Basic Japanese Candlestick Patterns
Candlestick chart was developed in 1700s in Japan by a man named Munehisa Homma, originally designed to trade rice futures in the 17th century, he invented a method to analyze the price with an overview of the open, high, low and close prices of each trading day over a certain period of time. A line, known as shadow, was drawn to show the day’s price range and a broader part of the candlestick represents the area between the session’s opening price and the closing price, known as real body.
If the opening price is lower than the closing price (i.e. a rising day), then the body is white; if the opening price is higher than the closing price (i.e. a falling day), then the body is black. As the style of charting is relatively easier to read and understand, it became very popular and analysts relate the chart patterns to various bullish or bearish signals, which were considered quite reliable in predicting future market directions.
The colour (white or black) and the length of the real body exhibit the market forces, whether bulls / demand or bears / supply are winning. Generally speaking, the longer body indicates the more intense in buying or selling pressure (e.g. long white candlesticks reveal strong buying interest, i.e. buyers are very aggressive) whilst shorter real body normally suggests indecisive market situation and further sideways consolidation would take place. According to different combinations of candlesticks, various bullish and bearish patterns were found and we are going to discuss some of those major patterns here.
This is a single candlestick reversal pattern made up of a small real body, ideally to be white but could be black, with a long lower shadow but a very short or even non-existent upper shadow. This candlestick should be formed after a decline, the bottom of the shadow marks a new low and then followed by white candlesticks. Therefore this is grouped under bullish reversal patterns.
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.
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.
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.
Another single candlestick reversal pattern which could be either bullish or bearish, depending on the combinations of the preceding and the subsequent candlesticks formations. A doji star is formed when the opening price and the closing price are virtually the same level (the word doji is actually a Japanese word ‘同市’ which means same price level) which made no real body, the length of the upper and lower shadows can vary and the appearance of the candlestick resembles a plus sign, a cross or an inverted cross. One doji star alone is only a neutral pattern as it indicates a sense of indecision between the bulls and bears, whether it is going to be a bullish or bearish sign mainly depends on the prior and future price developments.
Whenever you see a ‘doji’ candlestick after certain trending moves, you can consider it as a warning sign or a red flag for a possible reversal and one should wait to see if there is candlestick pointing to the other direction after the doji.