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Japanese Candlestick Patterns In Forex Trading

Japanese Candlestick Patterns

A Brief History of Japanese Candlestick Charting Patterns.

Candlestick charts originated in Japan during the 18th century. Since no defined currency standard existed in Japan during this time rice represented a medium of exchange. Various feudal lords deposited rice in warehouses in Osaka and would then sell or trade the coupon receipts, thus rice become the first futures market. In the 1700s legendary Japanese rice trader Homma Munehisa studied all aspects of rice trading from the fundamentals to market psychology.

Homma subsequently dominated the Japanese rice markets and built a huge fortune. His trading techniques and principles eventually evolved into the candlestick methodology which was then used by Japanese technical analysts when the Japanese stock market began in the 1870s. The method was picked up by famed market technician Charles Dow around 1900 and remains arguably the most popular form of technical analysis chart in use by today’s traders of financial instruments.

Why use Candlestick Charts?

Candlestick charts show the same information as bar charts but in a graphical format that provides a more detailed and accurate representation of price action.

Candlestick charts visually display the supply and demand situation by showing who is winning the battle between the bulls and the bears.

Candlestick charts reveal another dimension of the given period’s price action by pictorially displaying the force (or lack of force) behind each price bar’s movement.

Candlestick formations make all single bar and multi-bar patterns significantly easier to spot in real time, thus increasing your chances of catching high probability trade setups. In addition, because candlestick charts use the same data as bar charts (open, high, low, and close), all Western technical signals used on a bar chart can easily be applied to a candlestick chart.

Candlestick charts offer everything bar charts do and more, using them is a win-win situation because you can use all the trading signals normally used on bar charts with the added clarity and additional signals generated by candlesticks.

Candlesticks charts are more fun to look at.

The Anatomy of a Candle

Candlesticks have a central portion that displays the price distance between the open and the close. This area is known as the real body or simply the body.

The price distance between the open and the high for the period being analyzed is called the upper shadow, sometimes referred to as an “upper wick” as well. The highest price paid for a particular period is the marked by the high of the upper shadow.

The price distance between the close and the low for the period being analyzed is called the lower shadow, sometimes referred to as a “lower wick”.

The real body displays the opening and closing price of the security being traded. Closing prices have added significance because they determine the conviction of the bulls or bears. If the security closed higher than it opened, the real body is white or unfilled, with the opening price at the bottom of the real body and the closing price at the top. If the security closed lower than it opened, the real body is black, with the opening price at the top and the closing price at the bottom. Depending on the price action for the period being analyzed a candlestick might not have a body or a wick.

To better highlight or visualize price movements, modern candlestick charts (especially those displayed digitally) often replace the black or white of the candlestick real body with colors such as red (for a lower closing) and blue or green (for a higher closing).

592px-candle_definition_ensvg

Core Candlestick Patterns

There are multiple forms of candlestick patterns; here is a brief overview of the most popular and widely used single and multi-bar patterns commonly used today.

Bullish Candle

Signals uptrend movement, they occur in different lengths; the longer the body, the more significant the price increase

bullcandle

Bearish Candle

Signals downtrend movement, they occur in different lengths; the longer the body, the more significant the price decrease.

bearcandle1

Long Lower Shadow

These candles provide a bullish signal, the lower shadow must be at least the size of the real body; the longer the lower shadow the more reliable the signal.

lowerwick1

Long upper shadow
These candles provide a bearish signal, the upper shadow must be at least the size of the real body; the longer the upper shadow the more reliable the signal.

upperwick

Hammer

The hammer is a bullish signal that occurs during a downtrend. The lower shadow should be at least twice the length of the real-body. Hammers have little or no upper shadow. When a hammer occurs during an uptrend it is known as a “hanging man” and is a bearish signal. Because of the bullish long lower shadow however, this pattern needs bearish confirmation by a close under the hanging man’s real body.

hammer

Shooting Star

This candle has a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session that develops during or after and uptrend.

shootstar

Harami

The Harami is a two-candlestick pattern in which a small real body forms within the prior session’s larger real body.

harami

Doji

The Doji is a candlestick in which the session’s open and close are the same, or almost the same. There are a few different varieties of Dojis, depending on where the opening and closing are in relation to the bar’s range.

doji

Dragonfly doji

The Dragonfly Doji has a long lower shadow, the open, high, and close are at or very near the session’s high. This pattern often signals reversal of downtrend.

dragonflydoji

Gravestone doji

The Gravestone Doji has a long upper shadow, the open, low, and close are at or very near the session’s low. This pattern often signals reversal of an uptrend.

gravestone

High wave candle / long-legged doji

This candle has a very long upper or lower shadow and a small real body. If the opening and closing price are the same the candle has no real body and is then called a Long-Legged Doji. The first picture is a high wave candle the second is a Long-Legged Doji.

longleg

Engulfing candles

The bullish engulfing pattern consists of large white real body that engulfs a small black real body in a downtrend. The bearish engulfing pattern occurs when the bears overwhelm the bulls and is reflected by a long black real body engulfing a small white real body in an uptrend.

engulf

Spinning tops

Spinning tops are simply candles with small real bodies.

spintop

How Candlestick patterns translate into Nial Fuller’s Price Action Setups

My favorite price action setups consist of the pin bar, the inside bar, and my proprietary fakey setup. The above candlestick patterns can easily be condensed down to one of my three price action setups or may be applicable to more than one of my price action setups. It can be difficult to keep track of the various forms of candlestick patterns. This is why I feel like my three main price action setups do a great comprehensive job of including all the relative candlestick patterns and make them easier to understand in the context of daily price action. Let’s take a look at some charts with examples of some of the various candlestick patterns converted into my price action setups.

Pin Bars

The pin bar can include the following previously described candlestick patterns; long lower shadow candles and long upper shadow candles, hammers and shooting stars, dragonfly and gravestone dojis.

pinbar

hammerpin

shootingstarpin

Inside Bars

Inside bars can technically encompass any candlestick pattern because they are simply a series of at least two candlesticks where the first candlestick completely engulfs the entire range of the subsequent candlestick, however, more often than not inside bars end up being spinning tops or dojis. Note, the inside bar is different from the “engulfing pattern” because it includes the entire range of the bar, from high to low, where as the engulfing pattern only includes engulfment of the real body of the candle. I generally trade inside bars in the context of a strongly trending market as they are often great entry points into trends. However, often times inside bars will occur at major market turning points as well as the previous trend loses momentum, pauses and forms an inside bar, and then changes direction.

ib

The Fakey Setup

My fakey setup is essentially a multi-bar pattern that consists of a false break from an inside bar pattern or a key level. The fakey can consist of a number of different candlestick patterns. Often times the fakey setup will consist of a bullish or bearish engulfing pattern which is completely engulfing the range of a spinning top or doji candle which gives rise to a false break bar that can take the form of any of the candlesticks above that qualify as pin bars.

fakey

In Conclusion

Candlestick charts offer a more vivid depiction of price action than what a standard bar chart can provide. Candlestick patterns in and of themselves are useful, however there are many different names and interpretations of candlestick patterns which often can induce confusion and can be hard to keep track of. You will find that my price action educational material condenses all of the important candlestick patterns into 3 simple yet highly effective price action setups. I feel that my take on candlestick patterns expressed via my proprietary ideas on price action trading is a much more efficient, simple, and profitable way to trade candlesticks and I think after studying my forex trading course you will feel the same way.

Good trading,

Nial FullerLearn To Trade Forex

Copyright  2012  www.LearnToTradeTheMarket.com (reproduction of this content without persmission is illegal)

  1. Kenneth Eneh October 1, 2018 at 10:54 pm

    I am learning this one at a time as a newbie.

    Reply
  2. Cordelia September 28, 2018 at 7:39 pm

    Nial is the type of teacher I fell in love with during my secondary school years.

    If all teachers are like you, and if all authors write educational texts the way you write your posts, simple, consise and interesting, then the world of education will be so much easy…
    I love you Nial

    Reply
  3. Thobe September 28, 2018 at 2:07 pm

    Loaded article this.Clarifying all the candlestick patterns..thanks mentor.

    Reply
  4. Sylvanus September 21, 2018 at 3:04 am

    Thanks Nial, is quite a great education on candlestick pattern

    Reply
  5. Ntanin September 1, 2018 at 8:26 am

    Am glad reading this information on candlesticks, thanks very much

    Reply
  6. Ibra Ibrahim mango August 27, 2018 at 9:52 pm

    Thanks for your education of candlestick pattern.

    Reply
  7. Sam June 29, 2018 at 10:38 pm

    Thank you very much

    Reply
  8. Sydney Wentink June 12, 2018 at 5:31 pm

    Great thanks

    Reply
  9. Nomathemba May 18, 2018 at 4:51 am

    Thanks for your explanation Nial, although I still have to go back to these explanation repeatedly so as to master them.

    Reply
  10. Sanjar Ibrokhimov May 16, 2018 at 1:44 pm

    i LIKE IT

    Reply
  11. Nasir Sulaiman May 2, 2018 at 7:50 am

    Its an amazing summary of trading, which I have ever come across thanks to the femous trader

    Reply
  12. Samm Nujomma May 1, 2018 at 9:58 am

    Thumbs up Nial for an educative article. i will try to master the patterns for my trading strategies

    Reply
  13. Bilionea Asigwa April 24, 2018 at 6:36 am

    loved this…

    Reply
  14. Alekhooje Valentine March 3, 2018 at 4:19 pm

    nice article it enlarge my knowledge of trading

    Reply
  15. Falola Jacob Olalekan March 1, 2018 at 4:40 pm

    good but havent understand better

    Reply
  16. shahnazshakiba February 11, 2018 at 4:59 am

    dear fuller thanks for you mr fuller for educat forex they are very good exuss me iam dont know english you are very good i am iranian and love you good by shahnaz iran

    Reply
  17. Siddharth February 9, 2018 at 5:47 pm

    This looks good !
    Is this good enough to detect patterns in real time trading ?

    Reply
  18. ajit January 2, 2018 at 9:34 pm

    fantastic for newbees

    Reply
  19. Mbongiseni Madala December 30, 2017 at 5:30 pm

    Very useful, thanks as I will try my luck using your techniques

    Reply
  20. Pauline Bennett December 29, 2017 at 6:17 am

    thanks. real help to my building blocks of knowledge toward competency when trading.

    Reply
  21. Francesca December 11, 2017 at 12:51 pm

    Great explanation with graphics! Others often just explain candles by descriptions, but having it in graphics makes it more easier to understand.

    Reply
  22. LORRAINE LEBEYA November 24, 2017 at 4:38 am

    BASIC, BETTER AND THE BEST TO MOST I HAVE TRIED TO READ

    Reply
  23. Valerie Riordan November 22, 2017 at 7:34 am

    Explaination is excellent. Thanks Nial.

    Reply
  24. Olanrewaju Shittu November 20, 2017 at 1:53 pm

    Perfect

    Reply
  25. Abdul Matheen October 1, 2017 at 12:45 pm

    GOOD WORK

    Reply
  26. MANOJ September 10, 2017 at 11:36 pm

    EXPLANATION IS GREAT

    Reply
  27. Earnest March 1, 2014 at 2:09 pm

    Loved this so much. Awesome teaching.

    Reply
  28. Nader January 25, 2014 at 10:49 pm

    Thanks Nial for your help and lucid explanation about every aspect of trading.

    I really appreciate your concerns.

    Additionally, for a newbie in Forex , what do you recommend in the first place?
    Is studying books a good start in trading career?

    Thanks

    Reply
  29. chayadi September 7, 2013 at 11:24 pm

    good explanation candlestick

    Reply

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