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Japanese Candlesticks

A History Steeped in Rice:

Candlestick analysis boasts a rich heritage. Developed by Japanese rice traders as early as the 1700s, it remained largely unknown in the Western world until recently.

The Spark that Ignited the West:

The last 30 years have witnessed a surge in the popularity of candlestick patterns. This can be attributed in part to Steve Nison, an American who extensively researched candlestick signals. His 1991 book, "Japanese Candlestick Charting Techniques," became a catalyst for widespread interest in this technical analysis method.

Unveiling the Power of Patterns:

Candlestick analysis hinges on identifying specific formations – combinations of candlesticks or single candlestick patterns. These patterns can offer clues about potential trend reversals or continuations, empowering traders to make informed decisions.

Candlestick Formation

Candlestick charts have emerged as a preferred tool for traders due to their ability to convey a wealth of information compared to traditional bar or line charts.

Candlesticks offer a more intuitive way to visualize price action. The body of the candle represents the difference between the opening and closing prices, while the wicks (or shadows) illustrate the highs and lows reached during the trading period. This visual representation makes it easier to identify price swings and assess market sentiment.

A Window into Market Psychology:

The color of the candle body tells a quick story – green (or white) candles indicate a closing price higher than the opening price, suggesting a bullish sentiment. Conversely, red (or black) candles signify a closing price lower than the opening, hinting at a bearish market.

In this example, white is for up and black is for down. Candlesticks can be used for any time frame, whether it be one week, one day, one hour, or 15 minutes.

Size of Body and Shadow

Candlesticks have different body sizes. Long bodies indicate strong buying or selling pressure, while short bodies imply very little buying or selling activity.

Common Candlestick Patterns

There are over 40 candlestick formations. We will examine the most common ones.

Doji candlesticks have the same open and close price. They suggest indecision or struggle between buyers and sellers.

The Gravestone Doji has long upper shadow and no lower shadow. The open and close prices are both at the low end of the time period. It has a bearish connotation as it usually suggests a bullish rally is near an end and signals a reversal.

The Long legged Doji has a very long shadow and reflects indecision on the part of market participants. It signals an impending reversal of price direction.

Spinning Tops indicate indecision between buyers and sellers.

The Hammer has a small body near the high and has long lower shadows. The color is not as important. When found in a downtrend, usually it signifies bullish sentiment.

The Bullish Engulfing Pattern, when formed at the end of a downtrend, signifies bullish sentiment. This complete engulfing of the previous candle represents overwhelming buying pressure fading selling pressure.

The Bearish Engulfing Pattern is the opposite of the bullish engulfing pattern and signifies bearish sentiment. Sellers are beginning to overwhelm buyers.

The Piercing Pattern, when found in a downtrend, signifies an impending reversal to the upside.

The Shooting Star, when in an uptrend, indicates an impending reversal to the downside.

The Morning Star, when in a downtrend, signifies a bullish reversal. Prices start to rise.

The Evening Star is the opposite of a Morning Star. In an uptrend it signifies a bearish reversal. Prices start to fall.

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