AN EASY APPROACH TO JAPANESE CANDLESTICKS Stefano Calicchio published in: 2013 isbn:00000000000 Digital Edition powered by BackTypo by Simplicissimus Book Farm AN EASY APPROACH TO JAPANESE CANDLESTICKS Table of contents Colophon Disclaimer Introduction A First Look at the Japanese Candlesticks Brief Candlesticks History Basic information The Candlesticks Formation Candlesticks Typologies The Shadows Candlesticks The Price Patterns The Morning Star and the Evening Star The Hammer and the Hanging Man The Shooting Star and the Inverted Hammer The Engulfing Pattern The Dark Cloud Cover and the Piercing Line The Harami Pattern The Tweezer Top and the Tweezer Bottom The Three White Soldiers and the Three Black Crows Gaps and Candlestick Trading The Continuation Patterns The Three Methods Pattern The Thrusting Line The Japanese Candlesticks Graph Some Final Suggestions Conclusion Disclaimer This book does not constitute a consultation or solicitation to the public saving in any way. Dealing with Exchange is a risky activity. The reader is fully aware and responsible for his own financial decisions and the risks related to any type of activity. By such a disclaimer, the Author declines any responsibility on possible inaccuracies of reported data, damages, economic losses, consequential direct or indirect damages by the use or popularization of the information contained within this book. Copyright: 2012 © Standard license - All rights reserved. Introduction Would you like to discover one of the most well-known price Analysis Technique used by professional traders and companies? Would you like to learn and understand the market and its financial tools with a simple glimpse? Have you ever stopped thinking about how you could learn and immediately recognize the patterns and the predictable schemes of the market? If the answer to these questions is yes, the Japanese candlesticks are the best for you. While financial trading was acquiring more and more importance, the Japanese candlesticks managed to be amazingly successful all around the world in the last years. However, they owe their success to online trading, as well as to evolved graphic software and charting tools. Today all the brokers allow their own clients to visualize the market prices according to the candlesticks bar rules. This methodology can also be learnt in a simple and efficient way even by those who are not experts on financial markets, especially from a mathematical, statistical point of view. Furthermore, the Japanese candlesticks can offer an interpretative immediateness and a trading efficiency. The purpose of this guide is to provide you with the tools that you can apply to your daily work. A First Look at the Japanese Candlesticks In the next pages, you will learn the configurations of the Japanese candlesticks prices. This means that you will be offered the opportunity to study numerous price patterns or schemes, which are generally formed by two or more candlesticks. You will go into the implications of every configuration and you will be able to see them at work during a trend investment or a trend continuation. Technical Analysis is the subject from which the statistic observations of the market come. The premise is that the facts happened in the past can cyclically repeat in the future. This way, if you can identify the candlesticks that have been able to anticipate some important graphic movements by a statistic value, you can take advantage of this knowledge in the future market. Obviously, although there is no guarantee that the future and the past can be the same, this knowledge can help your background and turn out to be better over your competitors. It is suitable to point out in this early phase that the Japanese candlesticks are just a simple analysis and interpretation tool, so this is how they must only be used. This is why we have to start up by considering some typical candlesticks advantages and disadvantages, before starting a real trading operation. Among the numerous strong points of this technique, we can quote: The immediateness and speed by which a skilled analyst can recognize the price schemes inside a graphic candlestick; The extreme application flexibility, due to the fact that the Japanese candlesticks analysis can be applied to any kind of market (not only a financial one) and that a historical series of a price chart can be available; The psychological calmness that a trader can acquire by having at disposal a tool that allow him to understand what can happen in the market. Moreover, we have to bear in mind some limits: The signs that can produce a mistake because of a superficial valuation or interpretation; The occasional necessity to find a confirmation which can come from different analysis tools like indicators and oscillators, before sending a market order; The obligation to suit this technique to the corresponding market, due to the fact that some price charts seem to work better in a strong liquidity or in a volatility context; The necessity to wait for the chart to be closed, in order to understand its real value, that is to say, before being able to appraise positively the trading signs. By outlining what we have just stated, you can observe that the advantages are much higher than the possible application limits: To sum up, learning how a Japanese candlestick can work will offer you a great advantage over all the market traders that ignore its potentialities. Likewise, it is important not to apply scholastically a candlesticks technique. Experience and constancy will also help you to study and understand which patterns will be the best and what charts will be more functional for your financial working tools. Brief Candlesticks History It is the name of the Japanese candlesticks itself to suggest the origin and the background of this technique. Since The Candlestick Analysis was born in Japan in 1700 in the rice markets, hundreds of years of researches and applications have been made. At that time, rice was the principal goods of exchange in Japan. A rich merchant, Munehisa Homma, understood the cyclical repetition of the same patterns and prices on rice trading futures. This is why he decided to exploit this idea and plan his own speculative strategy. What he understood was so extraordinary that his name became legendary throughout Japan. He was considered the best trader of that time and became a government advisor of the Imperial Japan, which awarded him with the most important honors. In the meantime, he accumulated such a real fortune that he became the richest man in the country. Before dying, at the beginning of 1800, he left a book to the posterity about trading and psychological market rules. He entitled it “The Golden Fountain”, which was the first book to deal with the financial markets through an innovative approach of interpretative analysis of the price movements. In his book, Homma Munehisa explained that the convictions and the emotions of the traders have a conclusive influence on the movement of rice prices and that it could be used to plan a successful trading strategy. Thanks to his extraordinary activity, today we have the possibility to study and apply the Japanese candlesticks technique. Basic information The first thing to learn is to understand how a Japanese candlestick can take shape. The most evident difference between a traditional financial chart and a Japanese candlestick is about how they can be observed by traders. A candlestick is a price line divided into many single bars, which are similar to a candle. Each of them takes shape and develops according to two factors: The temporal sample with which the construction of a price chart is planned; The volatility measure that the financial tool has shown while it is observed. These points immediately highlight an interesting norm: the Japanese candlesticks can visually offer a different representation of the price volatility, which is a factor that facilitates enormously the task to understand the markets. The easiest way to notice this difference consists in comparing the same financial tool according to the graphic representation rules. All the graphs that we usually know, which come from the specialized press and the main financial media, are the socalled ‘linear type’. In the image below, you can observe that the price course is shown as a line that moves with the passage of time. In this kind of graph, which is an example of a bear trend, you can literally see and understand what a trend course is: A second graphic representation, used by the most expert traders, is the so-called bar graph visualization. Here is an example: In this graph, the prices are represented by bars whose height represents the peaks and the dips of the period we want to examine. On the left side of the bar, there is a hyphen showing the opening price, while on the right one it is possible to observe the closing price. We see through an enlargement the details of what we have just stated: At first sight, the bars visualization might complicate the general understanding of the graph. However, this visualization offers the chance to better observe the market and the construction of the prices. The dimension of the peaks and dips of the day allows getting precious information if you want to understand the course of the market and the price struggle between buyers and sellers. However, thanks to the Japanese candlesticks, we can be offered an even more interesting graphic visualization: Please, observe how the course dimension of the prices changes, according to their representation, which is common among candlesticks. Apart from the measure of the (linear) trend and the openings and closings comprehension, the bar color immediately offers us a visual relation as far as the purchases or sales predominance is concerned. In the enlargement, we can observe some of the most common Japanese candlesticks. In this essay, we will learn how to recognize the value and the meaning of it. For now, we are only going to observe how the trend perception compared to the classical linear graph can change; the price course acquires an extraordinary dimensionality and becomes immediate and fascinating. What really makes interesting this representation is the fact that the candlesticks set between the trend peaks and dips can offer some valid and anticipating signs about the possible continuation or investment of the price trend. The Japanese candlesticks research will let us anticipate so many changes that we can use them profitably during our trading activity. The Candlesticks Formation The distinctions among the different price graphic representation rules of a financial tool that we have seen above have been useful to underline the operative potentialities of the Japanese candlesticks over the most traditional charts. Now it is necessary to put another foot forward and learn how prices can take form through the candlesticks technique. This step is fundamental to understand a graph better, as well as to recognize easily the patterns and the continuation and investment schemes that will be studied in depth in the following pages. As we have already done for the bar graph, we can now see an enlargement of some Japanese candlesticks. The picture below represents two typical price candles. The first one, which is underlined in dark, is called ‘bear candlestick’. The second one, whose body is white, represents a ‘bull candlestick’: You will have already realized the difference between the two candles. In the bear candlestick, the closing price is lower than the opening price, which means that sellers have shown their great strength, by winning the price battle, while in the bull candlestick the opening price is lower than the closing one, which means that the battle has been won by buyers. Another interesting data we can observe in these candlesticks is represented by the so-called ‘shadows’. In the picture above, we can notice a bull (or upper) shadow and a bear (or lower) shadow. These symbols are actually formed by period peaks and dips and by a related tracing until the closing price. This is an important sign, because it transmits traders the emotional battle carried out in the field, by offering the strength of the two different armies in action: the buyers and the sellers. Candlesticks Typologies We have studied the dynamics with which the Japanese candlesticks can take form. Now we are going to analyze the different candlestick typologies that can appear in a market graph. This background will let us speed up our recognition abilities among the different candlesticks in a real time or as soon as they appear on the graph. The Japanese candlesticks were invented and distinguished according to two principles: The opening and closing prices, because these can determine the candlestick body shape and its relative color. (According to that, the price battle carried out in the sample has been won either by buyers or by sellers); The period price peaks and dips, which compete to point out the volatility of the period, by offering a clear sign around the contenders’ strength. A factor that we have taken for granted until now, although it results fundamental to understand the price patterns, concerns the dimension of the candlesticks body and its corresponding shadows, which produces many different candlesticks. We can find, for instance, candles with a very short or wide body, others with a very wide or thin shadow, and even others with no body or shadow at all. As far as candlesticks body is concerned, the difference is enormous. When the body is very long and wide, we can observe a price upsurge; in other words, we are in the presence of an evident one-way movement or a strong trend inversion. This kind of candlesticks is a clear sign of buyers or sellers’ strength. However, we will observe later that a candle position in the graph must be considered very carefully. On the contrary, when the body is very short and thin, we can see that the market is in a stalemate, which means that buyers and sellers are still waiting for a new battle. In the following picture, we can observe the abovementioned differences: These shadows point out the relevant dips and peaks, which can only be present at the top or at the bottom as well. A different candle can take form if a shadow is completely absent, both among a bull trading and a bear trading. Here is an example: This particular candlestick called Marubozu is rather meaningful, especially if it appears at the same time with a peak or a dip period. The lack of shadows means that we are in the presence of great bull strength (in the first case) or bear strength (in the second case). This sign means that a trend inversion is occurring. Now we can have a look at the analysis of the shadows and at how they can turn into a candle. Generally, the shadows can be very long or short. In the first case, if a shadow appears at the top or at the bottom of a candle, we have a rejected attack from buyers and sellers. The shadow of this kind of candles, which points out a volatility explosion, is called ‘long’. Here is an example: The candle on the right is named ‘Spinning Top’ and it is different because it has a long shadow, which is present both at the top and at the bottom. Moreover, in order to be considered a Spinning Top, a candle has to have a very small body as that in the picture above. When a candle takes this kind of shape, the market is losing its bearings and, in spite of a strong volatility, it does not know which direction to take. The fight between buyers and sellers is strong, but none of them has the necessary strength to prevail. Spinning Top candles are a warning sign about a possible trend inversion, especially if they occur near important supports or resistances. Sometimes two or three Spinning Top candles can follow before the market finally makes the decision to continue or not. It is fundamental to learn to recognize similar conditions of the market, in order to take advantage of the situation. The Shadows Candlesticks Among the various types of candles, which belong to candlestick analysis, we have not studied yet one of them that is useful to understand what happens in the market. These candles, which are often called ‘Doji’, are only made of shadows and are one of the most important ones in the Japanese candlesticks world. They are important signs not only because of their singularity, but also because of their position inside a price pattern. It is not a coincidence if a Doji regularly appears among some of the most effective and sure Japanese candlesticks patterns. As you can observe below, a shadow candle stands out for its lack of body: Shadows candles are rather rare, although they immediately draw particular attention because of their longlimbed and basic shape. When this kind of candles appears, they introduce an identical or a very similar closing point to the opening one. This is the reason why the central body grows thinner and thinner until it disappears almost completely. The transformation of a candle body into a horizontal line points out the perfect neutrality of battleground strength. This is why the most important Dojis can take form after wide candles and important market movements: because they can anticipate a possible market inversion. There are three types of Dojis, which deserve to be carefully examined: the Long-legged, the Dragon Fly and the Gravestone. The Long Legged Dojis point out a durable stalemate of the market. The contenders have produced some strong volatility situations and turned back with no important change. As far as the Dragon Fly and Gravestone candles are concerned, the case is different because it highlights a failed bull or bear trading. In order to take form, the candle opening and closing have to coincide with a corresponding peak or dip, so the characteristic T-form of a candle takes shape and it is immediately visible in a graph. These candles are also called ‘Inversion Doji’ because of their appearance at the end of a strong directional trend, which shows the possible change of direction in the shortterm. The Price Patterns At this point, as you have learned a little more about the Japanese candlesticks graphs, you should be able to recognize the different types of candlestick, which take shape in the market, and the corresponding implications that emerge after a battle between buyers and sellers. In the next pages, we will try to link what we have seen now from a wider point of view. We will see how two or more candles, taken as a whole and in a specific market situation, can anticipate a trend continuation or inversion with a good safety level. We will especially make a list of some of the patterns recognized as more statistically valid so that they can seem to be more familiar to you and recognizable as soon as they take shape in your trade price graphs. Among these, we must quote the followings: The The The The The The The The The Morning Star and the Evening Star; Hammer and the Hanging Man; Shooting Star and the Inverted Hammer; Engulfing Pattern; Dark Cloud Cover; Piercing Line; Harami Pattern; Tweezers Top and the Tweezer Bottom; three White Soldiers and the Three Black Crows. Now it is the time to study carefully the above-mentioned patterns. The Morning Star and the Evening Star These patterns are among the most effective anticipation schemes of a trend inversion and they are used in a profitable way by all traders from all over the world. This pattern is formed by three candles: the external ones have a long real body, while the candle in the middle is a typical Doji: The above-mentioned image shows a typical configuration called Morning Star. This price pattern occurs at the end of a bear movement. Here is an example: The Evening Star is exactly the opposite of a Morning Star, so the difference is that this pattern appears at the end of a bullish trend and it has the same statistic value of a bullish one: And here is an example of an Evening Star in a graph: Let us think for a moment about the psychological factor that these price patterns can produce: we are in the presence of a strong directional trading conclusion where a last bull or bear lash can produce a Doji, and an open space between the extreme edge of the previous candle and the beginning of a new one. The formed Doji is usually a rather small candle, that is to say, a sign of a sudden volatility decrease and a great uncertainty in the market. The third candle confirms the change of direction that could be realized through the Doji and the opportunity to start an interesting trade. The Hammer and the Hanging Man The Hammer and the Hanging man are other two very common inversion charts in the candlestick analysis. Unlike other patterns, these schemes are formed by only one candle. Here is an example: The final part represents a bear trading and it is constituted by a small body at the top and a long shadow at the bottom. This candle clearly shows that the sellers’ strength is going to disappear completely as shown by the long shadow formed at the bottom. This is an anticipating sign of a bull trend inversion, which is going to take form. A Hammer can appear in a graph like this: The Hanging Man is specular to the Hammer and takes shape during a bull movement. The typical market that can express a Hanging Man is the overbought, where buyers can lose their strength. To confirm this, the long shadow of the Hanging Man expresses the market wish to head for a bear movement. How does a Hanging Man appear inside a price graph? The following image can help you to understand this: To sum up, we can say that when these shapes are at the end of a bear or bull activity, a trend inversion is very likely to occur. It does not matter the color of the body of the candle you can see, although I recommend you to check carefully the candle that follows in the picture, in order to be sure about it. The Shooting Star and the Inverted Hammer The Shooting Star, also called Falling Star because of its shape, shows the end of a bull trend and it appears as if it was the peak or the last higher candle before lower prices come again. Its long shadow at the top of the Shooting Star reveals a lost battle, that is to say, bull strength against sellers. From a psychological point of view, the market shows a possible fall, although, from a trading point of view, a next bear candle can be seen as a confirmation of that. Here is an example of a Shooting Star in action: The second black candle is a confirmation of a break produced by the increasing minimum result of the previous bull trend, which guarantees a good inversion pattern. The Inverted Hammer is similar to a Shooting Star, but it takes shape at the end of a bear trading. It is formed by a candle with a rather small body at the bottom and a long shadow at the top. In order to understand the difference with the previous candle, it is necessary to observe the Inverted Hammer in action. In the following picture, we can see the most typical and natural price configuration of this pattern: It is also evident that we are in the presence of a white confirmation candle, which guarantees a real market turnaround. The Engulfing Pattern A pattern that traders who use the candlestick analysis prefer is the Engulfing Pattern, because of its effectiveness and frequency on price graphs. The Engulfing Bullish takes shape when a bear candle is followed by a long bull candle, whose peak and dip close below and above the previous candlestick. The word ‘engulfing’ describes exactly this operation, because it embraces or swallows the entire previous candle. This means that the market allows one side to keep everything under control and then pass it to the other side (from sellers to buyers or vice versa). The power of this sudden change makes this pattern very efficient so that the necessity to attend further confirmation candles can fall off, as it is usually required by weaker patterns. Here is an example of two Engulfing Patterns where the first candle is a bull one: And here you are an example of an Engulfing Bearish: When you have familiarized with these patterns, by recognizing them while they take their shape and according to dip or peak periods, the activity will turn out to be easy. Now we are going to see how this price pattern can appear in a trading context: A Bear Engulfing can appear like this: We cannot forget that these patterns must be detected during an overbought or oversold phase, because their presence in secondary markets becomes irrelevant for trading purposes. The Dark Cloud Cover and the Piercing Line The Dark Cloud Cover is a pattern that can anticipate a possible bear movement, so it must be detected when the market reaches the bottom. If it happens, some good trading opportunities can be taken, even if it requires at least another valid confirmation candle. Therefore, here you are an example of a Dark Cloud Cover: After this kind of candles, we can expect: A first strong bullish candle; A second bearish candle that opens above the previous peak. From a trading point of view, we can study this price scheme by observing the following example: Please observe how the confirmation grey candle offers a valid sign that closes with a lower dip if compared to the dips of the other two previous ones. It is evident that this is a perfect Dark Cloud Cover, which shows the ability to anticipate a bearish inversion of the prices. A Piercing Line is the opposite of a Dark Cloud Cover, because it represents a bull inversion. Here is an example: As usual, here you are a trading example: At best, it takes shape during a dip period, whereas the white candle confirms the trade validity. The Harami Pattern The Harami Pattern is the opposite of the Engulfing Pattern. This means that the first candle with a rather firm extension is followed by a candle that can be contained inside the previous real body. This shape shows the attempt to set in order the market after that a battle on the field has seen the prolongation of a bear or a bull trend: We must bear in mind that in a Harami Pattern the color of the candles is irrelevant. When this pattern is detected, we do not need to act, but just take note of the new standstill situation. Finally, we must not forget that the Harami is a very common technical pattern, which is often present in secondary markets and in every price consolidation situation. The Tweezer Top and the Tweezer Bottom The Tweezer is a pattern that occurs during a market peak or dip period. Its shape is similar to two candles with the same peak (in a bear trading) or the same dip (in a bull trading). Here is an example of a Tweezer Top: And here is an example of a Tweezer Bottom: From a trading point of view, this is an inversion pattern so that we can find them (at least during their best condition) in overbought and oversold markets. Now we can see a Tweezer Top pattern inside a trading context, in order to help the reader to recognize and memorize it: The Tweezer Bottom is a pattern with a similar course, although it appears in a bear market. Here is an example: Be careful with the survey, because the pattern cannot be considered valid on the body of the candles, but on its dips, which can be also formed by long shadows. The Three White Soldiers and the Three Black Crows We can conclude our roundup about the main Japanese candlesticks by offering our readers the analysis of two patterns formed by three candles: the Three White Soldiers and Three Black Crows. Even in this case, we are in the presence of a trend inversion pattern made by three wide candles. When three long white candles appear during a bear trend, the pattern is called ‘Three White Soldiers’. On the contrary, when three long black candles appear during a bull trend, the pattern is called ‘Three Black Crows’. Because of their simple shape, they can be easily identified. Here is an example: From a psychological point of view, the power of this sign is rather evident. Although at the end of one bear period a long white candle can be expected, the second and the third candle can represent a confirmation of a very firm trend inversion. A similar argument can be done for the Three Black Crows, represented as follows: Gaps and Candlestick Trading What are the Gaps? And what implications do they have in the Japanese candlesticks analysis? Before continuing with the continuation patterns, it can be interesting to study the market Gaps in depth, in order to consolidate some of the above-mentioned inversion patterns. By the term ‘market gap’, we mean the space that is created when: A bull candle opens and/or marks its dip above the peak of the previous candle; A bear candle opens and/or marks its peak below the dip of the previous candle. When a gap appears, we are in the presence of a market lack, as we can observe in the following graph: According to the candlestick analysis, it is important to learn how to recognize these gaps, because if they appear during an inversion pattern, they can acquire a very significant value. In many cases when there is a gap, prices tend to get close again, that is to say, they tend to come back to the previous peak or dip of the same opening gap. In this case, the gaps are said to act as supports and resistances, which create some price levels that traders must check carefully. A bull or a bear gap breakout is considered as a powerful sign of the market and it can lead to plan good trades. The Continuation Patterns Until now, we have seen numerous price patterns whose name ‘Inversions’ is due to their ability to foresee a sudden trend change in the market. Such patterns are useful during volatile markets, and they help the trader to plan profit strategies based on directional operations. However, investment strategies exist, for instance, in the option or the currency market, which allow earning in secondary markets with the passage of time. In this case, a trader must aim at verifying that the price formulation can continue in defined trade channels. Other times, it is important to understand if a bull or a bear trend has good options to go on. In all these cases, the Technical Analysis applied to Japanese candlesticks introduces some useful tools that can anticipate a trend continuation. This way, it is possible to receive some valid confirmations about a trade that has already started. The main continuation patterns that we are going to analyze are: The Three Methods Pattern; The Thrusting Line Pattern. We should also add the Harami Pattern, because, although it occurs during important bottom or top trading activities, it cannot be considered as a real inversion pattern. The Three Methods Pattern There are two kinds of ‘Three Methods Patterns’: they are the ‘Rising Three Methods’ and the ‘Falling Three Methods’. As we can guess, they are examples of bullish or bearish continuation patterns and must be identified to confirm a good recent trend. Therefore, if we can recognize these patterns in the price graph, we are in the presence of a good trend confirmation. Now we can begin by analyzing these images and relative comments on the picture. The Rising Three Methods will appear inside a trading context as follows: This pattern is formed by five candles: The first candle is a clear bull one; The other three ones have a rather small body and decreasing dips; The third candle is again a bull one and leads to form new peaks. The exact opposite pattern is the so-called Falling Three Methods, which we can see in the following picture: In addition, we must try to understand the psychological reason why this pattern has this shape. After a strong directional movement, the battle among buyers needs a break. This is well represented by the volatility diminution and the small body of the three following candles. The last candle introduces a definite break, which means that a firm trend continuation is started again. Moreover, this happens when the Three Methods pattern finds its own confirmation. The Thrusting Line The thrusting line is a rather ambiguous pattern, which can confuse many traders and can have either a bullish or a bearish trend. This can occur because: · Either a Bullish Thrusting Line can partially take the shape of a bull candle followed by a partial bear one; · Or a Bearish Thrusting Line, can take the shape of a bear candle followed by a partial bull one; In both cases, the breakout of the half zone of the previous candle does not happen. When a Thrusting Line appears, it means that we need further confirmations before offering trading guarantees. In the following graphic pattern example, we can see a Bullish Thrusting Line: And here is an example a Bearish Thrusting Line: The possible confirmation of a continuation pattern takes the shape of a gap or a third candle that closes towards the main trend. The Japanese Candlesticks Graph Now that you have a clear idea of the most important inversion and continuation Japanese candlesticks, you are ready to observe a graphic candlestick and identify a formation pattern. It is important to underline that this kind of activity cannot be improvised, because it is necessary to study and analyze carefully all the patterns which can appear in a graph if you want to learn to familiarize with this topic. In addition, consider that every financial tool has its own graphic peculiarities; for instance, you could find that some patterns can be more effective if compared to others, by simply changing the title you have observed. This is the reason why it is important to dedicate some of your time to study and observe a price graph, before making any trading decision. In order to familiarize and understand the patterns and schemes, and offer a clearer idea of the potentialities of this technique, we are going to study some price patterns in depth as a whole. Here are some graphs examples: The first graph is an example of a bearish trend, which ends with an Inverted Hammer (1) and a trend inversion. The bullish trend is subsequently confirmed by a Three Rising Method (2) and a new peak. At this point, we have a new bearish trend inversion characterized by a Dark Cloud Cover (3): The second graph, which also starts with a bearish trend, is stopped at the bottom by one of the most powerful bull candlesticks patterns: the Morning Star (4) and soon after a bullish trend inversion, which is confirmed by the presence of a second bull price scheme or a Harami pattern (5). The last graph shows the end of a bullish trend with a splendid Shooting Star (6), which confirms a bear inversion. Through this price fall, we find an interesting continuation pattern: the Thrusting Line (7), which suggests a new period dip. Some Final Suggestions This introductory guide has the purpose to introduce you easily to the Japanese candlesticks world by a practical, immediate way. Since a candlestick graph is usually seen as an agglomeration of symbols, which can be difficult to understand, this essay can give you the guidelines to learn quickly and easily how a Japanese candlesticks graph works and can be used. Now that you have the necessary basis to start using a candlesticks graph, you will be responsible for investigating this topic in depth. Nevertheless, you have to spend a lot of time by observing a price graph in a real time, in order to understand clearly the patterns that take a shape during a normal trading activity. It is not only a matter of memorization. The point is that you can be tempted to anticipate a pattern formation that eventually does not appear, because of a sudden change. For instance, a pattern similar to a bull candle can turn out to be just a shadow, and a pattern similar to a black candle can turn out to be just a doji. Moreover, it is possible that some patterns can be effective in precise sample times or in trading contexts that are different among them. In addition, many price patterns can be integrated into wider analysis methodologies, or chosen by using different Technical Analysis strategies, such as indicators, oscillators, and basic analysis. This is the reason why you must see this book as a simple introduction to Japanese candlesticks, so do not stop reading and studying the real market. Conclusion During this long investigation throughout the Japanese candlesticks world, we have tried to provide you with the main necessary elements that you can need to understand a candlesticks graph. You should have understood how the prices course in the market is represented graphically by the Japanese candlesticks and how they can turn into patterns or schemes that are able to anticipate a trade inversion. If you realize how powerful this technique is, you will manage to improve their efficiency and become more aware of the market signs, as well as to acquire an important psychological, operational calmness. To sum up, they can provide you with top results because of their ability to understand and keep under control the market trend prices. I hope this guide has been able to introduce you to the Japanese candlesticks world, as well as to help you understand better this market and get the best results in your daily work.
