The Magic of Japanese Candlestick

The Magic of Japanese Candlestick

Varun Aggarwal 24/05/2020 6
The Magic of Japanese Candlestick

Candlesticks are formed using the open, high, low, and close of a particular time period. 

Open (O), high (H), low (L), and close (C) serves as the best way to summarise the trading action for the given period, we need a charting technique that displays this information in the most comprehensible way. If not for a good charting technique, charts can get quite complex. Each trading day has four data points i.e. the OHLC. If we are looking at a 10-day chart, we need to visualize 40 data points (1-day x 4 data points per day). So you can imagine how complex it would be to visualize 6 months or a year’s data.

The Magic of Japanese Candlestick

History of the Japanese Candlestick

Before we jump in, it is worth spending time to understand in brief the history of the Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan.

The fundamental theory and concepts behind Japanese Candlesticks were invented over three hundred years ago by a Japanese rice trader named Sokyu Honma (1716 -1803). Sokyu lived in Sakata, Japan and was also known as Sokyu Homma and Munehisa Homma.

The Magic of Japanese Candlestick


He made extensive studies of the price movements of stocks and commodities, especially rice, which enabled him to identify traits and patterns from daily trading formations. He was then able to produce a very viable trading strategy that made him a very wealthy man. In fact, he eventually developed a very fearsome reputation for diligent and accurate trading which he gained from exploiting his enhanced knowledge of the rice markets and candlestick strategies. He compiled a book in 1755 called the ‘Fountain of Gold – the Three Monkey Record of Money’ in which he detailed his findings and observations on the psychology of trading.

You can gain a deeper understanding about the power of three if you study the main components of the Sakata Five Methods. They were:

1. The ‘Three Mountains’ or ‘Sanzan’ depicted trading patterns similar to the modern day ‘Head and Shoulders’.

2. The ‘Three Rivers’ or ‘Sansen’ was indicative of the shift in power between the two market forces of selling and buying.

3. The ‘Three Gaps’ or ‘Sanku’ identified saturation or exhaustion points in the direction of the current trend and, as such, was consider as a forecaster of potential reversals.

4. The ‘Three Parallel Lines’ or ‘Sanpei’ represented a continuation pattern that strongly suggested that the current trend was most likely to continue in its present direction.

5. The ‘Three Methods’ or ‘Sanpo’ indicated again that the current prevailing market force was strong enough to maintain the direction of the present price trend.

Though the candlesticks have been in existence for a long time in Japan, and are probably the oldest form of price analysis, the western world traders were clueless about it. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he introduced the methodology to the rest of the world. He authored the first-ever book on candlesticks titled “Japanese Candlestick Charting Techniques” which is still a favourite amongst many traders.

Most of the pattern in candlesticks still retains the Japanese names; thus giving an oriental feel to technical analysis.

Candlestick Anatomy

While in a bar chart the open and the close prices are shown by a tick on the left and the right sides of the bar respectively, however in a candlestick the open and close prices are displayed by a rectangular body.

The Magic of Japanese Candlestick

In a candlestick chart, candles can be classified as a bullish or bearish candle usually represented by blue/green/white and red/black candles respectively. Needless to say, the colours can be customized to any color of your choice; the technical analysis software allows you to do this. In this article, we have opted for the blue and red combination to represent bullish and bearish candles respectively.

Let us look at the bullish candle. The candlestick, like a bar chart, is made of 3 components.

The Magic of Japanese Candlestick

1.    The Central real body – The real body, rectangular connects the opening and closing price

2.    Upper shadow – Connects the high point to the close

3.    Lower Shadow – Connects the low point to the open

Have a look at the image below to understand how a bullish candlestick is formed:

This is best understood with an example. Let us assume the prices as follows.

Bullish Candle

Open = 62

High = 70

Low = 58

Close = 67

Likewise, the bearish candle also has 3 components:

The Magic of Japanese Candlestick

1.    The Central real body – The real body, rectangular which connects the opening and closing price. However, the opening is at the top end and the closing is at the bottom end of the rectangle

2.    Upper shadow – Connects the high point to the open

3.    Lower Shadow – Connects the Low point to the close

This is how a bearish candle would look like:

This is best understood with an example. Let us assume the prices as follows.

The Magic of Japanese Candlestick

Open = 456

High = 470

Low = 420

Close = 435

Time Frames

A time frame is defined as the time duration during which one chooses to study a particular chart. Some of the popular time frames that technical analysts use are:

o  Monthly Charts

o  Weekly charts

o  Daily or End of day(EOD) charts

o  Intraday charts – Hourly 1, 2, 3 and 4 hours, Minutes - 60 minutes, 30 minutes, 15 minutes, 5 minutes and 1 minute

One can customize the time frame as per their requirement. For example, a high-frequency trader may want to use a 1-minute chart as opposed to any other time frame.

As you can see from the table below as and when the time frame reduces, the number of candles (data points) increase. Based on the type of trader you are, you need to take a stand on the time frame you need.

The Magic of Japanese Candlestick

The data can either be information or noise. As a trader, you need to filter information from noise. For instance, a long term investor is better off looking at weekly or monthly charts as this would provide information. While on the other hand an intraday trader executing 1 or 2 trades per day is better off looking at the end of the day (EOD) or at best 15 min charts. Likewise, for a high-frequency trader, 1-minute charts can convey a lot of information.

So based on your stance as a trader you need to choose a time frame. This is extremely crucial for your trading success because a successful trader looks for information and discards the noise.

1.    Conventional chart type cannot be used for technical analysis as we need to plot 4 data points simultaneously.

2.    A line chart can be used to interpret trends but besides that, no other information can be derived.

3.    Bar charts lack visual appeal and one cannot identify patterns easily. For this reason, bar charts are not very popular.

4.    There are two types of candlesticks – Bullish candle and Bearish candle. The structure of the candlestick, however, remains the same.

5.    When close > open = It is a Bullish candle. When close < open = It is a Bearish candle.

6.     Time frames play a very crucial role in defining trading success. One has to choose this carefully.

7.     The number of candle increases as and when the frequency increases.

8.     Traders should be in a position to discard noise from relevant information.

The big assumption - History tends to repeat itself (Deja Vu)

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As mentioned earlier one of the key assumptions in technical analysis is that, we rely on the fact that the history tends to repeats itself. This probably is one of the most important assumptions in Technical Analysis. According to the assumption – History tends to repeat itself. However, we need to make an addendum to this assumption. When a set of factors that have panned out in the past tends to repeat itself in the future, we expect the same outcome to occur, as was observed in the past, provided the factors are the same.

Candlestick patterns and what to expect

The candlesticks are used to identify trading patterns. Patterns, in turn, help the technical analyst to set up a trade. The patterns are formed by grouping two or more candles in a certain sequence. However, sometimes powerful trading signals can be identified by just a single candlestick pattern. Hence, candlesticks can be broken down into single candlestick pattern and multiple candlestick patterns. Candlestick patterns help the trader develop a complete point of view. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop loss price.

Few assumptions specific to candlesticks

Before we jump in and start learning about the patterns, there are few more assumptions that we need to keep in mind. These assumptions are specific to candlesticks. Do pay a lot of attention to these assumptions as we will keep referring back to these assumptions quite often later. At this stage, these assumptions may not be very clear to you. We will explain them in greater detail as and when we proceed. However, do keep these assumptions in the back of your mind:

o  Buy strength and sell weakness – Strength is represented by a bullish (blue) candle and weakness by a bearish (red) candle. Hence whenever you are buying ensure it is a blue candle day and whenever you are selling, ensure it’s a red candle day.

o  Be flexible with patterns (quantify and verify) – While the textbook definition of a pattern could state certain criteria, there could be minor variations to the pattern owing to market conditions. So one needs to be a bit flexible. However, one needs to be flexible within limits, and hence it is required to always quantify the flexibility.

Look for a prior trend – If you are looking at a bullish pattern, the prior trend should be bearish and likewise if you are looking for a bearish pattern, the prior trend should be bullish

The single candlestick pattern

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As the name suggests, a single candlestick pattern is formed by just one candle. So as you can imagine, the trading signal is generated based on one trading candle. The trades based on a single candlestick pattern can be extremely profitable provided the pattern has been identified and executed correctly.

One needs to pay some attention to the length of the candle while trading based on candlestick patterns. The length signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity. If the candles are short, it can be concluded that the trading action was subdued.

The Marubozu

The Magic of Japanese Candlestick

the Marubozu candlestick pattern is a one-candle, easy-to-spot signal with a very clear meaning. It comes in both a bearish (red or black) and a bullish (green or white) form, and it commands attention with its long and sturdy shape. The word Marubozu means “Bald” in Japanese.

The text book defines Marubozu as a candlestick with no upper and lower shadow (therefore appearing bald). A Marubozu has just the real body as shown below. However, there are exceptions to this. We will look into these exceptions shortly.

Bullish Marubozu

The absence of the upper and lower shadow in a bullish Marubozu implies that the low is equal to the open and the high is equal to the close. Hence whenever the, Open = Low and High = close, a bullish Marubozu is formed.

The Magic of Japanese Candlestick

A bullish Marubozu indicates that there is so much buying interest in the stock that the market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. It does not matter what the prior trend has been, the action on the Marubozu day suggests that the sentiment has changed and the stock in now bullish.

The expectation is that with this sudden change in sentiment there is a surge of bullishness and this bullish sentiment will continue over the next few trading sessions. Hence a trader should look at buying opportunities with the occurrence of a bullish Marubozu. The buy price should be around the closing price of the Marubozu.

Live Example :

The Magic of Japanese Candlestick

Please Note : If a Bullish Marubozu has small upper shadow, it can be called as Bullish Belthold.

Bearish Marubozu

Bearish Marubozu indicates extreme bearishness. Here the open is equal to the high and close the is equal to low. Open = High, and Close = Low.

The Magic of Japanese Candlestick

A bearish Marubozu indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. It does not matter what the prior trend has been, the action on the Marubozu day suggests that the sentiment has changed and the stock is now bearish.

The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions and hence one should look at shorting opportunities. The sell price should be around the closing price of the Marubozu.

Live Example :

The Magic of Japanese Candlestick

Please Note : If a Bearish Marubozu has small lower shadow, it can be called as Bearish Belthold.

Marubozu Trap

Avoid trading during an extremely small (below 1% range) or long candle (above 10% range).

A small candle indicates subdued trading activity and hence it would be difficult to identify the direction of the trade. On the other hand, a long candle indicates extreme activity. The problem with lengthy candles would be the placement of stop-loss. The stop-loss would be deep and in case the trade goes wrong the penalty to pay would be painful. For this reason, one should avoid trading on candles that are either too short or too long.

Key takeaways:

1)   Remember the rules based on which candlesticks work

2)   A bullish Marubozu indicates bullishness

  • Buy around the closing price of a bullish Marubozu
  • Keep the low of the Marubozu as the stoploss
  • A bearish Marubozu indicates bearishness

3)   A bearish Marubozu indicates bearishness

  • Sell around the closing price of a bearish Marubozu
  • Keep the high of the Marubozu as the stoploss

4)   An aggressive trader can place the trade on the same day as the pattern forms

5)   An abnormal candle length should not be traded unless other parameters are also suggesting same.

a)    Short candle indicates subdued activity

b)   Long candle indicates extreme activity, however placing stoploss becomes an issue.

The Spinning Top

The spinning top is a very interesting candlestick. Unlike the Marubozu, it does not give the trader a trading signal with specific entry or an exit point. However, the spinning top gives out useful information with regard to the current situation in the market. The trader can use this information to position himself in the market.

The Magic of Japanese Candlestick

Two things are quite prominent…

o  The candles have a small real body

o   The upper and lower shadow are almost equal

What do you think would have transpired during the day that leads to the creation of a spinning top? On the face of it, the spinning top looks like a humble candle with a small real body, but in reality there were a few dramatic events which took place during the day.

Now think about the spinning top as a whole along with all its components i.e. real body, upper shadow, and lower shadow. The bulls made a futile attempt to take the market higher. The bears tried to take the markets lower and it did not work either. Neither the bulls nor the bears were able to establish any influence on the market as this is evident with the small real body. Thus Spinning tops are indicative of a market where indecision and uncertainty prevails. Variations in formation of spinning top can also be possible.

The Magic of Japanese Candlestick

If you look at a spinning top in isolation, it does not mean much. It just conveys indecision as both bulls and bears were not able to influence the markets. However, when you see the spinning top with respect to the trend in the chart it gives out a really powerful message based on which you can position your stance in the markets.

Live Example (Bearish) :

The Magic of Japanese Candlestick

Live Example (Bullish) :

The Magic of Japanese Candlestick

Remember, a spinning top has a small real body. The upper and lower shadows are almost equal in length. The colour of the spinning top does not matter. What matters is the fact that the open and close prices are very close to each other. Spinning tops conveys indecision in the market with both bulls and bears being in equal control.

The Dojis

The Dojis are very similar to the spinning tops, except that it does not have a real body at all. This means the open and close prices are equal. Doji provide crucial information about the market sentiments and is an important candlestick pattern. There are different variations of the pattern, namely the common doji, gravestone doji, dragonfly doji, long-legged doji and four price doji.

The Magic of Japanese Candlestick

The classic definition of a doji suggests that the open price should be equal to the close price with virtually a non-existent real body. The upper and lower wicks can be of any length.

However, keeping in mind the rule i.e. ‘be flexible, verify and quantify’ even if there is a wafer thin body, the candle can be considered as a doji.

Obviously the color of the candle does not matter in case of a wafer thin real body. What matters is the fact that the open and close prices were very close to each other.

The Doji's have similar implications as the spinning top. Whatever we learnt for spinning tops applies to Doji's as well. In fact, more often than not, the Doji's and spinning tops appear in a cluster indicating indecision in the market.

Have a look at the chart below, where the Doji appear in a downtrend indicating indecision in the market before the next big move.

The Magic of Japanese Candlestick

Here is another chart where the doji appears after a healthy up trend after which the market reverses its direction and corrects.

The Magic of Japanese Candlestick

So the next time you see either a Spinning top or a Doji individually or in a cluster, remember there is indecision is the market. The market could swing either ways and you need to build a stance that adapts to the expected movement in the market.

Long Legged Doji : Consists of a Doji with very long upper and lower shadows. Indicates strong forces balanced in opposition. The stop loss would be placed at the top of the upper wick on the Long-Legged Doji.

The Magic of Japanese Candlestick
The Magic of Japanese Candlestick

Dragonfly Doji (Bullish Pattern) : Formed when the opening and the closing prices are at the highest of the day. If it has a longer lower shadow it signals a more bullish trend. When appearing at market bottoms it is considered to be a reversal signal. Auspicious sign, signal bullish trend.

The Magic of Japanese Candlestick
The Magic of Japanese Candlestick

Gravestone Doji (Bearish Pattern) : Formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow it signals a bearish trend. When it appears at market top it is considered a reversal signal.

The Magic of Japanese Candlestick

The Four Price Doji : is simply a horizontal line with no vertical line above or below the horizontal. This Doji pattern signifies the ultimate in indecision since the high, low, open and close (all four prices represented) by the candle are the same. If formed with gap of previous candle from bottom(Bullish) and vice-versa.

The Magic of Japanese Candlestick

Paper Umbrella

The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades. The interpretation of the paper umbrella changes based on where it appears on the chart.

The Magic of Japanese Candlestick

A paper umbrella consists of two trend reversal patterns namely the hanging man and the hammer. The hanging man pattern is bearish and the hammer pattern is relatively bullish. A paper umbrella is characterized by a long lower shadow with a small upper body.

If the paper umbrella appears at the bottom end of a downward rally, it is called the ‘Hammer’.

If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging man’.

To qualify a candle as a paper umbrella, the length of the lower shadow should be at least twice the length of the real body. This is called the ‘shadow to real body ratio’.

Let us look at this example: Open = 100, High = 103, Low = 93, Close = 103 (bullish candle). Here, the length of the real body is Close – Open i.e. 103-100 = 3 and the length of the lower shadow is Open – Low i.e. 100 – 93 = 7. As the length of the lower shadow is more than twice of the length of the real body; hence we can conclude that a paper umbrella has formed.

The Hammer formation

The bullish hammer is a significant candlestick pattern that occurs at the bottom of the trend. A hammer consists of a small real body at the upper end of the trading range with a long lower shadow. The longer the lower shadow the more bullish the pattern.

The chart below shows the presence of hammer formed at the bottom of a down trend.

The Magic of Japanese Candlestick
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Notice the hammer has a very tiny upper shadow, which is acceptable considering the “Be flexible – quantify and verify” rule.

A hammer can be of any color as it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. However, it is slightly more comforting to see a blue colored real body.

The Hanging Man

If a paper umbrella appears at the top end of a trend, it is called a Hanging man. The bearish hanging man is a single candlestick, and a top reversal pattern. A hanging man signals a market high. The hanging man is classified as a hanging man only if is preceded by an uptrend.  Since the hanging man is seen after a high, the bearish hanging man pattern signals selling pressure.

The Magic of Japanese Candlestick

A hanging man can be of any color and it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. The prior trend for the hanging man should be an uptrend, as highlighted by the curved line in the chart above.

The thought process behind a hanging man is as follows:

1.    The market is in an uptrend, hence the bulls are in absolute control.

2.    The market is characterized by new highs and higher lows.

3.    The day the hanging man pattern appears, the bears have managed to make an entry.

4.    This is emphasized by a long lower shadow of the hanging man.

The Shooting Star

The price action on the shooting star is quite powerful, thus making the shooting star a very popular candlestick pattern to trade.

The shooting star looks just like an inverted paper umbrella.

The Magic of Japanese Candlestick
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Unlike a paper umbrella, the shooting star does not have a long lower shadow. Instead it has a long upper shadow where the length of the shadow is at least twice the length of the real body. The colour of the body does not matter, but the pattern is slightly more reliable if the real body is red. The longer the upper wick, the more bearish is the pattern. The small real body is a common feature between the shooting star and the paper umbrella. Going by the text book definition, the shooting star should not have a lower shadow, however a small lower shadow, as seen in the chart above is considered alright. The shooting star is a bearish pattern; hence the prior trend should be bullish.

The expectation is that the bears will continue selling over the next few trading sessions, hence the traders should look for shorting opportunities.

Inverted Gammer

The inverted hammer is a type of candlestick pattern found after a downtrend and is usually taken to be a trend-reversal signal. The inverted hammer looks like an upside down version of the hammer candlestick pattern, and when it appears in an uptrend is called a shooting star.

The pattern is made up of a candle with a small lower body and a long upper wick which is at least two times as large as the short lower body. The body of the candle should be at the low end of the trading range and there should be little or no lower wick in the candle.

The long upper wick of the candlestick pattern indicates that the buyers drove prices up at some point during the period in which the candle was formed, but encountered selling pressure which drove prices back down to close near to where they opened. When encountering an inverted hammer, traders often check for a higher open and close on the next period to validate it as a bullish signal.

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Important Points :

1.    A paper umbrella has a long lower shadow and a small real body. The lower shadow and the real body should maintain the ‘shadow to real body’ ratio. In case of the paper umbrella the lower shadow should be at least twice the length of the real body.

2.    Since the open and close prices are close to each other, the color of the paper umbrella should not matter.

3.    If a paper umbrella appears at the bottom of a down trend, it is called the ‘hammer’.

4.    If the paper umbrella appears at the top end of an uptrend, it is called the hanging man.

5.    The shooting star is a bearish pattern which appears at the top end of the trend. One should look at shorting opportunities when a shooting star appears.

6. If the inverted paper umbrella appears at the bottom end of downtrend-trend, it is called the Inverted Hammer.

Double Candlestick Patterns

The Magic of Japanese Candlestick

Bullish Engulfing

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A reversal pattern that produces a bullish signal when a bearish candlestick is followed by a larger bullish candlestick. It should be ignored if the combination of the two candlesticks does not occur after a downtrend. The shorter the body of the bearish candlestick, the longer the body of the bullish candlestick, and the stronger the signal. This pattern is usually an important reversal signal.

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Bearish Engulfing

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It is the exact opposite of the bullish engulfing pattern. After a defined uptrend, an engulfing bearish pattern is formed when a bullish candlestick is followed by a larger bearish candlestick. The shorter the body of the bullish candlestick, the longer the body of the bearish candlestick, and the more powerful the signal is.

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Bullish Counterattack

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The Counterattack Bullish is a bullish reversal pattern represented by two candles. During a downward trend, a first decreasing candle with a long body and short wick, is followed by a second candle heading upwards and closing near the first candle’s close.

As the name suggests, the pattern represents a bullish counterattack. During a downtrend, a green candle with medium-long body forms and closes at the same level as the previous candle. 

The long green candle means that the bulls have strongly rejected the downtrend, probably due to the price has reached a support and the price can go up. This pattern is likely to lead to a new uptrend or a pull-back. Therefore, if selected in your strategy, it would open a position.

The Magic of Japanese Candlestick

Bearish Counterattack

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The Bearish Counter-Attack candlestick pattern is a bearish reversal candlestick pattern. A Bearish Counter-Attack candlestick pattern can lead to a swift price reversal to the downside.

An uptrend has been in place for some time and bullish investors feel good about the momentum of the share price. A Bearish Counter-Attack candlestick pattern starts off with much more of the same, maybe even a little too much jubilee as the price opens with a gap-up compared to the previous candlestick pattern's closing price. Bullish investors are feeling great about the morning gap-up.

But somewhere in the middle of the trading period, things change. Investors are selling shares and by the end of the trading period the closing price for the candlestick is the same, or even slightly below the previous candlestick's closing price. Hence the "counter-attack" naming convention.

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Requirements

These are the requirements for a Bearish Counter-Attack candlestick pattern.

  • A Bearish Counter-Attack candlestick pattern is made up of 2 candlesticks
  • The 1st candlestick in the pattern has a green colored real body
  • The 2nd candlestick in the pattern gaps higher at the open than the 1st candlestick's closing share price
  • The closing share price, even after the initial gap-up, closes at the same or almost the same share price as the 1st candlestick in the pattern
  • The Bearish Counter-Attack is confirmed on the 3rd candlestick if the share price continues the reversal of momentum that started to take place with the 2nd candlestick

Dark Cloud Cover

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A bearish candlestick appears after a long bullish candlestick. The bearish period gaps above the high of the bullish and closes below the midpoint of the bullish candle’s body. This may indicate the end of a bullish trend and signals a selling opportunity. This pattern is a reversal signal but it should be ignored if it does not occur after an uptrend.

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Piercing Line

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This is a reversal bullish signal. You should ignore this if it does not occur after a downtrend. The bullish candlestick opens below the low of the previous bearish candlestick. However, prices move higher and the candlestick closes above the midpoint of the previous bearish candlestick body.

Characteristics of a piercing pattern:

  • Occurs at the bottom of a downtrend
  • Includes a bearish and bullish candle
  • The bullish candle opens lower than the close of the bearish candle
  • Bullish candle then closes above the 50% level of the bearish candle body
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What does this tell traders?

  • Potential trend reversal to the upside (bullish reversal)
  • Bears (sellers) are losing impetus at this key price level

Bullish Harami Line

As a potential market reversal, the harami line is a sign of consolidation in the market. It implies that the market can reverse upward and traders may need to wait for a confirmation before deciding to buy or sell. Its formation results from a bullish candlestick following a longer bearish candlestick. The bullish candle is completely engulfed by the body of the bearish candlestick. It must be ignored if it does not occur after a downtrend.

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Bearish Harami Line

A bearish candlestick follows a larger bullish candlestick. The bearish candlestick is fully nested by the previous bullish candlestick. As a reversal signal it needs to be ignored if it does not occur after an uptrend.

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Kicker Pattern

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This is a reversal signal that occurs in the beginning of a trend, during a trend and at the end of a trend. It is bullish kicker when a bearish Marubozu (open equals to high and the close equals to low of the period) is followed by a bullish Marubozu (open is the low and the close is the high of the period).

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Kicker can also produce a reversal signal in an uptrend.

It can be bearish when a bullish Marubozu is followed by a bearish Marubozu.

 

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Key takeaways:

1.    Explosive and powerful, the Bullish Kicker should not be overlooked. Most traders place it amongst the strongest and most influential candlestick patterns in existence, so when you spot it, be prepared for action

2.    However, the Bullish Kicker candlestick pattern is also unfortunately rare. Traders don't often change their opinion of a stock so dramatically and quickly. They tend to be more moderate, slowly shifting one way or the other.

3.    The Bearish Kicker should never be overlooked. In fact, some describe Kicker patterns as the most powerful Japanese candlestick signals of all! As always, however, be sure to confirm your suspicions before you make your next move. A red candle or a gap down can give you greater confidence in the Bearish Kicker's forecast and increase your peace of mind.

Tweezer Bottoms and Tops

Tweezer patterns are two candlestick reversal patterns.

This type of candlestick pattern is usually be spotted after an extended uptrend or downtrend, indicating that a reversal will soon occur.

There are two types of Tweezer patterns: the Tweezer Bottom and the Tweezer Top.

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Notice how the candlestick formation looks just like a pair of tweezers!

Amazing!

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The most effective Tweezers have the following characteristics:

The first candlestick is the same as the overall trend. If price is moving up, then the first candle should be bullish.The second candlestick is opposite the overall trend. If the price is moving up, then the second candle should be bearish.

The shadows of the candlesticks should be of equal length.

Tweezer Tops should have the same highs

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Tweezer Bottoms should have the same lows

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Two Crows Pattern

This pattern is a made up of three candlesticks. The black candlesticks of the second and third day represent the two crows that perched on the first white candlestick.

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Recognition Criteria

1. The market is characterized by a prevailing uptrend.

2. A strong white candlestick appears on the first day.

3. The second day is a black candlestick that gaps up.

4. On the last day another black candlestick appears that opens inside the body of the second day and then closes inside/outside the body of the first day.

Pattern Requirements and Flexibility

The Bearish Two Crows should start with a strong white body. A black body that forms an upside body gap with the first candlestick follows. The third day is another black body that opens at or above the close of the second day. The third day should close near the lows.

Trader’s Behaviour

An uptrend has been in place, and the strong white candlestick adds to the bullishness that is already present. The following day opens higher with a gap up. Prices fall a little bit, and a short black candlestick is formed. The bulls are not alarmed by this day, because even though a black body appears, prices fail to close below the close of the previous day. The third day opens at or above the close of the second day, but it declines throughout the day and closes well within the body of the first day. The third day’s action fills the gap of the second day, and shows that the bullishness is eroding.

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Sell/Stop Loss Levels

The confirmation level is defined as the last close. Prices should cross below this level for confirmation.

The stop loss level is defined as the last high. Following the bearish signal, if prices go up instead of going down, and close or make two consecutive daily highs above the stop loss level, while no bullish pattern is detected, then the stop loss is triggered.

Rising Window 

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A window (gap) is created when the low of the second candlestick is above the high of the preceding candlestick.

It is considered that the window should provide support to the selling pressure.

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Falling Window

A Falling Window candlestick pattern is a bearish continuation candlestick pattern. A Falling Window candlestick pattern is more commonly known as a gap-down

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This sharp decrease in the stock price usually happens outside of the market's normal trading hours, like after the release of bad press or a bad earnings announcement or stock market crash. Most gap-downs are news-driven events. Maybe it was earnings related or some other new. Maybe the share price was in a downtrend and then more bad news comes out for the company, like a top executive leaving. Either way, a gap-down is almost always the result of a news-driven event.

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For those investors that employ shorting stocks in their toolbox, a Falling Window candlestick pattern can provide short-sellers the most confidence when entering into a short trade.

Bullish Homing Pigeon

The pattern may indicate that there is a weakening of the current downward trend, which increases the likelihood of an upward reversal. The pattern is composed of a large real body followed by a smaller real body, and both candles are black (filled) or red indicating the close is below the open.

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Bullish homing pigeon patterns don't provide profit targets, and a stop loss is typically placed below the bottom of the pattern after an upside move is confirmed.

Bullish homing pigeons are bullish reversal patterns, but some research has suggested that it's a more accurate bearish continuation pattern. This is because prices don't move in straight lines. During a downtrend the price drops, then pauses or pulls back, and then proceeds lower again. The bullish homing pigeon could just be a pause before the price continues lower.

Descending hawk

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Descending hawk is a bearish reversal pattern, which forms in an uptrend. On the first day a long white candle evolves in the direction of the trend. On the second day, again a white body appears. The body of the first day candle completely engulfs the second candle. Shadows are not important in regard to both candles.

The descending hawk resembles the harami pattern, except for the colors of the body. Here both candles are white. It is the bearish version of the homing pigeon.

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The first figure of the descending hawk may be any candle with a white body, appearing as a long line, however doji or spinning top are not permitted. The second candle of the pattern must appear as a short line and again doji or spinning top is not permitted.

Bullish Tasuki

The Bullish Tasuki Line belongs to the tasuki patterns group, predicting a downtrend reversal. Both candles appear on as a long line. The first line has a black body, whereas the second line has a white body. The length of the shadows does not matter; however, the volume (if available on the given market) of the second line is significant. Relation of the bodies is insignificant.

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The pattern requires confirmation, that is, breaking out of the nearest resistance zone or trendline.

Bearish Tasuki

The Bearish Tasuki Line is a two-line bearish reversal pattern, belonging to the tasuki patterns family.

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The first line of the pattern is a white candle appearing as a long line. The second line also appears as a long line, but the candle is of black color. The length of the shadows does not matter; however, the volume (if available on the given market) of the second line is significant. Relation of the bodies is unimportant.

The pattern requires confirmation, that is, breaking out of the nearest resistance zone or trendline.

Triple Candlestick Patterns

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Planet Mercury or Morning Star

The pattern got the name because just like the planet mercury, which is the star of early morning i.e. it appears just before the sun rise, this pattern appears just before a potential rise in the price.

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A morning star is a visual pattern consisting of three candlesticks that is interpreted as a bullish sign. A morning star forms following a downward trend and it indicates the start of an upward climb. It is a sign of a reversal in the previous price trend.

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A morning star is a visual pattern made up of a tall black candlestick, a smaller black or white candlestick with a short body and long wicks, and a third tall white candlestick.

Doji Morning Star

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The Doji Morning Star is a bullish reversal pattern, being very similar to the Morning Star.

The only difference is that the Morning Doji Star needs to have a doji(Dragonfly, long legged, etc) candle on the second line. The doji candle (second line) should not be preceded by or followed by a price gap. Some variation with small difference is allowed with Doji.

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Bullish Abandoned Baby

The bullish abandoned baby is a three-bar pattern following a downtrend. It consists of a strong down candle, a gapped down doji, and then a strong bullish candle that goes up. It is exactly similar to Doji Morning star except the gap between the candles.

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The pattern signals the potential end of a downtrend and the start of a price move higher.

Some traders allow for slight variation. There may be more than one doji, or gaps may not be present after the first or second candle. But the overall psychology of the pattern should still be present.

Venus or Evening Star

Evening Star patterns are associated with the top of a price uptrend, signifying that the uptrend is nearing its end.

The Evening Star pattern is considered a very strong indicator of future price declines. Its pattern forms over a period of three days, in which the first day consists of a large white candle signifying a continued rise in prices; the second day consists of a smaller candle that shows a more modest increase or slight decrease in price not below starting point of first, while the third day shows a large red candle that opens at a price below the previous day and then closes near the middle or below of the first day. Close below the first candle is strong sell signal.

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Close below the first candle is strong sell signal.

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Bearish Abandoned Baby

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A bearish abandoned baby is a specialized candlestick pattern consisting of three candles, one with rising prices, a second with holding prices, and a third with falling prices. Technical analysts expect that this pattern signals at least a short-term reversal in a currently upward trending price.

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Doji Evening Star

The Evening Doji Star is a bearish reversal pattern, being very similar to the Evening Star. The only difference is that the Evening Doji Star needs to have a doji candle on the second line. The doji candle (second line) should not be preceded by or followed by a price gap.

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Three White Soldiers

The Three White Soldiers pattern is formed when three long bullish candles follow a DOWNTREND, signalling a reversal has occurred.

This type of triple candlestick pattern is considered as one of the most potent bullish signals, especially when it occurs after an extended downtrend and a short period of consolidation.

The first of the “three soldiers” is called the reversal candle. It either ends the downtrend or implies that the period of consolidation that followed the downtrend is over.

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For the Three White Soldiers pattern to be completed, the last candlestick should be at least the same size as the second candle and have a small or no shadow.

Three Black Crows

It is formed when three bearish candles follow a strong UPTREND, indicating that a reversal is in the works.

The second candle’s body should be bigger than the first candle and should close at or very near its low. Finally, the third candle should be the same size or larger than the second candle’s body with a very short or no lower shadow.

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Three Line Strike Bullish

When you hear the term "three strikes," you probably think of baseball. Three strikes and you're out! Depending on which team you're rooting for and who is at bat, that third strike could be frustrating or gratifying. When it comes to Japanese candlesticks, there are two forms of Three Line Strikes, one bullish and one bearish. Bullish Three Line Strike, a rare candlestick pattern that forms during an uptrend. Composed of four candles – three white and one black.

Despite its name, the Bullish Three Line Strike actually contains four candles, three of which are considered "strikes." After the initial trio of progressive candles, a fourth candle strikes down to lower the price. For help spotting this elusive signal, look for the following characteristics:

Firstan uptrend must be in progress. Seconda white (or green) candle must appear on the first day. Thirdanother white candle must appear on the second day, closing higher than the previous day. Fourtha third white candle must appear on the third day, again closing higher than the previous day's close. These candles continue the established uptrend. Fifththose three escalating white candles should be followed by a black (or red) candle, which opens higher than the previous candles but then dips down, closing below the first candle's opening price. In the end, this fourth candle should contain the real bodies of the three previous candles within its length.

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Three Line Strike Bearish

The bullish three line strike reversal pattern carves out three black candles within a downtrend.

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Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar.

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According to Bulkowski (Famous Investor and Chartist), this reversal predicts higher prices with an 84% accuracy rate.

Two Black Gapping

Two black gapping candle pattern acts as a continuation of the downward price trend. Look for two black candles that gap below the prior one and the second of the two candles has a lower high. That combination is simple enough and it appears often, so you will have no trouble finding it in real time trading or in a historical price series.

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The exciting thing about this candlestick is that is performs so well, but a check of the numbers shows that all is not rosy. The two black gapping candles does best after an upward breakout, but performance after downward breakouts really suffers.

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Upside Tasuki Gap

The Upside Tasuki Gap is a three-bar candlestick formation that signals the continuation of the current uptrend. The Upside Tasuki Gap’s third candle may partially close the gap between the first two bars or last two candles might look like dark cloud cover or bearish harami.

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The Upside Tasuki Gap demonstrates an uptrend’s strength through the gap open of the pattern’s second candle, as well as its escalating price. The pattern’s third candle indicates a pause in the trend as the bears attempt to move the price lower but cannot close the gap between the first and second candle. The bear’s inability to close the gap suggests the uptrend will likely continue.

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KEY TAKEAWAYS

  1. The first bar is a large white/green candlestick within a defined uptrend.
  2. The second bar is another white/green candlestick with an opening price that has gapped above the close of the previous bar.
  3. The third bar is a black/red candlestick that may partially closes the gap between the first two bars.

Downside Tasuki Gap

The Downside Tasuki Gap is a three-line bearish continuation pattern belonging to the tasuki patterns family.

Its first line appears as a long line in a downtrend, having a black body.

The second line may appear as any black candle, either as a long or short line. A price gap exists between first two lines.

The third line may be any white candle (except doji candles) which opens between prior opening and closing prices. It closes above the prior closing price, however, is not closing the price gap between first and second line.

The Magic of Japanese Candlestick

To conclude, remember history tends to repeat itself. Candlestick patterns can be broken down into single and multiple candlestick patterns. Buy strength and sell weakness, be flexible – quantify and verify and look for a prior trend. Each pattern comes with an in-built risk mechanism. Candlesticks give an insight into both entry and stop loss price.

Special thanks to Manisha Khurana in compiling this article. Hope you all liked reading it. Feedback will be appreciated. Thank You!

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  • Steve Harmel

    You won’t gamble with money after mastering this.

  • Wayne O'connor

    This is gold

  • Gavin Mccready

    Gonna read this until I master it

  • Aaron Cawthorn

    That was extremely informative. Thank you!!

  • Joanne Gibson

    Appreciate this!!! Thanks Varun

  • Shishir Kudchadker

    Excellent article for interpreting candlesticks.

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Varun Aggarwal

Finance Expert

Varun is the director of Profit Idea. He is a multi-skilled experienced professional in academics, corporate and administration fields. He has over 10 years of corporate training experience in the field of finance & provides training for CFA, MBA, Stock Market (Derivatives, Fundamental & Technical Analysis) & various other financial subjects. He is also associated with various institutes, boards & banks. Varun holds financial and investment qualifications from Delhi University, Yale University, London Business School, Indian School of Business, Columbia University and IESE Business School.

   

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