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JAPANESE CANDLESTICK PATTERN



Candlestick pattern charts are the financial charts used to describe the price movements of stocks,currency etc over a given period of time . The chart is composed of lines or bars where each bar is named as candle . The candlestick graph can be set on any time scale you want like 1 minute, hour, week or month as you want . If you set time scale to be 5 minute, then each candle will provide you the information for every 5 minutes and similarly for any other time frame.
Each candle provides you with four information for a particular session : opening price, closing price, highest price and the lowest price of given period of time. It candlestick chart is generally represented in red-green or black-white pattern where red or black candle represents the Bearish trend while green or white candle represents a Bullish trend.

Structure of candlesticks

A candle is composed of two main parts :- Body and Shadow(also called as wick)
Body : Body is the middle part of the candle . It provides opening price and closing price of the day .If it is a bullish candle than its lower part will provide the opening price while upper point of the candle provides with the closing point of the day(or any other time frame). If it is a bearish candle, then lower point represents closing price and upper point provides opening price .
Shadow : It marks highest and lowest price of the period.Whether it is a bearish candle or Bullish, Upper shadow(also called as wick) marks the highest point of the day while lower candle(also called tail) points to lowest price.
japanese candle stick example
If the shadow's of a candlestick are short, it shows that majority of the trading activities have took place between the opening and closing price only.If the shadow is longer , it shows that traders were active and were able to take the price significantly above or below the opening of the session.
Remember:Buyers are responsible for taking the price up and thus, are called as Bulls . Similarly, Sellers take the price down by selling, and are known as Bears .
When lower shadow is longer than upper shadow , than it depicts that sellers were more powerful than buyers during the session as price has fell significantly from the opening price.We have to also notice here that as th tail is long thhis means close price is significantly more than the lowest price, this means that buyers were able to raise the price till the end of session of that candle. In this way we can analyse any candle which help you to trade than. These long shadows on one side generally form just before the formation of new trend.
above described condition can be of the following candle.

What makes candlestick charts different from other charts?

Each type of technical analysis chart have it's own plus points but candlestick charts are always found to be the first choice of most of the analysts. There must be a reason behind this popularity of candlestick charts. Actually there's not only one, but multiple reasons :
  • Being a chart that considers time in its formation, candlestick charts can tell us the market behaviou about any period of time. Unlike Renko or point and figure graph, it tells us the bullish or bearish behaviour of the market with respect to the time.
  • Though, charts like Baseline also show price action wrt time but candlestick charts have something extra to offer. Candlestick charts also act like powerful indicators with the help of their pattern formations.Learning all candlestick patterns can really help the traders to make their trading decisions.
  • Yes,candlestick charts have great features to really help the traders . But what I like most is their visual appeal . Even after providing such a great set of information, analysing candlesticks is not cumbersome or boring as that of Bar charts.Bar charts can also tell the low and high points with respect to the time but they are far less impressive than candlesticks.

Note that candlestick charts are great but it never means that other charts like Renko, bar charts etc. are of no use. They have their own benefits to use, here we have just tried to indicate plus points of candlestick charts over another technical analyis charts.

Types of candlesticks

A candlestick tells us 5 things about market in a givven period of time :
  • Open Price
  • Close Price
  • Low Price
  • High Price
  • Growth or Downfall in the market ( by its color )

When these points are plotted on the graph with different ratios and ranges, we get different shapes of candlestick having their own meaning. In this section, we are going to discuss all these different shapes of candlesticks and their interpretations .
  1. Marubozu candlesticks

    Marubozu are long candlesticks with negligible or no wicks on them. Marubozu in Japanese mean Bald which truly justifies the structure of candlestick having no wicks or shadow. Occurence of Marubozu represents strong Bullish or Bearish signals.
    As Marubozu don't have any wicks,it means that price have not retreated from any point and the open-close are near or similar to high and low of the day.
    Green Marubozu shows that buying of stocks had overpowered the sellers till the end of period. As the buying was strong till end, this claims that Buyers are not done yet, buying activities are going to continue further.Similar is the case of Red Marubozu , it represents strong Bearish behaviour and suggests the fall in prices further.
  2. Doji

    As you might see in the pictorial representation, Doji candlesticks does not have any significant body size. This type of candlestick is formed when opening price and closing price of the stock are same or almost same. Price may fluctuate to long ranges in between the period or day but it will close at the opening point. Doji are also of different types based on their length of wicks.
    Types of Doji candlestick :
    • Long-legged Doji candlestick : The long-legged Doji is characterized by it's shadow of longer length on both sides which indicate that both of the Bears and Bulls had gained power or dominance over the other at some points of the time but till the end of session , price came back to it's opening price.
      long-legged doji candlestick pattern structure study and analysis
    • Dragonfly Doji candlestick Dragonfly Doji have a very long tail(lower shadow) while it's upper shadow is of negligible length or there is no upper shadow.It suggests about an aggresive sell of stocks in between the session duration but the buyer were able to absorb the effect till the end. Ideally , it is a "T" shaped candlestick.
      In general, it is considered to be a bullish reversal pattern occuring during the downtrend period.It outlines that a Bullish trend is supposed to arrive soon .
      dragonfly doji candlestick pattern
    • Gravestone Doji candlestick Gravestone Doji is the type of candlestick having a long upper shadow with no lower shadow or having a negligible length. Although it is a Doji , and therefore it does not tell much in isolation, but it can be considered as a Bearish reversal signal if it appears during an upward trend . This Doji occurs when Bulls loose the momentum but not let the momentum to be gained by Bears and thus both shares similar powers.
      gravestone doji candlestick pattern
  3. spinning tops

    Like Dojis, Spinning tops also reveal hard battle between buyers and sellers. Spinning tops have a visible body but of very short length .The body should appear on the center, also,both wicks should be atleast as long as the body section of candlestick.
  4. Belt Holds

    Belt Holds are similar to Marubozus but have a very small wick on their closing end, opening side of the candle is bald.If it is a bullish ( green ) candlestick, its lower portion is opening side and it will have no wicks attached to it while the upper side have a little wick attached on its top.Red candle will have this shadow on its lower side.
    As the opening side have no wicks , it reveals that the bulls or bears ( respective to bullish and bearsih belt hold candles) were powerful and confident but with time, opposite traders also tried to move the game further.

    The appearance of a bullish belt hold in downward trend shifts the odds towards a short term reversal in sentiment from bearish to bullish while bearish candle in bullish trend can signal short term possible trend reversal.
  5. Hammer / Hanging Man candlestick

    Hammer is a candlestick with small body and a wick on it lower side having length atleast double to its body. The name hammer is given due to its resemblence with the same.Hammer candlestick can be seen only during downtrend, if it is seen in an upward trend , than it is known as Hanging-man candlestick . Color of Hammer and hanging man does not matter much.They depict a possible trend change. Generally more powerful signal than what belt holds provide.
    hammer candlestick pattern structure
  6. Shooting star / Inverted Hammer candlestick

    Shooting star is observed during upward trend and as the name suggest,shooting star try to signal the fall in prices. It is a candlestick with small body and a wick on it upper side having length atleast double to its body.Inverted Hammer can be seen only during downtrend. Basically they have same structure, the name changes when they change appearence in trends. Color of Inverted Hammer and Shooting star does not matter much.They also depict a possible trend change.
    all possible shooting stars


You must have got familiar about what a candlestick is and now you need to understand that when we study candlestick charts , candlesticks in it often form some pattterns having their own significant meaning and a Technical Analyst or a trader tries to identify them to get some hint to trade.Study these patterns along with other technical indicators to make your trade profitable.

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