Candlesticks are the Oriental Technical Analysis Tool for trading in the stocks, forex, futures, cryptocurrencies, and securities in general.
Candlesticks were brought to the western world by Mr Steve Nison at the end of the ’80s and are an incredibly powerful tool that we can use to combine with our arsenal of technical analysis instruments that can make us successful home traders.
Even if Candlesticks are being taught as a basic tool for trading, this does not mean that they are not powerful. They are so powerful that they became a standard all over the world and can be used on every single trading platform that supplies charting tools, including TradingView.
This is no financial advise, all the content and the ideas present in this page and all the other pages of the website do not guarantee financial success and may lead to a loss of your money. You should always do your own due diligence before trading or seek professional advise.
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- Mr Steve Nison brought Candlesticks to the western world in the 90s.
- Mr Steve Nison, author of Japanese Candlestick Charting Techniques and Candlecharts Academy website.
- Candlesticks can be used platforms like TradingView.
- Article is merely an overview of the principles.
the fascinating history of candlesticks
the fascinating history of candlesticks
- Everything started in Japan between the 1500s and the mid-1700s.
- Between 1500 and 1600, Japan was constantly at war and only in the early 1600s was Japan unified.
- Candlestick patterns are derived from military conditions.
- The rice market was institutionalised, and the Dojima Rice Exchange was set up in late 1600 in Osaka.
- Rice coupons were sold against future rice deliveries which became the world’s first futures contracts, and the Dojima Rice Exchange became the first futures exchange.
How are Candlesticks used for Successfully Trading?
Candlesticks are a great visual signal of the market and the balance between bulls and bears, but like every single indicator within the market, they need further confirmation by multiple indicators. Therefore, you will see me doing my technical analysis videos, where I mention multiple indicators and rarely relying on just one.
The western technical analysis tools are already a great indicator, but Candlesticks have the power to show us a change in trends much earlier than others. Hence, they have the power to increase our profits and/or limit our losses.
There are multiple uses and combinations of traditional western strategies and Candlesticks, and you will find them all in Steve’s book. The simplest is the resistance and support lines, combined with Candlesticks, that you will often see me applying during my technical analysis videos, which I invite you all to join.
The beauty of Candlesticks is that they have names, which makes them fun to remember and easy (unless you are like me where you struggle with names).
As you have seen in my previous article, technical analysis is a way to measure the emotional component of the market, and you will see that their names will immediately give you a hint as to what that particular candle or pattern represents in terms of emotions hence, whether they represent a bullish or bearish sentiment towards the market that is being analysed.
How are Candlesticks used for Successfully Trading?
- Candlesticks are a great visual signal, but like every indicator within the market, they need further confirmation.
- Candlesticks have the power to show a change in trends much earlier.
- They have the power to increase profits and/or limit losses.
- The simplest combination is the resistance and support lines which are combined with Candlesticks.
- Candlesticks all have names.
How to read candlesticks
Candlesticks are easy to understand; they are composed of a body (known as ‘real body’) and shadows.
They are usually empty or full (black or white), but nowadays you can find them in green and red. Regardless of the colour, when they are full (white, or green); they are positive, meaning that they show an increase in value. While if they are empty, in other words, either black or red; they stand for a decrease in value.
These green or red parts are the real bodies of the candles, while the other thin lines above or below them are called shadows.
Each Candlestick stands for the activity within a determined period, which you can decide. For instance, if we follow a daily time frame, we know that each candle shows what has happened during a day. If we check a 12 hours time frame, we will see what activity has occurred within 12 hours and hence the activity in a day would be if we check two 12 hours candlesticks.
The real body of each Candlestick stands for the opening price and the closing price. If the Candlestick is green, the opening price is at the bottom of the real body, and the closing price is at the top. While if the real body is red, the opening price was higher, and the closing price was lower.
The shadows stand for the price extremes. The upper shadow of the Candlestick shows the highest price reached during that timeframe, while the lower shadow shows the lowest price reached during the timeframe.
In this example, we can see that this Candlestick had opened at 7,700.00, went to its lowest at 7,600.00 and then reached the highest price of 7,850.00, but then went down and closed at 7,800.00 because the interval of time (in this case a day) was finished.
Some candles have a very thin real body; this means that they open and close at the same price; they are called Doji.
Some have a small body, but not as small as a Doji, and are called ‘Spinning Tops’.
If a Candlestick has no bottom shadow because the extreme is either the opening or the closing price, it is defined as a Shaven Bottom, while if the same thing happens at the head of the Candlestick, it is called a Shaven Head.
Although they are very simple to understand, they are incredibly powerful, and you will soon find out that even if a definition is provided for each candle pattern, there are lots of grey areas, and space for interpretation. Therefore, I recommend reading the book
as it holds more shades than I could implement (and maybe remember) in one single internet article.
Trust me, these Candlesticks, combined with the basic trend lines, have the potential to get you started in trading straight away!
How to read candlesticks
- Candlesticks are composed of a body (known as ‘real body’) and shadows.
- They are usually empty or full (black or white), but you can find them in green and red.
- Each Candlestick stands for an activity within a determined period.
- The real body of each Candlestick stands for the opening price and the closing price.
- The shadows stand for price extremes. Upper shadow shows the highest price reached, while the lower shadow shows the lowest price reached.
- Candles that have a very thin real body; means that they open and close at the same price; and are called Doji.
- Some have a small body, and are called ‘Spinning Tops’.
- If a Candlestick has no bottom shadow, it is defined as a Shaven Bottom, while if the same thing happens at the head, it is called a Shaven Head.
Some Candlestick Examples
the hammer and the hanging man
A quite easy Candlestick that shows a reversal pattern is The Hammer, which is made by a small body and a long lower shadow, which needs to be at least as twice as long as the real body of the candlestick.
The head should either be shaven or with a small shadow. The colour of the body is irrelevant; what counts is their position in the charts.
The peculiarity of this Candlestick is that it changes name according to where it is found in a chart. If it is at the bottom of a downtrend, it is called The Hammer, while if it is at the top of an uptrend, it is called The Hanging Man.
Along with having a different name according to its position, this Candlestick can either show a potential reversal of the trend based on where it is found in the chart. If it is at the bottom of a downtrend, it represents a potential bullish reversal, like in this example with Apple stock.
In this example we can see Apple in September 1990 being unable to hold on the support line (1) at $1.20 that kept it at the same price range since 1987, generating a series of three red candles culminating under “A”.
In October 1990, we see the formation of a green Hammer right under “A”, which had generated an abrupt inversion of the trend, bringing Apple to a new high and possibly a new resistance as it has been tested for several months to come, until a new descent in June 1992 (the first red candle under “B”), after which we see three red candles; the second being another Hammer, which brought Apple back to an attempt to reach the previous resistance at $2.40, but failed. However, finding support at “2” which was defined with the first Hammer (“A”).
Intel in November 2008 had found support at $12.04 after a bear run started at $24.32. The first signal of this support was the red Hammer “A”, which was followed by another red Hammer just two weeks later.
This support area “1” was confirmed again in March 2009 where Intel resisted another attempt to be brought down by the bears.
Another Hammer formed later during a bullish trend in November 2009 “B”, defining a new support area for investors “2” and the bull run ended exactly at $24.32 with a Hanging Man “C”, but this time, Intel kept above with new support found and confirmed with another Hammer.
It is particularly important to consider that while the Hammer needs no confirmation to determine an invert of the trend, the Hanging Man needs the candle to close below the Hanging Man’s body.
The hanging man and the hammer
- A Candlestick that shows a reversal pattern is The Hammer. This is made of a small body and a long lower shadow, which needs to be at least as twice as long as the real body. The head should either be shaven or with a small shadow.
- The peculiarity of The Hammer is that it changes name according to where it is found in a chart.
- If it is at the bottom of a downtrend, it is called The Hammer, while if it is at the top of an uptrend, it is called a Hanging Man.
- It is important to consider that while the Hammer needs no confirmation to determine an invert of the trend, the Hanging Man needs to be close below the Hanging Man’s body.
The Engulfing Pattern
Candlesticks are not only sending signals as individuals but can be combined with two or more candles before they can give us a sign of the direction of a market.
The Engulfing Pattern is certainly one of the simplest. It can be recognised very easily because two candles make it, and they need to be of opposite colours. Also, the body of the second candle must completely cover the body of the earlier candle.
There are two Engulfing Patterns. One is bearish, and one is bullish. The bearish pattern requires that the first candle is green and the second candle red (and must completely cover the body of the green candle).
The bullish pattern requires that the first candle be red and the body of the second candle, along with being green, still needs to be completely covering the body of the earlier candle.
It is particularly important for these two patterns, that the bullish engulfing it is at the bottom of a downtrend and for the bearish to be at the top of an uptrend. If we find a bearish engulfing in a downtrend, this is not a reversal signal — likewise, the bullish engulfing at the end of an uptrend.
In this Forex example, we can see that GBP JPY in the week between 6 and 13 April 2015 that a red candle formed, and a green candle formed at once above “A”. We have traced some green horizontal lines along the body of the green to show that it was engulfing the body of the red candle.
Because we were coming from a downtrend, this was a valid reversal signal, plus we could have confirmed that it was the second time that GBP JPY was bouncing at 176,000, in fact after this bullish engulfing pattern, it went up to 196,000.
This second example of USD EUR in the Forex Exchange shows several Engulfing Patterns. We can see that after a Bull run ended in November 2008, a huge red candle, engulfing the earlier red one, formed in December “A”. These two candles also defined a resistance area “1” which was assessed three times “B” and “C”.
One interesting thing to notice which is ESSENTIAL to keep in mind when trading, is that while “B” formed another bearish engulfing pattern with the red candle in July 2010, “C” was a bullish engulfing, which in this case did not result in a bull run because it was not at the bottom of a downtrend. In fact, USD dropped to €0.7282 in December 13 when another bullish pattern engulfed forming “D” and then another in May 2014 at €0.7214, also defining an uptrend (the green diagonal line drawn from the first bottom in the chart, which combined with the resistance line “1” created a bullish pattern for the western technical analysis canon (a triangle, which we will see soon).
After the two bullish engulfment’s “D” and “E”, we had a bull run that broke the resistance set with “1” and at the peak of that run another engulfing pattern formed “F” in April 2015, setting a new resistance line “2”, which was tested twice, where the second time “G” another bearish engulfment formed, and a few months later the US dollar drop and bounced on the previous line “1”.
The engulfing pattern
- The Engulfing Pattern is one of the simplest. Two candles make it, and they need to be of opposite colours. Also, the body of the second candle must completely cover the body of the earlier candle.
- There are two Engulfing Patterns. One is bearish, and one is bullish.
- It is particularly important, that the bullish is at the bottom of a downtrend and for the bearish to be at the top of an uptrend.
- If a bearish is engulfing a downtrend, this is not a reversal signal — likewise, the bullish engulfing at the end of an uptrend.
Despite having seen only two examples, we can already see how easy it is to combine Candlesticks with support and resistance lines which are very simple to draw and understand, although we have not covered this yet during this mini-course. You can find more if you start following me on YouTube with my technical analysis videos.
Now you have the tools to go on TradingView, search for Hammers or bullish or bearish engulfing patterns or Hanging Men (but be careful when you need further confirmations) and do paper trading so that you can experiment and play with stocks and trade exchanges of your choice, without risking anything.
There are several more complex or simpler Candlestick patterns, and I truly encourage you to buy the book as it is one of the best investments that you can do if you are serious about becoming a successful trader and living off of your profits.
Also, you can have a look at Steve’s website and take advantage of the free content that he offers through the Candlecharts Academy. He certainly knows more than me.
I am considering creating content with more Candlestick examples, on YouTube, and I will share the playlist here on this page once it is ready.
Having created the basics of chart reading, I am now able to produce content that is more advanced and start from the Exponential Moving Averages (which are the lines that you will see crossing each-other along with the Candlesticks in my YouTube videos).
- It is easy to combine Candlesticks with support and resistance lines which are very simple to draw and understand.
- Have the tools to go on TradingView, search for Hammers or bullish or bearish engulfing patterns or Hanging Men.
- There are several more complex or simpler Candlestick patterns available in Steve’s book.
- Look at Steve’s website and take advantage of the free content that he offers.