7 Japanese Candlestick Charts You Should Know

by Traders Reserve | March 3, 2011 6:00 am

This article originally appeared on Traders Reserve[1].
By Steve Nison

A candlestick chart is a style of bar chart that displays the high, low, open and close for a security each day over a specified period of time. Originating in Japan, this Eastern candle charting technique can be a very powerful trading tool when combined with Western technical analysis.

But remember that candlestick charting techniques are tools and not a system. For example, one must view a candlestick pattern within the context of the surrounding technical picture. Without doing so would be, as the Japanese proverbs says, “Like leaning a ladder against the clouds.”

With candle charts, one can use candle charting techniques, or Western techniques, or a combination of both. This union of Eastern and Western techniques provides traders with uniquely effective tools to help enhance profits and decrease market risk exposure. (See my article on trading seasonal effects with candlestick charts[2].)

There have recently been books, articles, and seminars from so-called “candlestick experts” who make no reference to where they found their information about candlesticks. Even more troublesome is that they are making up their own candlestick signals without any historical basis.

Conversely, all of the candlestick patterns and signals I follow have been confirmed by more than one Japanese source (Japanese traders, Japanese books, etc.). From my vast array of candlestick resources, there is absolutely no mention of many of these “new” patterns I see tossed around by other writers and speakers.

Once you have the basics under your belt, here are seven candlestick patterns every trader should know:

Engulfing

This pattern consists of two candles. A bullish engulfing pattern is when a white real body engulfs (hence the name) a small black real body during a downtrend. It doesn’t mean a stronger rally on a candlestick chart, but it does increase the likelihood of that being excellent support and could be the start of an ascent. But be careful. The dual bullish engulfing patterns have nothing to do with how far the market will ascend. These additional support points are a great advantage when candlestick trading.

Hammer

This pattern is an important bottoming candlestick line. The hammer and the hanging man (see below) are both the same line. That is a small real body (white or black) at the top of the session’s range and a very long lower shadow with little or no upper shadow. When this line appears during a downtrend, it becomes a bullish hammer. For a classic hammer, the lower shadow should be at least twice the height of the real body

Hanging Man

This pattern is an important top reversal. The hanging man and the hammer are both the same type of candlestick line, i.e., a small real body (white or black), with little or no upper shadow, at the top of the session’s range and a very long lower shadow. But when this line appears during an uptrend, it becomes a bearish hanging man. It signals the market has become vulnerable, but there should be bearish confirmation the next session, i.e., a black candlestick session with a lower close or a weaker opening, to signal a top. In principle, the hanging man’s lower shadow should be two or three times the height of the real body.

Harami

The Harami pattern is a real small body that is contained within what the Japanese call an “unusually long black body or white real body.” “Harami” is an old Japanese word for pregnant. The Japanese nickname for the long candle is the “mother” candle, and the small candle is the “baby” or “fetus.” The second candle of the Harami can be white or black. The Japanese will say that with a Harami the market is “losing its breath.” The sellers may be in control of this stock.

Piercing

The piercing pattern is composed of two candles in a falling market where sellers are in control. The first candle is a black real body day and the second is a white real body day. This white candle opens lower, ideally under the lower of the prior black day. Then prices rebound to push well into the black candle’s real body, which can set up a powerful reversal.

Doji

The doji may be the most popular candlestick pattern. This is a session in which the open and close are the same (or almost the same). There are different varieties of doji lines (such as a gravestone or long-legged doji) depending on where the opening and closing are in relation to the entire range. Doji lines are among the most important individual candlestick lines. They are also components of other important candlestick patterns.

Evening Star

This pattern is a major top reversal pattern formed by three candlesticks. The first is a tall white real body, the second is a small real body (white or black), which gaps higher to form a star, and the third is a black candlestick, which closes well into the first session’s white real body.

New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.[3]

For more trades, ideas and strategies, visit Traders Reserve[1].

Source URL: https://investorplace.com/2011/03/technical-analysis-candlestick-chart-patterns/

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