What Are Japanese Candlesticks?
The Heikin-Ashi candlesticks has been created by the Japanese. They generally have a body and may have a stick on the top and stick on the bottom. The length of the sticks depend on the opening and the close of the market and vary from how far the market goes up and down.
In addition of the common look a Japanese candlestick, there are also two other kinds, such as the Doji and the Marubozu.
Never use Japanese candlestick signals alone and never use Japanese candlestick patterns as a stand-alone indicator. They should be used in conjunction with other indicators.
Japanese Candlestick Patterns
Japanese Candlestick patterns can give you valuable insight about future price action. The basic Japanese candlestick patterns can tell what the market is thinking. Traders trade according to what candlesticks may predict but because they are widely used the signals are not so efficient. This is how in 1992, George Soros made over one Billion dollars in a single trade. He became known as "the Man Who Broke the Bank of England."
Advanced Japanese candlestick patterns have a higher degree of reliability. Combined with gaps they can become profitable trading strategies.
In order to understand how Japanese candlestick patterns really work, just make the effort to imagine what the pattern looks like when you look at a shorter or longer time frame on the chart. Bear in mind that the length of the wick or tail represents Reversal Potential, and the length of the body represents Trend Momentum.
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Japanese Candlestick Analysis
There's no proven fact that Japanese candlestick analysis is superior to other types, at least not officially, but most seasoned traders who have an eye for detail DO prefer Japanese candlesticks! So they might be better after all, particularly for those who believe in technical analysis.
The problem is that inexperienced traders who believe too early in Japanese candlesticks, end up spotting too many Japanese candlestick patterns on the charts. Just remember to sort out conflicting signals just by looking at multiple time frames and study the length of the wick, tail and body of the Japanese candlesticks in that time frame. A 4 hour chart is more reliable than an hourly chart!
Patterns are usually created by groups of different numbers of individual Japanese candlesticks making different formations. It's important to know that many Japanese candlestick patterns are identical, yet have different names, but they are the same thing.
You can see how this is true just by observing a particular bullish or bearish pattern on a chart. Then if you change time frames from a daily chart to a weekly chart, or from a 15min chart to an hourly chart, as examples, you will see another bullish (or bearish) pattern since both charts have the same highs and lows! They may have different name but identical meaning,
So don't be intimidated by many candlestick pattern names, they are all based on few basic patterns.
Morning Star (above left), and Hammer (above middle), are both bullish patterns suggesting a bottom has been made in the market. They are essentially the same principle, since if you are looking at a Morning Star pattern, then just by changing time frames of the chart you will end up looking at a Hammer bullish formation, and vice versa.
The Hammer was named first, and the logic behind this pattern is that the long tail of the candlestick indicates that buyers managed to prevail over sellers and bring the market back up, suggesting more bullish price action to come. If the Hammer is inverted, then it implies that sellers managed to prevail and the market will move lower still.
However, whenever a trader analyzes any Japanese candlestick pattern, it's important for him or her, before making any decisions, to consider the prices of the days that precede and follow the formation of the pattern.
Hanging Man illustrated
Note that the actual color of Hanging-Man's body is not so important,
what is important is preceding price action!
Harami means pregnant in Japanese, a reversal of trend in the making. Again, if you change the time frame for a longer one, there is good chances that the two candles of the Harami pattern will be a single Hammer!
There are two variations of Harami: The Harami and the Harami Cross. They have the same meaning.
Example of the Harami pattern as seen on the weekly chart
The same market on the monthly chart shows an Inverted Hammer
|Try visualizing these two candlesticks as one combined candlestick, for example two, 30 min candlestick as 1 hr candlestick. You will find somewhere in another time frame a Hammer, and an inverted Hammer.|
|A Piercing Line is an indication that the market may be trending upward soon.|
The Bearish Engulfing is the opposite as it occurs in an uptrend. It usually signals a peak or a slowdown into the advancement of a bullish trend. In fact, the bears may be gaining strength.
- How many Japanese candlesticks patterns can you recognize?
- Your questions…