Japanese Candlestick
Analysis
SLIDES PREPARED BY:
RESEARCH DIVISION
What is a Japanese
Candlestick
• In earlier times, Japanese created their own old school version of technical
analysis to trade rice
• A westerner by the name of Steve Nison “discovered” this secret technique called
“Japanese candlesticks”, learning it from a fellow Japanese broker.
What is a Japanese Candlestick
• Candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes –
whatever you want! Candlesticks are used to describe the price action during the given time frame.
Candlesticks are formed using the open, high, low, and close of the chosen time period.
• If the close is above the open, then a hollow candlestick is drawn.
• If the close is below the open, then a filled candlestick is drawn.
• The hollow or filled section of the candlestick is called the “real body” or body.
• The thin lines poking above and below the body display the high/low range and are called
shadows.
• The top of the upper shadow is the “high”.
• The bottom of the lower shadow is the “low”.
Candle
Structure
• Long bodies indicate strong buying or selling. The longer the body is, the
more intense the buying or selling pressure. This means that either
buyers or sellers were stronger and took control.
• Short bodies imply very little buying or-selling activity.
• Long hollow candlesticks show strong buying pressure. The longer the
hollow candlestick, the further the close is above the open. This indicates
that prices increased considerably from open to close and buyers were
aggressive
• Long filled candlesticks show strong selling pressure. The longer the filled
candlestick, the further the close is below the open. This indicates that
prices fell a great deal from the open and sellers were aggressive
• Candlesticks with long shadows show that trading action occurred well
past the open and close.
• Candlesticks with short shadows indicate that most of the trading action
was confined near the open and close.
Basic Candlestick Patterns
Spinning Top:
• Candlesticks with a long upper shadow, long lower shadow and small real bodies
are called spinning tops.
• The small real body (whether hollow or filled) shows little movement from open to
close, and the shadows indicate that both buyers and sellers were fighting but
nobody could gain the upper hand.
Marubozu:
• Depending on whether the candlestick’s body is filled or hollow, the high and low
are the same as its open or close. Check out the two types of Marubozus in the
picture.
A Hollow Marubozu contains a long body with no shadows. The open price
equals the low price and the close price equals the high price. This is a very
bullish candle as it shows that buyers were in control the entire session. It usually
becomes the first part of a bullish continuation.
• A Filled Marubozu contains a long body with no shadows. The open equals the
high and the close equals the low. This is a very bearish candle as it shows that
sellers controlled the price action the entire session. It usually implies bearish
continuation.
Basic Candlestick Patterns
Doji:
• Doji candlesticks have the same open and close price or at least their
bodies are extremely short. A doji should have a very small body that
appears as a thin line.
• Doji candles suggest indecision or a struggle for turf positioning
between buyers and sellers. Prices move above and below the open
price during the session, but close at or very near the open price.
• If a Doji forms after a series of candlesticks with long hollow bodies (like
hollow Marubozus), the Doji signals that the buyers are becoming
exhausted and weakening. In order for price to continue rising, more
buyers are needed but there aren’t anymore! Sellers are licking their
chops and are looking to come in and drive the price back down.
• If a Doji forms after a series of candlesticks with long filled bodies (like
filled Marubozus), the Doji signals that sellers are becoming exhausted
and weak. In order for price to continue falling, more sellers are needed
but sellers are all tapped out! Buyers are foaming in the mouth for a
chance to get in cheap.
Lone Rangers – Single Candlestick Patterns
Hammer and Hanging Man:
• The hammer and hanging man look exactly alike but have totally
different meanings depending on past price action. Both have cute
little bodies (filled or hollow), long lower shadows, and short or absent
upper shadows.
• The hammer is a bullish reversal pattern that forms during a
downtrend. It is named because the market is hammering out a
bottom.
• When price is falling, hammers signal that the bottom is near and price
will start rising again. The long lower shadow indicates that sellers
pushed prices lower, but buyers were able to overcome this selling
pressure and closed near the open.
• The hanging man is a bearish reversal pattern that can also mark a top
or strong resistance level. When price is rising, the formation of a
hanging man indicates that sellers are beginning to outnumber buyers.
• The long lower shadow shows that sellers pushed prices lower during
the session. Buyers were able to push the price back up some but only
near the open.
Lone Rangers – Single Candlestick Patterns
Inverted Hammer and Shooting Star:
• The inverted hammer and shooting star also look identical. The only
difference between them is whether you’re in a downtrend or
uptrend. Both candlesticks have petite little bodies (filled or hollow),
long upper shadows, and small or absent lower shadows.
• The inverted hammer occurs when price has been falling suggests the
possibility of a reversal. Its long upper shadow shows that buyers
tried to bid the price higher.
• The shooting star is a bearish reversal pattern that looks identical to
the inverted hammer but occurs when price has been rising. Its shape
indicates that the price opened at its low, rallied, but pulled back to
the bottom.
• This means that buyers attempted to push the price up, but sellers
came in and overpowered them. This is a definite bearish sign since
there are no more buyers left because they’ve all been murdered.
Double Trouble – Dual Candlestick Patterns
• The bullish engulfing pattern is a two candle stick pattern that signals a strong
up move may be coming. It happens when a bearish candle is immediately
followed by a larger bullish candle.
• This second candle “engulfs” the bearish candle. This means buyers are flexing
their muscles and that there could be a strong up move after a recent
downtrend or a period of consolidation.
• On the other hand, the bearish engulfing pattern is the opposite of the bullish
pattern. This type of pattern occurs when bullish candle is immediately followed
by a bearish candle that completely “engulfs” it. This means that sellers
overpowered the buyers and that a strong move down could happen
Tweezer Bottoms and Tops
• The tweezers are dual candlestick reversal patterns. This type of candlestick
pattern could usually be spotted after an extended up trend or downtrend,
indicating that a reversal will soon occur.
Assumption
• When a set of factors that have panned out in
the past tends to repeat itself in the future, we
expect the same outcome to occur, as was
observed in the past. One of the key
assumptions in technical analysis of the
market is that we rely on the belief that
history tends to repeat itself