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Candlestick Pattern Tutorial
Japanese candlestick patternstechniques covered here, have been around for hundreds of years. Onlyrecently have us westerner's begun to apply these old principles to ourdaily trading.What is unique about a candlestickpattern compared to other forms of price analysis, is that thatcandlestick formations give you a very accurate snapshot at currentmarket sentiment...take a look.

Introduction…a New Way to look atPrice Action !

How would you like to learn a new way to lookat price action that is more efficient and more telling than what yourcurrently looking at?



Technical analysis is simply the study ofprices as depicted on price charts. Technical analysis assumes thatcurrent prices should represent all known information and data about themarkets, and market conditions. Prices not only reflect intrinsic facts,they also represent human emotion and the mass psychology and sentimentof the moment.

Prices are, in the end, a function of supplyand demand. However, on a moment to moment basis, human emotions…fear,greed, panic, hysteria, elation, etc. also dramatically effect prices.Markets may move based upon people’s expectations, not necessarilyfacts...



A market "technician" attempts todisregard the emotional component of trading by making his decisionsbased upon chart formations, assuming that prices reflect both facts andemotion.


Standard bar charts are commonly used to convey price activity into aneasily readable chart. Usually four elements make up a bar chart, theOpen, High, Low, and Close for the trading time period. A price bar canrepresent any time frame the user wishes, from 1 minute to 1 month.

The total vertical length/height of the barrepresents the entire trading range for the period. The top of the barrepresents the highest price of the period, and the bottom of the barrepresents the lowest price of the period. The Open is represented by asmall dash to the left of the bar, and the Close for the session is asmall dash to the right of the bar. Below is a standard bar chartexample.



Candlestick Chart Patterns Explained


You may be asking yourself, "If I can already use bar charts toview prices, then why do I need another type of chart?"


The answer to this question may not seem obvious, but after goingthrough the following candlestick chart explanations and examples, youwill surely see value in the different perspective candlesticks bring tothe table. In my opinion, they are much more visually appealing, andconvey the price information in a quicker, more efficient and easiermanner.


What is the History of Candlestick Charts?


Candlestick charts are on record as being the oldest type of charts usedfor price prediction. They date back to the 1700's, when they were usedfor predicting rice prices. In fact, during this era in Japan, MunehisaHomma become a legendary rice trader and gained a huge fortune usingcandlestick analysis. He is said to have executed over 100 consecutivewinning trades!
The candlesticks themselves and the formations they shape were givecolorful names by the Japanese traders. Due in part to the militaryenvironment of the Japanese feudal system during this era, candlestickformations developed names such as "counter attack lines" andthe "advancing three soldiers". Just as skill, strategy, andpsychology are important in battle, so too are they important elementswhen in the midst of trading battle.


What do Candlesticks Look Like?


Candlestick charts are much more visually appealing than a standardtwo-dimensional bar chart. As in a standard bar chart, there are fourelements necessary to construct a candlestick chart, the OPEN, HIGH, LOWand CLOSING price for a given time period. Below are examples ofcandlesticks and a definition for each candlestick component:

• The body of the candlestick is called the real body, andrepresents the range between the open and closing prices.


• A black or filled-in body represents that the close during thattime period was lower than the open, (normally considered bearish)and when the body is open or white, that means the close was higherthan the open (normally bullish).


• The thin vertical line above and/or below the real body is calledthe upper/lower shadow, representing the high/lowprice extremes for the period.

Bar Compared to Candlestick Charts
Below is an example of the same price data conveyed in a standard barchart and a candlestick chart. Notice how the candlestick chart appears3-dimensional, as price data almost jumps out at you.


( 3a )

( 3b )


The long, dark, filled-in real bodiesrepresent a weak (bearish) close ( 3a ), while a long open,light-colored real body represents a strong (bullish) close (3b ). It is important to note that Japanese candlestick analyststraditionally view the open and closing prices as the most critical ofthe day. At a glance, notice how much easier it is with candlesticks todetermine if the closing price was higher or lower than the openingprice.
Common Candlestick Terminology
The following is a list of some individual candlestick terms. It isimportant to realize that many formations occur within the context ofprior candlesticks. What follows is merely a definition of terms, notformations.

• The Black Candlestick -- when the close is lower than theopen.

• The White Candlestick -- when the close is higher thanthe open.

• The Shaven Head -- a candlestick with no uppershadow.

• The Shaven Bottom -- a candlestick with no lowershadow.

• Spinning Tops -- candlesticks with small real bodies,and when appearing within a sideways choppy market, they representequilibrium between the bulls and the bears. They can be either whiteor black.

• Doji Lines -- have no real body, but insteadhave a horizontal line. This represents when the Open and Close arethe same or very close. The length of the shadow can vary.

Candlestick Reversal Patterns
Just as many traders look to bar charts for double tops and bottoms,head-and-shoulders, and technical indicators for reversal signals, sotoo can candlestick formations be looked upon for the same purpose. Areversal does not always mean that the current uptrend/downtrend willreverse direction, but merely that the current direction may end. Themarket may then decide to drift sideways. Candlestick reversal patternsmust be viewed within the context of prior activity to be effective. Infact, identical candlesticks may have different meanings depending onwhere they occur within the context of prior trends and formations.

• Hammer -- a candlestick with a long lower shadowand small real body. The shadow should be at leasttwice the length of the real body, and there should be noor very little upper shadow. The body may beeither black or white, but the key is that thiscandlestick must occur within the context of a downtrend to beconsidered a hammer. The market may be"hammering" out a bottom.

• Hanging Man -- identical in appearance to the hammer,but appears within the context of an uptrend.

• Engulfing Patterns -- Bullish -- when a white, realbody totally covers, "engulfs" the prior day's realbody. The market should be in a definable trend, not choppingaround sideways. The shadows of the prior candlestick do not need tobe engulfed.

• Bearish -- when a black, real body totally covers,"engulfs" the prior day's real body. The market should bein a definable trend, not chopping around sideways. The shadows ofthe prior candlestick do not need to be engulfed.

• Dark-Cloud Cover (bearish) -- a top reversal formationwhere the first day of the pattern consists of a strong white,real body. The second day's price opens above the top of theupper shadow of the prior candlestick, but the close is at or nearthe low of the day, and well into the prior white, real body.

• Piercing Pattern (bullish) -- opposite of the dark-cloudcover. Occurs within a downtrend. The first candlestick havinga black, real body, and the second has a long, white, real body. Thewhite day opens sharply lower, under the low of the prior black day.Then, prices close above the 50% point of the prior day's black realbody.
  
  
  
  Stars -- These candlestick formations consist of a small real body that gaps awayfrom the real body preceding it. The real body of the star should notoverlap the prior real body. The color of the star is not too important,and they can occur at either tops or bottoms. Stars are the equivalentof gaps on standard bar charts.
  
  
  
  Stars make up part of four separate reversal patterns:
  Morning Star
  Evening Star
  Doji Star
  Shooting Star (Inverted Hammer)


• Morning Star -- this is a bullish bottom reversalpattern. The formation is comprised of 3 candlesticks. The firstcandlestick is a tall black real body followed by the second, asmall real body, which gaps (opens), lower (a star pattern). Thethird candlestick is a white real body that moves well into thefirst period's black real body. This is similar to an island patternon standard bar charts.

• Evening Star -- a bearish top reversal pattern andcounterpart to the Morning Star. Three candlesticks compose theevening star, the first being long and white. The second forms astar, followed by the third, which has a black real body that movessharply into the first white candlestick.

• Doji Stars -- When a doji gaps above a real body in anuptrend, or gaps under a real body in a falling market, thatparticular doji is called a doji star. Two popular dojistars are the evening star and the morning star.

• Evening Doji Star -- a doji star in an uptrend followedby a long, black real body that closed well into the prior whitereal body. If the candlestick after the doji star is white andgapped higher, the bearishness of the doji is invalidated.

• Morning Doji Star -- a doji star in a downtrend followedby a long, white real body that closes well into the prior blackreal body. If the candlestick after the doji star is black andgapped lower, the bullishness of the doji is invalidated.

• Shooting Star -- a small real body near the lower end ofthe trading range, with a long upper shadow. The color of the bodyis not critical. Not usually considered a major reversal sign, onlya warning.

• Inverted Hammer-- not really a star, but does looklike a shooting star. When occurring within a downtrend, may be aturning signal. Body color is not critical.
  
  
  
  Using candlestick charts is a key component to any portfolio strategy. Whether you're trying to create income or just buyingstock implementing the use of high probability candlestick patterns is anecessary tool if you want to be successful.