There are far more patterns of multiple candlesticks than there are stand-alone candles with high meaning. Specific combinations include the star formations, engulfing bull or engulfing bear, the harami, evening and morning stars, three white soldiers or three black crows, tweezers bottom or top, and many others. In total, there are over 100 candlestick patterns, but if you learn just a handful, they will help your understanding of market sentiment. Many people believe that candlestick patterns excel in identifying reversal points, and in Forex so many people agree with this view that you do yourself a disservice if you do not learn at least some of the key patterns
- Candlestick charts are used by traders to determine possible price movement based on past patterns.
- Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
- Many algorithms are based on the same price information shown in candlestick charts.
- Trading is often dictated by emotion, which can be read in candlestick charts.
Spinning Tops
Japanese candlesticks with a long upper shadow, long lower shadow, and small real bodies are called spinning tops. The color of the real body is not very important. The Spinning Top pattern indicates the indecision between the buyers and sellers.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. Even though the session opened and closed with little change, prices moved significantly higher and lower in the meantime.
Neither buyers nor sellers could gain the upper hand, and the result was a standoff.
Marubozu
In Japanese, the word Marubozu means ‘shaved head’. If you look at a Marubozu candlestick, the first thing you will notice is that it has only a body and no tail, wick, or shadow.
Marubozus are used by traders to identify strong bullish or bearish patterns. The lack of shadows or wicks indicates that the chart does not extend beyond the price range of the opening day. There are two types of Marubozus:
White/Green Marubozu
A Green/White Marubozu has a long body that is either green or white in colour with no wicks or shadows. This implies that the opening price is equal to the market low and the closing price is equal to the market high.
In simpler terms, the candle opened at its lowest price and closed at the highest price. This is an indicator of a market that is highly bullish. Depending on the period that you are looking at the chart for, this candle indicates a bullish sentiment. This can either indicate a bullish reversal pattern or the continuation of a bullish cycle. It also indicates that the buyers dominated the market.
Black/Red Marubozu
A Red/Black Marubozu has a long body that is either red or black in colour with no wicks or shadows. This implies that the opening price is equal to the market high and the closing price is equal to the market low.
In simpler terms, the candle opened at its highest price and closed at the lowest price. This is an indicator of a market that is highly bearish. Depending on the period that you are looking at the chart for, this candle indicates a bearish sentiment. This can either indicate a bearish reversal pattern or the continuation of a bearish cycle. It also indicates that the sellers dominated the market.
- A Marubozois a long-bodied candlestick with no shadow, from the Japanese word meaning “close-cropped”.
- Candlestick charts look at the opening and closing price on a single day and are used by technical traders.
- A candlestick with no shadows is regarded as a strong signal of conviction by either buyers or sellers, depending on whether the direction of the candle is up or down
Doji
The usual approach to forecasting trends and building a trading strategy is to examine candlestick patterns in the prices of assets traded on the stock market. When studied along with a variety of other data, there are a lot of different candlestick patterns that signal multiple possible market directions.
A Doji is a special pattern in a candlestick chart, which is a popular trading chart. It is distinguished by its short length, which indicates a limited trading range. The short length indicates that the opening and closing prices of the traded financial asset are equal or have little variances. A plus sign, a cross, or an inverted cross are all examples of Doji candlesticks.
In order for the price to continue rising, more buyers are needed but there aren’t any more! 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 Black Marubozus), the Doji signals that sellers are becoming exhausted and weakening.
In order for the 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.
- Doji are used in technical analysis to help identify securities price patterns.
- A doji names a trading session in which a security has an open and close that are virtually equal, which resembles a candlestick on a chart.
- The word doji comes from the Japanese phrase meaning “the same thing.”
- A doji candlestick is a neutral indicator that provides little information. They are rare, so they are not reliable for spotting things like price reversals.
- Doji formations come in three major types: gravestone, long-legged, and dragonfly.
Hopefully, by the end of this lesson on Japanese candlesticks, you will know how to recognize different types of candlestick patterns and make sound trading decisions based on them.
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