THE LONDON BULLION MARKET ASSOCIATION
Of Black Crows, Pregnant Candles
and Evening Stars
An Introduction to Candlestick Charting
by Nicole Elliott, Senior Analyst, Mizuho Bank
Elliott switched to
candlestick charts for her
market analysis because she
felt that they compress more
information and display it
graphically in a fashion more
easily readable than the bar
version. The Zen-like poetry
of the naming conventions is
an added benefit.
Legend has it that, shortly after their invention
almost 400 years ago, one very successful
trader used candlestick charts to execute over
100 consecutive winning trades. But legend or
not, candlestick charts have remained in use
throughout the centuries – and in fact have
enjoyed a surge in popularity in recent years.
It was Japanese rice futures traders who first
developed these candlestick charts in the
1600s, well pre-dating the first American bar
charts of the 1880s.They are based upon the
same information as bars and, as with bar
charts, for any given period – a month, a day
or an hour – prices are plotted vertically on a
chart moving from left to right by the chosen
time interval.The examples used in Chart 1
are based on days, but the rules apply equally
to other periods.
A note is made of the opening price, the high
and low points, and the closing price that day.
The high and low are treated in the
conventional way, joined with a vertical line,
but the other two points are configured
differently than in a bar chart.The open and
close are used to form the body of the candle
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the three key elements
to study.
fig 1
Some years ago, Nicole
Open
Close
and are plotted as
Open
Big bodies logically
a slightly wider
Close
mean that the market
section around the
has seen a sizeable move
vertical line. On bar
fig 2 Doji Patterns
in price that day.The closer the
charts the open is
open and close are to the
sometimes plotted as a
extremes of the day’s range,
small horizontal line to
the bigger the body, and the
the left of the bar, while
more momentum in the market.
the close is always
Conversely, the smaller the
plotted as a small
fig 3 Spinning Tops & Bottoms body, the more evenly
horizontal to the right. If
matched are buyers and sellers,
these were joined, you can
and the higher the likelihood of a
see that it is only a small step from
trend reversal. Small bodies with
bars to candles (Figure 1).
lines of equal size at either end are
called spinning tops or spinning
If prices open high and trade
fig 4 Shooting Stars
bottoms depending on where they
down towards the close, the
lie at the end of a trend (Figure 3).
body of the candle is coloured in
black (or any other of the six
A very reliable pattern has a small
million colours available on
body (of either colour) at one
today’s computers). If
end of a large daily range,
the market closes above
where it opened, then the fig 5 Hanging Man & Hammer showing that a market has
opened and scurried all the
body is left empty, or
way to the other extreme, only to
traditionally white, based upon the
reverse direction and finish back
use of white graph paper.
where it started. The shadow is the
long line attached to the small
Patterns formed by the
body. At the top of a bull trend,
candlesticks are given a
fig 6 Bullish Engulfing
this formation is called a
name when they signal a
shooting star or hanging man;
possible change in the
at the bottom, it’s called a
prevailing trend. One of the
hammer, as the pattern looks
most common of these is a
like a mallet.These are
doji – derived from the
considered very powerful and
Japanese for simultaneous –
fig 7 Bearish Engulfing
clear chart signals that warn of
which occurs when the
an immediate and often
open and close are at
violent change in trend
exactly the same level and
(Figures 4 and 5).
the body is represented by a
horizontal line (Figure 2).
Other reversal patterns look at
Shooting Star, Hanging Man,
two or more candles in succession. A bullish
Spinning Top
engulfing pattern is one where, on day two,
The total day’s range and how this lies relative
there is a candle with a large white body
to the body, the colour of the body, and the
whose range is bigger than the previous day’s
body size relative to the whole candlestick are
(ideally a doji occurs on the first day, followed
ALCHEMIST
ISSUE THIRTY–FOUR
This chart below of COMEX gold clearly illustrates several key formations.
XAU=, Bid (Candle) Daily
20 December 2003 – 13 May 2004
Shooting Star
Shooting Star
Pr USD
Spinning top
Bearish Engulfing
425
420
415
410
405
400
395
Harami
390
385
Hammer
380
Hammer
375
370
29 Dec 03
12 Jan 03
26 Jan 03
09 Feb 03
23 Feb 03
by a candle whose body is bigger than the
whole of the previous day’s range – Figure 6).
A bearish engulfing pair is the opposite, with a
large black body eclipsing the previous small
body (Figure 7).
08 Mar 03
22 Mar 03
05 Apr 03
19 Apr 03
03 May 03
bodies) at the top of a bull trend are, as the
name hints, an evil omen and suggest the
trend will turn down.Three white soldiers at
the bottom of a bear market are the opposite
and hint at a bullish trend emerging. Other
three-candle combinations are the morning
Dark cloud cover is a similar topping pattern,
and evening stars with the former at a bottom
but the second day’s black body does not
and the latter at a top.The first candle in an
totally eclipse the previous
evening star combo has a
day’s white body, which can
large white body; the
fig 8 Dark Cloud Cover
be as big as day two’s body
second day’s small body
(Figure 8). Piercing pattern is
does not touch the first
the name of this formation
body, nor does it touch the
when it occurs at the bottom
third day’s big black body
of a trend when a large white
(Figure 11). The reverse
candle does not quite overlap
holds for a morning star
the previous day’s black one
where the third candle is
(Figure 9).
white and the first one has a
fig 9 Piercing Pattern
big black body. The middle
Harami (stemming from the
day must have a small body, but
Japanese word for pregnant) are
this can be of either colour (Figure
patterns that are also made up of
12).
two days’ worth of candles,
where the second day’s body
As with bar charts, we also look
(which can be either colour)
for bigger patterns made up
fig 10 Harami
lies totally within the
from a series of candles such
previous day’s big body.
as head and shoulders,
These are opposite of the
triangles, double bottoms,
engulfing patterns and
and we use trendlines plus
represent what we
support and resistance
western chartists would
levels as in conventional
call an inside day.These
technical analysis
patterns denote uncertainty,
fig 11 Evening Star
and show that a potential
If all this is starting to
turning point in that the
sound complicated, do
big day’s move has seen no
not worry. The main
follow-through (Figure
advantage of using
10).
candlestick charting is
that the closing price
Three black crows (three
relative to the open
fig 12 Morning Star
consecutive big black
stands out clearly, and
spikes or false breaks of a trendline can be
easily spotted, as they are shadows. With
practice, your eyes become able to skim over
lots of charts and pick out quickly those that
are interesting and worth watching; the ones
showing markets on the move or trends that
are reversing.
This article provides only a brief introduction
to candlestick charting. For further reading,
see Japanese Candlestick Charting Techniques
and Beyond Candlesticks by Steve Nison,
published by John Wiley and Sons Inc.There
are also numerous websites devoted to
candlesticks. ■
Nicole Elliott,
a graduate of the London School of
Economics and member of the Society of
Technical Analysts, has worked in the City of
London for over 20 years. In trading, sales or
as an analyst within the treasury
departments of major international banks,
technical analysis has always formed the
backbone of her methodology.As Mizuho
Corporate Bank’s senior analyst in London
she covers the foreign exchange, interest rate
and commodity markets and equity indices.
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