Introduction


Traditional methods of chart analysis use bar or point and figure charts. Yet over 100 years before these methods originated, the Japanese were using their own style of technical analysis in the rice market. This style evolved into the candlestick techniques currently used in Japan.

In the 1600s the Japanese were trading forward contracts in rice-called "empty rice", because they were trading rice that wasn't there. Rice was not only Japan's main staple, but it underpinned the economy. Samurai warriors' salaries were rice stipends. These stipends were derived by a rice tax levied by the government. From the peasant on up, the price of rice was crucial.

Although they were not the first to trade forward contracts (the Dutch were in the l 500s), the Japanese were the first to use technical analysis. It's believed Japanese price charts originated around 1750. Some patterns used by the Japanese are similar to our own, but were discovered much earlier. For example, the equivalent of our head and shoulders formation was predated by the Japanese three Buddha pattern. This was related to the Buddhist temples in which there is a large central Buddha with saints on both sides -a perfect analogy to a head and shoulders.

With their extended historical foundation, Japanese candlestick patterns can offer us new insights. Their picturesque names also make them fun to use. Expressions such as "dark cloud covers," "morning stars," and "windows" abound.

These techniques offer a wide spectrum of applications:

  • Candlestick charts are a useful stand alone tool. They can also be merged with other technical tools to create a synergy of techniques.
  • Knowing how the Japanese analyze markets provides valuable information given the extent of their participation in the U.S. financial markets.
  • Certain Japanese candlestick combinations may imply a period of consolidation (therefore a decline in volatility), others hint of a forceful price move (thus a rise in volatility). They give deeper insight into market conditions that could provide benefits to option traders.

The Japanese method of plotting is called candlesticks because the daily lines resemble candles. The candlestick lines, alone and in combination, provide valuable assistance in trading. This report uses American names for the indicators. The "tsutsumi" line is a line that "engulfs" the prior day's price action. So this is called an engulfing line. The Japanese names are in parenthesis. Indicators are illustrated and shown in chart examples.

The patterns illustrated are representative examples. The lines don't have to look exactly as they do in the illustrations to provide a valid signal. And, as with all charting methods, formations are somewhat subject to the interpretation of the user.




Reading the Candlestick Lines

The daily candlestick line illustrates the market high, low, open and close. The thick part of the candlestick is called the "real body". It represents the range between the open and close. When the real body is black (i.e., filled in), as in the Long Black Body below, it means the close was lower than the open. If, as in the Long White Body below, the real body is white (i.e., empty), it means the close was higher than the open.

The thin lines above and below the real body are called the "shadows" and they represent the high and low of the day. The Long Black Body shows a close near the low of the day. The Long White Body shows a close near the high of the day. The relationship between the day's open, high, low and close change the look of the daily candlestick.

Short Line Candlestick Pattern

Long Black Body. This represents a bearish period in the market. Prices experienced a wide range, and the market opened near the high and closed near the low of the period.

Short Line Candlestick Pattern

Long White Body. This is the opposite of a long black body, and represents a bullish period in the market. Again, prices experienced a wide range, however, the market opened near the low and closed near the high of the trading period.

Short Line Candlestick Pattern

Spinning Tops. These are small real bodies, and can be either black or white. The small body repre-sents a relatively tight range between the open and close for the period. In a trading range environ-ment, spinning tops are neutral, but they may be-come important as parts of other chart patterns . (Sec stars and harami later in this report.)

Short Line Candlestick Pattern

Doji Lines. These illustrate periods where the opening and closing prices for the period arc the same. The length of the shadows can vary. As you '11 sec throughout this report, doji lines arc important in a variety of patterns.




Software Solutions

TraderMade offer a number of solutions for working with Candlestick Patterns.

Charting Application with Automated Pattern Recognition

Professional Charting

TraderMade's Professional Research portal contains to accurately identify patterns in any chart that they have on our platform. Candlestick Patterns have been developed over time and are empirically proven, sentiment based prediction of the future market directionality based on patterns found in recent market data.

Out Technincal Analysis Charting Application Professional Charting has built in Candlestick Pattern Recognition


Research Portal

TraderMade's Professional Research portal contains to accurately identify patterns in any chart that they have on our platform. Candlestick Patterns have been developed over time and are empirically proven, sentiment based prediction of the future market directionality based on patterns found in recent market data.

Research Portal with Candlestick Patterns




Questions and Answers

What candlestick pattern is the most reliable?

The tried a testes candlestick patterns that give good results and are east to identify: Doji, Bullish Engulfing Pattern, Bearish Engulfing Pattern, Morning Start and Evening Star.

How many types of candlestick patterns are there?

The short answer is many, and many that you will never see. The best thing to do is concentrate on the the few core patterns that give strong reversal signals and an opportunity to buy. You can read more in our free course.

Is candlestick charting reliable?

Not all candlestick patterns are reliable but there is a core group that are easy to identify and give good signals. Combined with other influencing factors and research they can prove a valuable and reliable tool.

Do you provide a free candlestick pattern course?

Yes click here Candle Stick Pattern Course

Candlestick Pattern Definitions



Dark Cloud Cover | Doji | Doji Star | Dragonfly Doji | Engulfing Patterns | Evening Star| Hammer| Hanging Man| Harami| Harami Cross| High Wave| Hikkake| Long Black Body| Long Legged Doji| Morning Star| Piercing Lines| Rickshaw Man| Shooting Star| Short Line| Spinning Tops| Three Black Crows| Tweezer Bottoms| Tweezer Tops|

Dark Cloud Cover Candlestick Pattern

The Dark Cloud Cover is a bearish pattern. This is the opposite of the piercing line. A strong white body is immediately followed by a black body. To qualify as a Dark Cloud Cover, the black body must open above the high - and close below the centre of - the previous white body. The Dark Cloud Cover has more significance as a top formation than the piercing line does as a bottoming formation. This is because tops are often formed faster than bottoms. Lows are made by indifference. Investors may be attracted to other markets, and in no rush to enter. This explains why bases often build over a relatively long period of time. At tops, however, there is more of a rush to get out. Thus, tops are often made more swiftly than are bottoms.

Dark Cloud Candlestick Pattern

Dark Cloud Cover


Doji Candlestick Pattern

These illustrate periods where the opening and closing prices for the period are the same. The length of the shadows can vary. Doji lines are important in a variety of patterns.

Doji Candlestick Pattern

Doji


Doji Star Candlestick Pattern

The Doji Star appears after a prolonged move, and is composed of a gap and a Doji line (when the open and the close are the same price). This is often the sign of an impending top or bottom. Doji Stars often mark imminent turning points in the market, but more conservative traders should wait for the next day’s body to confirm a change in price trend.

Doji Star Candlestick Pattern

Doji Star


Dragonfly Doji Candlestick Pattern

The Doji Star appears after a prolonged move, and is composed of a gap and a Doji line (when the open and the close are the same price). This is often the sign of an impending top or bottom. Doji Stars often mark imminent turning points in the market, but more conservative traders should wait for the next day’s body to confirm a change in price trend.

Dragonfly Doji Candlestick Pattern

Dragonfly Doji


Engulfing Patterns Candlestick Pattern

The engulfing pattern is a strong reversal signal, especially after a prolonged trend. Only the real body is important in this formation; shadows are virtually ignored. The bearish engulfing pattern has a black real body that engulfs the prior day’s white real body. This pattern is bearish during an uptrend. Conversely, a white body at the bottom of a downtrend that engulfs the prior day’s black body is a potentially bullish signal.

Engulfing Patterns Candlestick Pattern

Bearish - Bullish

Engulfing


Evening Star Candlestick Pattern

The Evening Star formation is the reverse of the Morning Star and is a signal of a potential top in the market. After a long white body, we see a upside gap to a small real body. This is followed by a black body that closes above the midpoint of the white body made just before the star. Aptly named because it appears just before darkness sets in, the evening star is a bearish signal. Basically, the Evening Star is similar to a dark cloud cover with a “star” in the middle.

Evening Star Candlestick Pattern

Evening Star


Hammer Candlestick Pattern

Umbrellas can be either bullish or bearish depending on where they appear in a trend. If they occur during a downtrend, they are called hammers and are bullish, as in “the market is ‘hammering out’ a base”.

Hammers are excellent signals of a market at or near its bottom. At times, they are also important at the lower end of the congestion band.

Hammer Candlestick Pattern

Hammer


Hanging Man Candlestick Pattern

Umbrellas can be either bullish or bearish depending on where they appear in a trend. If they occur during an uptrend, they are called hanging man and are bearish, as in “the market is ‘hammering out’ a base”.

The ominous name of the hanging man line (derived because it looks like a hanging man with dangling legs) hints at its bearish nature. If one appears at the top of a prolonged uptrend, it’s usually time to vacate long positions.

Hanging Man Candlestick Pattern

Hanging Man


Harami Candlestick Pattern

This is similar to an inside day in contemporary Western analysis. But while an inside day is usually considered neutral, the Harami Line is an indication of a waning in momentum. The small body of the Harami line is contained within the long body directly preceding it.

Harami Candlestick Pattern

Bearish - Bullish

Harami


Harami Cross Candlestick Pattern

This is similar to an inside day in contemporary Western analysis. But while an inside day is usually considered neutral, the Harami Cross is an indication of a waning in momentum.

Harami Cross indicates that the market is at a point of indecision and a trend change, or reversal, is possible. We have found that the Harami Cross pattern is useful in forecasting trend changes - especially after a long white body in an uptrend.

Harami Cross Candlestick Pattern

Bearish - Bullish

Harami Cross


High Wave Candlestick Pattern

The High Wave pattern has a small body and longer shadows and represents uncertainty and lack of consensus in the market therefore a potential change in the trend.

High Wave Candlestick Pattern

High Wave


Hikkake Candlestick Pattern

The Hikkake pattern is similar to the Three Inside Up pattern but with no restraints. This pattern does not require a downtrend nor does the direction of the candles. This can be both a continuation of a trend or reversal depending on the direction of the breakout - above or below the previous high/low.

Hikkake Candlestick Pattern

Bearish - Bullish

Hikkake


Long Black Body Candlestick Pattern

This represents a bearish period in the market. Prices experienced a wide range, and the market opened near the high and closed near the low of the period.

Long Black Body Candlestick Pattern

Long Black Body


Long Legged Doji Candlestick Pattern

Similar to the Rickshaw Man candlestick pattern, the candle has long upper and lower shadows meaning that the price has moved up and down significantly before it closed or near to the opening price.

Long Legged Doji Candlestick Pattern

Long Legged Doji


Long White Body Candlestick Pattern

This is the opposite of a long black body, and represents a bullish period in the market. Again, prices experienced a wide range, however, the market opened near the low and closed near the high of the trading period.

Long White Body Candlestick Pattern

Long White Body


Morning Star Candlestick Pattern

The Morning Star pattern is a signal of a potential bottom in the market. It is aptly called a Morning Star because it appears just before the sun rises (in the form of higher prices). After a long black body, we see a downside gap to a small real body. This is followed by a white body that closes above the midpoint of the black body made just before the star. The Morning Star is similar to a piercing line with a “star” in the middle.

Morning Star Candlestick Pattern

Morning Star


Piercing Lines Candlestick Pattern

The piercing line is a bullish pattern. This combination is composed of a long black body followed by a white body. The white body should open lower and then close above the centre of the black body. Basically, the market gaps lower on the opening and then retraces to close above the midpoint of the previous period’s black body. If the white body does not “pierce” this halfway point, more weakness can be expected in the market. We have found this pattern to be most significant in a downtrend, or at the lower end of a congestion band.

Piercing Lines Candlestick Pattern

Bullish - Bearish

Piercing


Rickshaw Man

The Rickshaw Man is a reversal pattern, which indicates indecision and a lack of direction - and when formed in a strong trend it therefore signals a reversal.

Rickshaw Man Candlestick Pattern

Rickshaw Man


Shooting Star

The Shooting Star pattern appears at short-term tops in the market, and is a bearish signal. As its name suggests, the Shooting Star is a small real body at the lower end of the price range with a long upper shadow.

Shooting Star Candlestick Pattern

Shooting Star


Spinning Tops

The Spinning Top is a reversal pattern, this occurs when a small body has a long upper and lower shadow, which are at least twice as long as the body.

Spinning Tops Short Line Candlestick Pattern

Bullish - Bearish

Spinning Top


Three Black Crows

Crows being an ominous bird, this is a bearish pattern. After a long white body we see a series of three black bodies. There is an upside gap between the white body and first black body. Shadows are ignored. The second black body closes lower than the first. Although an upside gap is usually bullish in contemporary analysis, this pattern is bearish in candles.

Three Black Crows Candlestick Pattern

Three Black Crows


Tweezer Bottoms

In a falling market, a Tweezer Bottom is formed when the lows are the same (including any lower shadows). We have found that the Tweezer is more important when it confirms either another bearish line (for a top) or bullish line (for a bottom).

Tweezer Bottoms Candlestick Pattern

Tweezer Bottoms


Tweezer Tops

A Tweezer formation is simply two lines with matching highs or lows. The Tweezer could be composed of candle lines with real bodies and/or dojis, and could occur on consecutive or nearby periods. The pattern is similar to the double top or bottom in traditional Western technical analysis. In a rising market, a Tweezer Top is formed when the highs, including any upper shadow, match on consecutive or nearby periods. This would be a bearish reversal indicator.

Tweezer Tops Candlestick Pattern

Tweezer Tops