Candlestick Trading

How to use Japanese Candlesticks in forex trading ?

Candlesticks are by far the most important instrument that we have at Forex and which are used to study the technical aspects of the stock marketplace. The analysis, the in depth information and the other vital aspects of the stock marketplace which are rendered by candlesticks’ signals are of utmost importance for enabling a person to gain a successful stand in the trading market.

Japanese Candlesticks

Candlesticks are the most ancient instrument for the technical study of the global market. They were discovered way back in the seventeenth century by a rice trader who lived in Sakata, Japan. He employed 10 years of his life in researching out various methodologies and analyzing various aspects of the market which includes the weather effect, the psychological thinking of the vendors and the purchasers and the impact of various other dynamic components on the price fluctuations of rice. This guy went on to become a rich person with many trades under his belt and also wrote 2 prolific books relating to technical analysis of the market regimes.
japanese candlestick
I pointed out his psychological studies because of the fact that candlesticks serve as effective indicators of the psychological aspects of the market place which involve both vendors (Bears) and customers (Bulls). It is their psychological behaviors that results in deciding the volatility of the prices that are prevalent in the market place.
The timing of the fluctuations in the prices, the timing when increased purchases and vending will co- exist and what are the features that influence the fears, greed and other psychological influences are all addressed through the indications that are given by the candlesticks indicators. Candlesticks have their own easy to understand technical language which if learned effectively guides traders and customers about various aspects of the market economy and helps them to predict or evaluate the future effectively. Candlesticks are primarily actual time indicators which if used in unison at the optimum time with other effective indicators such as Bollinger Bands prove to be very effective trading instruments. Other indicators such as MACD, RSI and Stochastic due to their time delay normally result in giving false signals. Not using candlesticks’ indicators while trading is a blind take where you are just relying on the judgments and instruction of someone else who might not be up for it. Such blind directions may easily be untimely and will cause you the delay which can prove dangerous. The candlestick, its trading aspects and the technical studies that are associated with it were launched in the states of the western region back in 1958 and gained a lot of fame. Candlesticks are basically a rectangle that serves four types of information in a particular span of time period. If applied on a daily basis, you will have a single candlestick and similarly if you go on applying it on a five minutes time period basis, then you will have one for every five minutes time period and so on.
Every candlestick comprises of four components or numbers which are as follows:
A. Open price
B. Close price
C. High price
D. Low price

Let’s take the example of one hour time period; for this period, consider that the price was currency pair (CP) when the candlestick began. In this time period of one hour, it takes one hour for every candle stick to shape up completely. Consider that at the start of the one hour time period the price or the cost was 1.9825. This is what we call open price and it will move up and down during this one hour. When the time is over suppose that the price is 2.0080 at this closing time. This 2.0080 is what we call closing price. The time, at which the closing price is higher than the opening price, the candle is a Bullish. This indicates that the price has tilted higher during the completion of the candlestick or during the time period which we took i.e. 1 hour.
During the formation of the candlestick, the higher price will be the maximum price and the lower price will indicate the minimum price. Different shapes and color will be shown by the candlestick during the span of its formation and you will have to wait till it shapes out completely and then go for the indications or the signals that it gives. Study this indications or signals to make the rational decision. The two major parts that comprise the candlestick are 1. Shadows and 2. Body
Market psychology:
Dealing with the candlesticks means to study the market psychology with reference to the candlesticks’ shapes and colors. They indicate us whether there is more vending than purchasing or there is more greed than fear and vice versa. These indications help traders and customers to evaluate or access the price fluctuations or the way it will go.
Different shapes of candlesticks:
Various shapes are taken by the candlesticks during the price fluctuations that occur and these shapes are as follows.
A. Typical candlesticks:
The whole of 4 prices are different or distinct from one another. Typical candlesticks may show a bearish or bullish shape.
Marubozu: it stands for shaven. So the candlesticks without a shadow are known as Marubozu.
What does Marubozu stand for in the market?
When we talk about Bullish Marubozu, here low cost is similar to open cost and high cost is similar like close cost. The Bullish Marubozu stands for strength which means that they do not allow the Bears to bring the costs down and meanwhile the candlestick gets completed. This indicates that stronger purchasing activities are being carried out in the market. So the longer or larger the candlestick, the stronger will be the Bulls.
The Bearish Marubozu is opposite to the Bullish Marubozu which means stronger Bears and active vending activities in the market especially at the time when the Bearish Marubozu (BM) is longer than the previous candlesticks.
B. What do they indicate?
1. When you see a Bullish Marubozu, it is an indication that the prices may move higher because of the Bull’s strength and you must not move to a smaller position.
2. At the time when you see a Bearish Marubozu, you must not acquire the strong position.
3. A Bullish Marubozu indicates a reversal signal which means that you should wait for the next Candlestick and if it turns out to be Bullish, you will get the long position.
4. Similarly when you see a Bearish Marubozu at the end or finish of an uptrend, it again indicates reversal signal. Here you may only wait for the next one and if also turns out to be Bearish, you will acquire the small position.
5. So by now, if you have the longer position and you have the Bearish Marubozu at the end of the uptrend, you must close the position and acquire your income.
We will also discuss the various patterns of the candlesticks so that we learn how to make the right decision at the right time. All you need to remember is that Bullish/Bearish Marubozu means that the Bulls/Bears are very strong.
C. Doji:
Doji stands for unskillfully because such candlesticks do not comprise of any body. They are Doji because when we have a Doji, the open and the close costs are similar. They do not have any color and are neither Bullish nor Bearish. Both the powers of the Bullish and the Bearish here are almost the same or well balanced and the costs are uncertain or have no place to move. There is confusion here in the price movement because the Bulls do not have the capability to take the prices up and the Bears do not have the capability to take the prices down. Therefore these unskillfully candlesticks are indicative of uncertain signals and indecisions. All sorts of unskillfully candlesticks demand confirmation which I will explain here. The most important of these candlesticks is known by the name of Rickshaw man. This indication signal is truly a tough one. Here at a point of time when you see it at the peak of the uptrend, it indicates that the prices may tilt up or it may even become the range.
Gravestone is another type of Unskillfully Candlestick.
This candlestick also indicates towards indecision and when it is seen the top or peak of the uptrend, it means that the price wish to move up and down.
Unskillfully or Doji candlesticks can also be seen in some other shapes and sometimes they can even have a little body.
What to do when one sees a Doji or unskillfully?
I have already mentioned that these candlesticks stand for uncertainty in the movement of prices because at one time they may be seen at the very top of an uptrend and may also be seen at the very bottom of a downtrend. So if you have some position and you get a Doji or unskillfully, you should get you income and if you do not have any position, then you should wait for the confirmation and then select the appropriate direction along with entering the trade.
Confirmation basically means that you should be waiting for the next candlestick which may give you a confirmation e.g. when it is a Gravestone at the peak of an uptrend, you should be moving shorter but after waiting for the next candlestick or even the next 2 candlesticks. So if they turn out to be Bearish, this means that the prices have changed directions and you may go short. The longer the shadows of Doji, the stronger they are.
D. Hammer and Hanging Man:

This type of candlestick is normally seen at the very bottom of a downtrend and has a very minute upper shadow and sometimes it has no shadow at all. Such candlesticks at the peak of the uptrend are called as Hanging Man.

E. Shooting Star:

It is in the form of an inverted hammer which is at the top of an uptrend and may be Bullish or Bearish in its color. When the Shooting star is at Bottom of a downtrend, it is called as an Inverted Hammer. Like unskillfully or Doji, both Shooting Star and Inverted Hammer requires a confirmation. The confirmation here is the gap between the shooting star and hammer and the candlesticks which are to come next. Another conformation here is a giant Bearish candlestick behind a Shooting star. Confirmation is basically something that indicates or points out that the prices have changed directions.
Candlesticks are though vital signals themselves but a combination may also generate great and effective signals of reversal.
1. High wave
High Wave stands for a set of candlesticks that are composed of longer shadows and little bodies. It is an extremely vital signal both at the bottom of a downtrend and the top of an uptrend.
2. Engulfing pattern
It is power signal of reversal at the bottom of end of trends. This pattern arises through two candlesticks which feature various colors. Here the body of the 2nd candlestick entirely engulfs the body of the first one in the pattern. The 1st candlestick in this pattern may be an unskillfully or Doji. This pattern will be stronger at a time when the first candlestick has a small and the 2nd one has a giant body.
3. Dark Cloud Cover
This pattern is basically a gesture of Bearish reversal and may be shaped out by two candlesticks at the peak of an uptrend. Here the first candlestick will be Bullish and the 2nd one will be Bearish. This pattern shapes up when the 2nd candlestick begins to take over the rising price of the first candlestick but it may well also tilt down and turn out to be over the finish of the open cost of the first candlestick. Now what is the time at which this DCC pattern indicates a strong signal of reversal?
a. When the closing cost of the Bearish Candlestick is close to the opening cost of the previous candlestick.
b. When both the candlesticks are Shaven or are without shadows.
c. When the candlesticks open a strong resistance and then moves down.
The DCC which is seen at the bottom of a downtrend is known as Piercing Line. When you see the DCC at the top of an uptrend or you see the Piercing line at the bottom of the downtrend, you should wait for the upcoming candlestick. If the upcoming candlestick which is behind the DCC turns out to be a Bullish one which shows upwards as well as higher movement than the high price of the 2nd candlestick, then you must take such DCC as a continuation signal. However if it turns out to be a Bearish when which has the feature of moving down as well lesser than the close cost of the 2nd candlestick, then the Piercing line which you will have will be a continuation signal. Now if the next candlesticks that comes after the Piercing Line is Bullish one, then after the Piercing line will be a reversal signal.
F. Harami
It is basically a Japanese word which stands for pregnant lady and is a pattern which is shaped by two candlesticks. The big one here is called mother and the smaller one is called the baby. Here the mother or the bigger one covers the complete or minimum body of the smaller one or baby. Harami may be seen both at the peak of the uptrend or the bottom of the downtrend. The little one here may be shaped somewhere besides the bigger one and the vital compulsion here is that the little (baby) candlestick must be covered by the bigger (mother) candlestick. Additional variations that occur in their sizes are very much potent and effective signals. Although DCC, Piercing line and Harami may all work as indication of reversal signals, but still they should be confirmed via the next candlesticks. Such patterns however may not be considered reliable and strong signals. So if you by bow have some position and you have a little income in your account, and you see some of the patterns that have been mentioned above, then you should abandon your deals or cut down on them for tightening the stop loss and wait for things to shape up so that the market moves ahead.
But if it changes direction, you will be in a secure zone because you will be having your income by now or you have stopped the loss that protects your income. If the path of the direction continues to be the same, you will be earning extra income. The time at which the little candlestick in the Harami sample is an unskillfully or Doji one, the sample will be called as Harami cross. The candlestick with the longer body which is followed up by an unskillfully or Doji that is itself covered by the long candlestick, it must not be in anyway avoided.
G. Morning and Evening Star and Abandoned Body
The morning star is basically shaped by a combination of three candlesticks. This pattern may be seen at the bottom of the downtrend and is a prolific reversal signal.
1. The first candlestick here with a considerable body should be a Bearish one.
2. The second one will be a smaller candlestick which will be shaped lesser than the first one and may be Bullish or Bearish. Basically the 2nd one serves as the Morning Star and both the candlestick together constitute a Morning star (MS) signal.
3. The third one is a Bullish candlestick which is shaped upper than the second one and it also wraps an important portion of the body of the first candlestick in the pattern.
The effectiveness, reliability and the potency of the reversal signals given by the Morning star and the Evening star depends on certain factors which should be considered carefully.
1. Consider the gap that exists between the first and the 3rd candlestick of the evening or the morning star. The larger the gap, the stronger will be the signal.
2. Consider the extent of the coverage of the first candlestick with the 3rd candlestick. The greater the coverage degree, the stronger will be the signal.
3. The large trading size of the third candlestick as compared to the first one.
The evening or morning star may be Doji or unskillfully from time to time. Here again, the distance that exists between the first and the third candlestick as well as the unskillfully or Doji carries utmost importance. The Morning and Evening star may sometimes be very small candlesticks with very little or even no shadow at all. Here the distance will be a huge one and no candlesticks will be wrapping the shadows of the evening or morning star. Such a pattern is called as Abandon Baby and is considered a great signal of reversal. The pattern is normally very rare in the market. This pattern like many others may be seen at top of the uptrend or bottom of the downtrend.
H. Tweezers
Tweezers comprise of two candlesticks which are very close to one another. Their highs and lows in the market are almost the same. Tweezers may well be shaped by the shadows of the candlesticks and can even be built by the bodies of the candlesticks that have no shadows or are Shaven. Like the Harami or Doji candlesticks, the Tweezers may also have little bodies. They are not considered as great signals of reversal and also require confirmation. The timing to look out for a Tweezers signal is very important. The tweezers which have been shaped out correctly under the resistance line or else over the support lines and similarly under or over the Fibonaccievels which play the role of resistance or support are very much vital, and particularly at the time when they comprised of two unskillfully or Doji candlesticks. The longer the shadows, the more potent will be the Tweezers signals.
There is a probability that you may look few or even many candlesticks between the two candlesticks that shape out the Tweezers pattern, but still you should not avoid the Tweezers considering them a possible reversal signal.
Now you have seen various types of patterns of candlestick that Japanese make and I do not consider it tough to learn the types of the candlesticks and the various patterns that they built. The key to focus here is not only the names that have been educated but also the psychological stories that are reflected through different patterns of the candlesticks. The reason is the same as I have mentioned in the begging of this exposition that candlesticks play the role of psychological pointers of this market that indicate or reflects the emotions and thinking of sellers and purchasers. They give you a somewhat clear picture that whether the dealers are more inclined towards the purchases or they have abandon them and are waiting for things to shape up perfectly. So learning the language of these candlesticks is of utmost importance.
Take the example of Doji or unskillfully candlesticks. As told earlier that these patterns show that the market prices and trends are subject to indecisions because the prices may move up or down, here the purchasers may sometime turn out to be stronger with more purchases and the prices may move in the upward direction and similarly the vendors may sometime turn out to be dominating with more vending and the prices may move down.
Finally the candlestick completes at a time when the costs are exactly the same as the open costs and the unskillfully or Doji Candlesticks turns out to be shaped as well. This means that neither the purchasers and nor the vendors go hold of the market. This is the reason why this pattern brings indecisiveness and one must wait for the confirmation signal because the movement direction of the prices is uncertain.
Now if the next candlestick finishes like a comparatively huge bearish one, this means that bears have taken control and the lower will be the costs, but if it finishes like a comparatively huge Bullish one, this would mean that Bulls have got the hold and the prices will be bigger.