Introduction to Japanese Candlesticks
By Marcus Fei

Japanese have relied on candlesticks for centuries but it is only very recently that Japanese candlesticks have become popular with the Western world. Candlesticks use the exact same data that a bar chart would, i.e. open, high, low, close, only candlesticks are much more appealing to the eye.

Candlesticks typically would have a real body and upper and lower shadows signifying where the prices have traveled in the course of the period and whether the price ended higher or lower at the close. A typical candlestick on an up day would have a green (or white) body while a candlestick on a down day would have a red (or black) body. A strong up or down day would leave a long real body where a weak up or down day would register a small real body. Small real body candlesticks are also known as Spinning Tops which often represents indecision in the market.

Candlesticks do not necessarily have to have a real body and/or upper or lower shadows. If a price did not move at all throughout the entire period, a candlestick would just register a horizontal bar which can also be called as a doji. Doji can come in a few different forms. The primary characteristic of dojis is that dojis do not have a real body. Dojis, like Spinning Tops, often suggests indecisions in the market. Dojis with long upper and lower shadows are also known as High Wave candles and they often suggest that neither the bears nor the bulls have the upper hand. Dojis with long lower shadow and no upper shadow is known as the Dragonfly doji and is often indicative of potential buying pressure and support. Dojis with long upper shadow and no lower shadow is known as the Gravestone doji and is often indicative of potential selling pressure and resistance.

Individually, candlesticks can often provide significant suggestions as to what kind of market psychology is driving the market. Combining several candlesticks can further create candlestick patterns that can provide suggestions of potential market reversals as well as continuations.

Bullish reversal patterns are candlestick patterns that can be spotted in a downtrend where as bearish reversal patterns are candlestick patterns that can spotted in an uptrend. The key criterion for the candlestick pattern to be valid is often the presence of the immediate preceding trend. Bullish and bearish continuation candlestick patterns can also be spotted during uptrends and downtrends and can potentially assist the trader in deciding whether to enter a trade, exit a trade or to remain in a trade.

Below is a basic collection of some of the more recognisable candlestick patterns grouped according to the signals they indicate.

Bullish Reversals

   

 

Bullish Continuation

 

 

Bearish Reversals

   

 

Bearish Continuation

 

 

Candlesticks and candlestick patterns can be an effective tool in studying the psychology of the market participants and are essential in making market timing decisions. However, candlesticks themselves do not offer time and price targets and should always be used in conjunction with other technical tools and techniques to obtain better trading results.

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