JAPANESE CANDLESTICKS PART 1
Candlestick charts are thought to have been used in the 18th Century by Munehisa Homma, and first shown to the world in Steve Nisons book on Japanese Candlestick charting techniques.
Candlesticks measure the price fluctuations over a certain amount of time. So if you were on the 15 minute timeframe, each candlestick represents 15 minutes from opening to closing. Candlesticks show you the high and low it made and also where it closed.
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Knowing this information, especially on the high timeframes, really helps with understanding how bullish or how bearish the market currently is and whether there are any reversal patterns, which we will cover shortly.
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We are going to see some examples of strong candles and weak candles which, when completely understood, can be used as a strong confluence when entering or exiting a trade.
Doji Candlesticks
Doji candlesticks represent equilibrium between buyers and sellers; neither have gained control. Price may move above and below the opening level but neither buyers or sellers are in control.
The Doji can vary from small cross-like candlesticks to big cross-like candlesticks, they still show a lot of indecision in the market because as you can see price has tried to push away from the candlestick open but has been pushed back to almost the exact same spot.
The significance of a Doji in a trend comes usually after some sort of strong buying or selling in the market, the Doji candle signifies that the buying or selling power is starting to weaken. So the buyers and sellers in the market are starting to match each other. Again this could signify a reversal or it could just be the market retracing before another drop or push back in the same direction.
The Dragon Fly Doji takes the form of the letter “T” and it’s where the candle opens and closes at the same level. Sellers initially had control and made a new low, as you can see from the wick, but towards the end buyers gained control and it ended in a state of equilibrium, where neither buyers or sellers took control.
The Gravestone Doji is the opposite of a Dragon Fly Doji.
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The Gravestone Doji opens and closes at the same level and at the start of this candle when the buyers were in control it made a new high, as you can see from the wick. Then sellers gain control and the candle closes at the same level it opened.
The Marubozu
The bullish and bearish Marubozu is a very well known candlestick, which doesn’t have any wicks. Just a long candle body.
So, if we look at the bullish Marubozu, we know that the open of the candle was actually the low of the candle, this means that buyers had full control over this period of time and closed in favour of buyers/bulls too.
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If we look at the bearish Marubozu, we know that the open of the candle was the high of the candle and that sellers had full control over this period of time and closed bearish too.
The bullish Marubozu indicates a bullish continuation or a bullish reversal.
The bearish Marubozu indicates a bearish continuation or a bearish reversal.
Long wicks vs Short wicks
The long wicks provide us with a story of what happened during the session, the lower wicks represent the session lows and the upper wicks represent the session highs.
Starting with the candle on the left, we can see that sellers initially had control to produce the long wick to the downside but then during the session there was a change and buyers gained control and closed as a strong bullish green candle.
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With the candle on the right we can see that buyers initially had control over this session producing a long wick to the upside but sellers regained control and closed as a strong bearish red candle.
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Short bodies vs Long bodies
A simple way to look at this is: a longer body of the candle equals a stronger force of either buyers or sellers. For example, a longer green body of the candle means there’s a lot more buyers in the market than the smaller green bodied candle. This is exactly the same for the red candles, the longer the candle body the more sellers there are in the market.
A bigger bodied green candle after a series of bearish (red) candles can mean one of two things; either we are experiencing a pull back/retrace or it’s a sign that the market is losing selling power and could see a reversal in direction.
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This is the same for a Bearish candle at the end of a Bull run. Candlesticks make it easy for a trader to quickly see how much momentum there is in the market and easy to see where pullbacks or retracements start and finish.
Spinning Tops/Tweezer Tops
Spinning Tops or Tweezer Tops represent indecision in the market. They are small-bodied candles with small wicks. This means that neither buyers nor sellers have control of the market.
These normally appear when the market is consolidating (where price could go either way), this could be the start of a change in trend or continuation of the previous trend.
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So look out for these around key levels/areas of interest. Whenever the market is in a state of equilibrium it is usually followed by some strong movement and momentum; this is when you can really profit from the markets.
Make sure you look out for tweezer tops and spinning tops along the significant trendlines. These show us that price is stalling before the rejection of the trendline hence allowing us to get ready to look for an entry.
Remember we don't just enter off candlesticks alone but following one of these indicators we will then look to build up confluences to create a solid trade setup.
The Hanging Man
The Hanging Man is a bearish candlestick pattern which usually forms at the end of an uptrend. The hanging man is usually created when there is a big sell off around the high or top of an uptrend, but then buyers regain some sort of control creating the big wick to the downside. This is an early indication that buyers are losing control
When this candlestick pattern occurs at the end of a downtrend its called a hammer. They are red candles with a long wick to the downside and small wick to the upside.
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The best way to use the hanging man is to look for this reversal candle around key areas of resistance. This will maximise the probability of the hanging man being followed by a significant sell off.
In the example on above you can see that we hit a key area of resistance, we then see the hanging man reversal candlestick which we have highlighted in the blue box.
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You can see that not long after the market saw a big sell off. Remember you would never enter a trade just off the candlestick alone but it’s a great indication of what will happen next.
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This was on a daily timeframe, candles on the higher timeframes also hold more significance.