JAPANESE CANDLESTICK

SIMPLIFIED

Discover the Secret And Function of Candlestick Chart in Technical Analysis

advancechartist@gmail.com
 JAPANESE CANDLESTICK SIMPLIFIED

TABLE OF CONTENT

1.0 INTRODUCTION AND HISTORY OF

CANDLESTICK
2.0 CANDLE READING
3.0 VARIOUS TYPES OF CANDLE
4.0 VARIOUS CANDLESTICK STRATEGY
5.0 WEAKNESS OF CANDLESTICK
1.0 History of Candlestick
This is an ancient Japanese method of technical analysis, used in trading rice in 1600's. It was
used in trading rice contracts from 1710 onwards. So candlesticks are also called 'Japanese
Candlesticks' or simply 'Japanese Candle'.

The history of candlestick charting dates back to 16th century. It was developed by Japanese
traders in 1600's, to trade rice contracts. Until about 1710, only physical rice was being
traded. Later a futures market emerged where 'coupons', were issued, which were records
of promise of delivery of rice at a future time. This is the beginning of futures trading.

The Japanese candlesticks charts became very popular due to the level of ease in reading
and understanding the graphs. The Japanese rice traders also found that the resulting charts
would provide a fairly reliable tool to predict future demand.

At this juncture Homma Munehisa (1724-1803) a rice trader from Sakata, Japan, organized
this ancient wisdom, developed and used Japanese candlestick charting very successfully. He
was the one who developed candlestick as it is until now.

Steve Nison, understood the startling power of Japanese candlestick charts and popularized
this method to the Western Hemisphere. He is acknowledged as the leading authority on the
subject. Articles written by Steve Nison that explain Candlestick charting appeared in the
December, 1989 and April, 1990 issues of Futures Magazine. He has written a definitive book
on the subject, by name Japanese Candlestick Charting Techniques.
FIGURE 1: HOMMA MUNIESA (DEVELOPE JAPANESE CANDLESTICK)
FIGURE 2: STEVE NISON (INTRODUCE CANDLESTICK TO THE WEST)
2.0 Japanese Candlestick

Candlestick charting allows a quick read on changes in supply and demand. By

analysing the daily price movements of an issue using candlesticks, a trader is able to
confirm evidence of trend reversal very early on.

Candlesticks draw an inductive, as opposed to deductive, view of markets – the facts

are presented graphically, one has only to see and understand. The candlestick graph
is comprised of both red / black and green / white candle bodies, often with "wicks"
at both ends.
Bullish Candlestick
A single green / white candlestick body highlights that the opening price was at the
bottom of the body of the candlestick. In the case where the candle has wicks on either
end, the bottom wick symbolizes the low prices traded during that period and the top
wick points to the high of the period.

FIGURE 3: WHITE OR GREEN CANDLE

Bearish Candlestick

Whenever a candle body is black / red, the opening price is the top of the candle body
and the closing price is the bottom of the candle body. Again, if there are wicks, they
signify intra-day highs and lows. Candlestick charts are considered to be much more
visually attractive than a standard two dimensional bar chart. Similar to a standard bar
chart, there are four elements needed to construct a candlestick chart, the Open, High,
Low and Closing price for a given time period.

Given below are the illustrations of candlesticks and a definition for each candlestick
component.

FIGURE 4: RED OR BLACK CANDLE

3.0 Types of Candlesticks

1. MAROBUZU
Recognition: A candlestick with no shadow extending from
the body at either the open, the close or at both.

Sentiment: Black (Bearish), White (Bullish)

2. Harami
Recognition:

A two candle pattern forming in a down trending price pattern.

The body of the first candle is the same color as the current
trend and should be a long black candle. The body of the second
candle is white and opens and closes within the body of previous
day's candle.

Sentiment: Bullish

FIGURE 5: BULLISH HARAMI

3. BEARISH Harami

Recognition:

A two candle pattern forming in an uptrending price pattern. The

body of the first candle is the same color as the current trend
and should be a long white candle. The body of the second
candle is black and opens and closes within the body of the
previous day's candle.

Sentiment: Bearish

FIGURE 6: BEARISH HARAMI

4. Piercing Recognition: A two candle pattern, the body of the first
candle is white and the body of the second candle is black.
The black day opens higher, above the trading range of the
previous day. The price closes below the 50% level of the
white body.

Sentiment: Bullish (After strong downtrend)

FIGURE 7: BULLISH PIERCING

5. Doji

Recognition: The open and close are the same or very close
to the same.

Sentiment: Neutral

However, next candle (upon closing) movement determine

which direction it will go.

6. Bullish Engulfing

Recognition: The body of the second day completely

engulfs the body of the first day. Shadows are not a
consideration.

Sentiment: Bullish
7. Bearish Engulfing

Recognition: The body of the second day completely

engulfs the body of the first day. Shadows are not a
consideration.

Sentiment: Bearish

8. Abandoned Baby

Recognition: A rare reversal pattern characterized by a gap

followed by a Doji, which is then followed by another gap
in the opposite direction. The shadows on the Doji must
completely gap below or above the shadows of the first and
third day.

Sentiment: Reversal. The third candle shows the real

direction

9. Hammer Recognition: The lower shadow (or tail) should be at least

three times the length of the body. The color of the body is
not important although a black body has slightly more
Bearish indications and a white body has slightly more
Bullish indications.

Sentiment: Reversal
10. Morning Star Recognition: A three candle pattern at the bottom of a
downtrend. The body of the first candle is black, confirming
the current downtrend. The second candle is an indecisive
formation. The third candle is white and should close at
least halfway up the black candle.

Sentiment: Bullish

11. Evening Star

Recognition: A three candle pattern at the top of an

uptrend. The body of the first candle is white, confirming
the current uptrend. The second candle is an indecisive
formation. The third candle is black and should close at
least halfway down the white candle.

Sentiment: Bearish

12. Shooting Star

Recognition: One candle pattern appearing in an uptrend.

The shadow (or tail) should be at least two times the length
of the body. The color of the body is not important,
although a black body has slightly more Bearish indications.

Sentiment: Bearish (Sentiment Change)

13. Bullish Kicker

Recognition: The first day's open and the second day's open
are the same BUT the price movement is in opposite
directions. Usually gap up on the second candle. This
indicate major sentiment change from seller to buyer

Sentiment: Bullish (Bearish kicker the opposite)

Gap Up

14. Dark Cloud Cover Recognition: A bearish reversal pattern that continues the
uptrend with a long white body. The next day opens at a
new high then closes below the midpoint of the body of the
first day.

Sentiment: Bearish

15. Candle Continuation Recognition: A bullish reversal pattern consisting of three

Three White Soldier consecutive long white bodies. Each should open within the
previous body and the close should be near the high of the
day.

Sentiment: Bullish (Continuation)

Importance of Candlestick
a. To indicate reversal point at Major Point

FIGURE 8: SIDEWAY MOVEMENT

Scenario above showing on the price movement of the stock price in candle
formation. When we had identify the movement of price action of a stock price, we
are able to predict market movement at some point ex: at the support and resistance
line.

The scenario is an example of sideways movement of a stock price. Sideways

movement is a movement of the price move in a certain price range. The stock is call
sideway because it make no advancement in either to uptrend nor downtrend. Thus,
this is what we call as sideways movement.

When a price move in a sideways movement by making a rebound at one certain

psychological line that we call as support and resistance, we could be able to
anticipate that reversal would happen.

Thus, at this price point you should anticipate a reversal (temporary or strong
reversal) at the support or resistance line and observe for any candlestick reversal to
appear.
Various important trading signal:

FIGURE 9: DOJI

FIGURE 10: DOJI IN TREND

Some techniques use candlestick to trend
continuation.
Candlestick is not originally use for prediction but has largely impact the world of trading with make
traders possible to see market movement with its shape close and open candle formation. By research
by experienced traders, some movement of groups of candlestick can be used as an indication to
estimate future market movement. And this movement usually reliable to predict to market trends
especially for the use in the near term.

Thus, yet still, it cannot be use for price target setting but actually can be used as a signal to market
continuation movement.

In a price level of potential market reversal usually cannot be trace by candlestick alone as it cannot
be use to set as price target. Price target of potential reversal can be use by other advance chartist
method, tools or can also be determine easy and accurately by normal support and resistance line.
Candlestick reversal is usually being use to indicate that the reversal at a price point is real. It also to
indicate a support and resistance line is strong or not.

This is one example how to use candlestick for price continuation. Usually we use a technique that is
call a group candle counting.
 9
8 9

7
6

Figure: Single and Group Candle Counting

4-8-12 Candle Trending Method

Candlestick Weakness of candlestick

a. Did not give price target

Sadly to say, candlestick does not have ability to give traders any price target and how
far a trend can continue and REACH IT PIT STOP.

Unless it is being use with other technical analysis tools. Even though, most of the time
most of people does not use it for price target, just an ease for people to notice price
reversal at certain crucial price point.
THE END.
THANK YOU..