JAPANESE CANDLESTICKS
What are Japanese Candlesticks?
Japanese candlesticks can be used for any time frame, whether it be one day, one hour or 15-minutes.
They are used to describe the price action during the given time frame.
Japanese candlesticks are formed using the open, high, low, and close of the chosen time period.
If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
The hollow or filled section of the candlestick is called the “real body” or body.
The thin lines poking above and below the body display the high/low range and are called shadows.
The top of the upper shadow is the “high”.
The bottom of the lower shadow is the “low”.
Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control.
Short bodies imply very little buying or selling activity. In forex, bulls mean buyers and bears mean sellers.
Long white Japanese candlesticks show strong buying pressure.
The longer the white candlestick, the further the close is above the open.
This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time!
Long black (filled) candlesticks show strong selling pressure.
The longer the black Japanese candlestick, the further the close is below the open.
This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.
Basic Candlestick Patterns
SPINNING TOPS
Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.
The pattern indicates the indecision between the buyers and sellers.
The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.
Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.
Neither buyers nor sellers could gain the upper hand, and the result was a standoff.
If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.
MARUBUZU
Marubozu means there are no shadows from the bodies.
The word “marubozu ” translates to “bald head” or “shaved head” in Japanese.
So a bald candle or shaved candle means it has no shadow or wick.
Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.
Check out the two types of Marubozus in the picture below.
A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.
This means that the candle opened at its lowest price and closed at its highest price.
This is a very bullish candle as it shows that buyers were in control of the entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.
This means that the candle opened at its highest price and closed at its lowest price.
This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.
Depending on where a marubozu is located and what color it is, here are few guidelines:
If a White Marubozu forms at the end of an uptrend, a continuation is likely.
If a White Marubozu forms at the end of a downtrend, a reversal is likely.
Black Marubozu
If a Black Marubozu forms at the end of a downtrend, a continuation is likely.
If a Black Marubozu forms at the end of an uptrend, a reversal is likely.
DOJI
Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line.
Doji candles suggest indecision or a strugglefor turf positioning between buyers and sellers.
Prices move above and below the open price during the session, but close at or very near the open price.
Neither buyers nor sellers were able to gain control and the result was essentially a draw.
There are FOUR special types of Doji candlesticks.
The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign.
If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak.
In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.
When a Doji forms on your chart, pay special attention to the preceding candlesticks.
If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.
In order for price to continue rising, more buyers are needed but there aren’t any more! Sellers are licking their chops and are looking to come in and drive the price back down.
The word “Doji” refers to both the singular and plural form.
Hammer and the Hanging Man
The hammer and hanging man look exactly alike but have totally different meanings depending on past price action.
Both have cute little bodies (black or white), long lower shadows, and short or absent upper shadows.
The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.
When price is falling, hammers signal that the bottom is near and price will start rising again.
The long lower shadow indicates that sellers pushed prices lower, but buyers were able to overcome this selling pressure and closed near the open.
Just because you see a hammer form in a downtrend doesn’t mean you automatically place a buy order! More bullish confirmation is needed before it’s safe to pull the trigger.
A typical example of confirmation would be to wait for a white candlestick to close above the open to the right side of the hammer.
The hanging man is a bearish reversal pattern that can also mark a top or strong resistance level.
When price is rising, the formation of a hanging man indicates that sellers are beginning to outnumber buyers.
The long lower shadow shows that sellers pushed prices lower during the session.
Buyers were able to push the price back up some but only near the open.
This should set off alarms since this tells us that there are no buyers left to provide the necessary momentum to keep raising the price.
Inverted Hammer and Shooting Star
The inverted hammer and shooting star also look identical. The only difference between them is whether you’re in a downtrend or uptrend.
An inverted hammer is a bullish reversal candlestick.
A shooting star is a bearish reversal candlestick.
Both candlesticks have petite little bodies (filled or hollow), long upper shadows, and small or absent lower shadows.
The inverted hammer occurs when price has been falling suggests the possibility of a reversal. Its long upper shadow shows that buyers tried to bid the price higher.
However, sellers saw what the buyers were doing, and attempted to push the price back down.
Since the sellers weren’t able to close the price any lower, this is a good indication that everybody who wants to sell has already sold.
And if there are no more sellers, who is left? Buyers.
The shooting star is a bearish reversal pattern that looks identical to the inverted hammer but occurs when price has been rising.
Its shape indicates that the price opened at its low, rallied, but pulled back to the bottom.
This means that buyers attempted to push the price up, but sellers came in and overpowered them. This is a definite bearish sign since there are no more buyers left.
