JAPANESE CANDLESTICK PATTERN
Charts
1. They are of 3 types.
(a) Line Chart
(b) Bar Chart
(c) Candlestick
Candle
2. They represent actual price of market. A candle consists of following basic
features;
Candlestick
3. A candlestick is a popular method of displaying price movements on a price
chart. It is often used in technical analysis.
4. Formation of a Bullish Candlestick. As shown in the diagram below, market
opens at a point marked as “Open”, sellers pushed it to the point marked as “Low”;
buyers pushed the market to the level marked as “High”; sellers again pushed it
downwards and ultimately candle closed at point marked as “Close”. During this
process, wicks are also formed.
5. Formation of a Bearish Candlestick. As shown in the diagram below, market
opens at a point marked as “Open”, buyers pushed it to the point marked as “High”;
sellers pushed the market to the level marked as “Low”; buyers again pushed it
upwards and ultimately candle closed at point marked as “Close”.
Summary of Candlesticks Formation.
Market Movement Bullish Candlestick
Market Open Lower end
Sellers push Low (Lower wick formed)
Buyers Push High (Upper wick formed)
Sellers again push Candle closed at Upper end
Market Movement Bearish Candlestick
Market Open Higher end
Buyers push High (Upper wick formed)
Sellers Push Low (Lower wick formed)
Buyers again push Candle closed at Lower end
Candlestick Patterns
6. Market operates on basis of buyers and sellers. A trader has to forecast if
buyers would be greater than sellers or vice-versa; accordingly trade is taken
wherever forecast number is greater (buyers / sellers). In order to forecast, market
structure is observed which consists of certain candle patterns. Some patterns if
formed in the market predict forward movement while some predict a market reversal.
These candlestick patterns have been discussed hereunder:
Bullish / Bearish Engulfing (Market Reversal) - A strong Pattern
7. Bullish Engulfing. In a bearish trend at the level where support exists; a
bullish candle would engulf a preceding bearish candle in such a manner that the
bullish candle would open and close beyond the open and close levels of preceding
bearish candle as depicted in diagram below.
8. Bearish Engulfing. In a bullish trend, where resistance exists; a bearish
candle would engulf a preceding bullish candle in such a manner that the bearish
candle would open and close beyond the open and close levels of preceding bullish
candle as depicted in diagram below.
Market
Engulfing Trend Pattern
Forecast
Bullish candle would engulf
Bullish Engulfing Bearish Bullish
bearish candle
Bearish candle would engulf
Bearish Engulfing Bullish Bearish
bullish candle
Earlier it was a supply
level so there is
resistance hence sellers
superseded and made a
bearish engulfing.
Earlier it was a demand
level so there is support
hence buyers
superseded and made a
bullish engulfing.
9. Tip (Concept of Supply / Demand Levels would be forthcoming). In order
to let market take reversal it is necessary that Bullish / Bearish engulfing should be
formed where Supply / Demand Level exists in the preceding market. If it is not the
case, the market would not take reversal. As shown in the chart below, a bullish
engulfing has been formed but since there is no level there so market has not gone
bullish.
10. In the chart given below, there is preceding high level of supply so on formation
of bearish engulfing, market has followed bearish trend.
Bearish engulfing
Indecision / Doji Candle (Market Reversal)
11. It represents equal number of buyers and sellers in the market which depicts
that market is in an indecisive condition. The least in size the candle would be, better
would be the doji candle and hence forecast.
12. Doji is a trend reversal candle on meeting following conditions;
(a) In bullish trend, a bearish candle should be formed following a doji. It
predicts that market may go in bearish trend onwards.
(b) In bearish trend, a bullish candle should be formed following a doji. It
predicts that market may go in bullish trend onwards.