sumitomo, began using candlesticks in his daily work, and started introducing the ideas to London professionals.
In the December 1989 edition of futures magazine Steve Nison, who was a technical analyst at Merrill Lynch in New York, produced a paper that showed a series of candlestick reversal pattern and explained their predictive powers.
He went on to write a book on the subject, and a fine book it is too. Thank you Messrs Fenny and Nison.
Since then, candlesticks have gained in popularity by the year, and these days they seem t0 be the standard template that most analysts work from.
Why Candlesticks are important to your trading analysis?
Candlesticks are important to you trading analysis because, it is considered as a visual representation of what is going on in the market.
By looking at a candlestick, we can get valuable information about the open, high, low and the close of price, which will give us an idea about the price movement.
Candlesticks are flexible, they can be used alone or in combination with technical analysis tools such as the moving averages, and momentum oscillators, they can be used also with methods such the Dow Theory or the Eliot wave theory.
I personally use candlesticks with support and resistance, trend lines, and other technical tools that you will discover in the next chapters.
The human behavior in relation to money is always dominated by fear, greed, hope, candlesticks analysis will help us understand these changing psychological factors by showing us how buyers and sellers interact with each other's.
Candlesticks provide more valuable information than bar charts, using them is a win - win situation, because you can get all the trading signals that bar chart generate with the added clarity and additional signals generated by candlesticks.
Candlesticks are used by most professionals' traders, banks, and hedge funds, these guys trade millions of dollars every day, they can move the market whenever they want.
They can take your money easily if you don't understand the game.
Even if you can trade one hundred thousand dollars trading account, you can't move the market, you can't control what is going in the market.
Using candlestick patterns will help you understand what the big boys are doing, and will show you when to enter, when to exit and when to stay away from the market.
What is Candlestick?
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| Candlesticks Body |
Japanese candlesticks are formed using the open, high, low and close of the chosen time frame.
If the close is above the open, we can say that the candlesticks is bullish which means that the market is rising in this period of time. Bullish candlesticks are always displayed as white candlestick.
The most trading platform use white color to refer to bullish candlesticks. But the color doesn't matter, you can use whatever color you want.
The most important is the open price and the close price.
If the close is below the open, we can say that the candlestick is bearish which indicates that the market is falling in this session. Bearish candles are always displayed as black candlesticks. But this is not a rule.
You can find different colors used to differentiate between bullish and bearish candlesticks.
- The filled part of the candlestick is called the real body.
- The thin lines poking above and below the body are called shadows.
- The top of the upper shadow is the high.
-The bottom of the lower shadow is the low
candlestick Body Sizes
Candlesticks have different body sizes:
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| Candlesticks |
Long bodies refer to strong buying or sellers pressure, if there is a candlestick in which the close is above the open with a long body, this indicates that buyers are stronger, and they are taking control of the market during this period of time.
Conversely, if there is a bearish candlestick in which the open is above the close with a long body, this means that the selling pressure controls the market during this chosen time frame.
Short and small bodies indicate a little buying or selling activity.
Candlesticks Shadows (tails)
The upper and lower shadows give us important information about the trading session.
Upper shadows signify the session high.
Lower shadows signify the session low.
Candlesticks with long shadows show that trading action occurred well past the open and close.
Japanese candlesticks with short shadows indicate that most of the trading action was confined near the open and 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 came in and drove 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 price lower. But for one reason or another buyer came in and drove prices back up to end the session back near its open price.
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| Candlestick |
1. Abandoned Body
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Abandoned Body |
A rare reversal pattern is characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.
Prediction
A three-day bearish reversal pattern similar to the evening star. The uptrend is continuous with a large white body. The next day opens higher, trades in a small range, then closes at its open (doji). The next day closes below the midpoint of the body of the first day.
Reversal Pattern
2. Dark Cloud Cover
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Dark Cloud Cover |
A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high, then closes below the midpoint of the body of the first day.
Prediction
Continues the uptrend.
3. Doji
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Doji |
Doji form when the open and close of security are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like a cross plus a sign. Doji conveys a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.
Prediction
Sense of indecision or tug-of-war between buyers and sellers.
4. Downside Tasuki Gap
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Downside Tasuki Gap |
A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then does not close the gap.
Prediction
Continuation Pattern
5. Dragonfly Doji
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Dragonfly Doji |
A Doji is where the open and close prices are at the high of the day. Like other Doji days, this one normally appears at market turning points.
Prediction
Turning Points
6. Engulfing Pattern
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Engulfing Pattern |
A reversal pattern can be bearish or bullish, depending on whether it appears at the end of an uptrend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body and closes in the opposite direction of the trend. This pattern is similar to the outside reversal chart pattern but does not require the entire range (high and low) to be engulfed, just the open and close.
Prediction
A reversal pattern that can be bearish or bullish.
7. Evening Doji Star
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Evening Doji Star |
A three-day bearish reversal pattern similar to the evening star. The uptrend is continuous with a large white body. The next day opens higher, trades in a small range, then closes at its open (doji). The next day closes below the midpoint of the body of the first day.
Prediction
Uptrend Continues
8. Evening Star
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Evening Star |
A bearish reversal pattern that continues an uptrend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.
Prediction
Uptrend Continues
9. Falling Three Methods
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Falling Three Methods |
A bearish continuation patterns. A long black body is followed by three small body days, each fully contained within the range of the high and low of the first day closes at a new low.
Prediction
Continuation Pattern
10. Gravestone Doji
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Gravestone Doji |
A Doji line develops when the Doji is at, or very near, the low of the day.
Prediction
Indecision
11. Hammer
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Hammer |
Hammer candlesticks from when a security moves significantly lower after the open, but rallies to close above well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a hammer.
Prediction
A security trades significantly lower than its opening.
12. Hanging Man
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Hanging Man |
Hanging man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a hanging man.
Prediction
Uptrend of Price
13. Harami
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Harami |
A two-day Pattern that has a small body day completely within the range of the previous body, and is the opposite color.
Prediction
Reversal Pattern
14. Harami Cross
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Harami Cross |
A two-day pattern is similar to the harami. The difference between is that the last day is a doji.
Prediction
The previous trend may be about to reverse.
15. Inverted Harami
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Inverted Harami |
A one-day bullish reversal pattern. In a downtrend, the open is lower, then it trades higher but closes near its open, therefore looking like an inverted lollipop.
Prediction
Downtrend
16. Long Body/Long Day
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Long Body/Long Day |
A large price moves from open to close, where the length of the candle body is long.
Prediction
Bullish candlestick reversal pattern.
17. Long - Legged Doji
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Long - Legged Doji |
This candlestick has long upper and lower shadows with the Doji in the middle of the day's trading range, clearly reflecting the indecision of traders.
Prediction
indecision
18. Long Shadows
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Long Shadows |
Candlesticks with long upper shadows and short lower shadows indicate that buyers dominated during the first part of the session, bidding prices higher. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the first part of the session, driving prices lower.
Prediction
Dominated
19. Marubozu
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Marubozu |
A candlestick with no shadow extending from the body at either the open, the close, or at both. The name means close-cropped or close-cut in Japanese, though other interpretations refer to it as Bald or Shaven Head.
Prediction
Trade will go with the flow of direction
20. Morning Doji Star
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Morning Doji Star |
A three-day bullish reversal pattern that is very similar to the morning star. The first day is in a downtrend with a long black boy. The next day opens lower with a Doji with a small trading range. The last day closes above the midpoint of the first day.
Prediction
Downtrend
21. Morning Star
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Morning Star |
A three-day bullish reversal pattern consisting of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.
Prediction
Downtrend
22. Piercing Line
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Piercing Line |
A bullish two-day reversal pattern. The first day, in a downtrend, is a long black day. The next day opens at a new low, then closes above the midpoint of the body of the first day.
Prediction
Downtrend
23. Rising Three Methods
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Rising Three Methods |
A bullish continuation pattern in which a long white body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new high.
Prediction
Resumption of that trend
24. Shooting Star
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Shooting Star |
A single-day pattern can appear in an uptrend. It opens higher, trades much higher, then closes near its opening. It looks just like the inverted hammer except that it is bearish.
Prediction
Uptrend
25. Short Body/Short Day
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Short Body/Short Day |
A short day represents a small price move from open to close, where the length of the candle body is short.
Prediction
Indicates that the open and close prices of the security were quite close to another.
26. Spinning Top
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Spinning Top |
candlestick lines that have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision.
Prediction
indecision
27. Stars
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Stars |
A candlestick that gaps away from the previous candlestick is said to be in a star position. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from the previous price action.
Prediction
Reversal Pattern
28. Stick Sandwich
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Stick Sandwich |
A bullish reversal pattern with two black bodies surrounding a white body. The closing price of the two black bodies must be equal. A support price is apparent and the opportunity for prices to reverse is quite good.
Prediction
Bearish and bullish pattern.
29. Three Black Crows
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Three Black Crows |
A bearish reversal pattern consisting of three consecutive long black bodies where each day closes at or near its low and opens within the body of the previous day.
Prediction
Market Downturn
30. Three White Soldiers
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Three White Soldiers |
A bullish reversal pattern consisting of three consecutive long white bodies. Each should open within the previous body and the close should be near the high of the day.
Prediction
Reversal of the current downtrend
31. Upside Gap Two Crows
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Upside Gap Two Crows |
A three-day bearish pattern that only happens in an uptrend. The first day is a long white body followed by a gap open with the small black body remaining gapped above the first day. The third day is also a black day whose body is larger than the second day engulfs it. The close of the last day is still above the first long white day.
Prediction
Continues the uptrend.
32. Upside Tasuki Gap
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Upside Tasuki Gap |
A continuation pattern with a long white body followed by another white body that has gapped above the first one. The third day is black and opens within the body of the second day, then closes in the gap between the first two days but does not close the gap.
Prediction
Continuation of the current uptrend
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