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JAPANESE
CANDLESTICK METHOD OF CHARTING
A new method of Japanese candlestick charting and patterns analysis will
help every one to look into the market trends in one more new way
technical analysis. Now the question is what does the candlestick
charting offer better than the western bar chart. As data wise both are
same. But in a visual appearance candlestick seems easier than bar
chart. All the candlestick interpretations we can able to do in the bar
chart. A minimum practice is enough to read candlesticks.
The overall psychology of the market cannot be measured by statistics.
Some form of technical analysis is used to analyze the changes in these
psychological factors. Japanese candlesticks read the changes in the
makeup of investors’ interpretation of value. This is then reflected
in the price movement. More than just a method of pattern recognition,
candlesticks show the interaction between the buyers and sellers. The
author says Japanese candlestick charting provides insight in to the
financial markets that is not readily available in with other charts.
Related analysis techniques such as candlestick filtering and
candlestick power charting will add to your analysis and timing
capabilities.
Shortly
all the required candlestick patterns shall be published along with
definition lines.
The formation of candlesticks: -
In a bar chart the prices of high and low is drawn as a bar,
opening price as a left side tick and closing price as a right side
tick. In candlesticks the body of the candle is formed with open and
closing prices and high, low are marked as a thin line extended from the
body of the candle.
One more distinction is given if the closing price is higher than
the opening price then it is shown as a white candle. If closing price
is lower than the opening price then it is shown as black candle.
Some definitions of the candlesticks: -
Long days: -
Long days mean a
lengthy candlestick body. This occurs when there is a large difference
between the opening and closing price. A long white day is seen when
close, >, open. Similarly a long black day is seen,
when close, <, open.
Short
days: - Short
days refer to the candle where the price difference between the open and
close is minimum. A white short candle is shown when closing price is
up. If the closing price is lower than open then it is shown as a black
candle.
Marubozu:
- Marubozu means close cropped / cut in Japanese language. It is
compared with a baldheaded or a head after a full shaving with blade say
there is not a single hair in the head. This pattern happens when
following conditions match as below
When
High = close
or high
= open
Low = open
or low = close
White
Marubozu: - When the closing price is equal to high and opening price is
equal to low then it turns as a white marubozu. A white marubozu is a
long white body with no shadows / extended lines on either end. This is
an extremely strong candle due to its own merits.
Black
Marubozu: - When closing price is equal to low and opening price
is equal to high it turns as a black marubozu. This shows extremely a
weak trend. Especially it occurs in a bear market continuation. Some
times it is seen in bullish trend reversal.
Opening
Marubozu: - The opening
marubozu has no shadow from the opening price.
Say the opening price is either equal to high or low of the day. One more distinction is given as it is again divided in to
two categories.
1.
Opening marubozu white - Bullish
When
Close, >, open
And
Open =
Low (its name bald head stands)
2.
Opening marubozu black -
Bearish
When
close, <, open
And
Open
= High
Closing
Marubozu: -
It
is also divided into two categories as white and black. A closing price
end of the candle has no shadow / extending line. It means the closing
price is either equal to high or low price of the day.
Say the close end is a baldhead.
A
white closing marubozu - strong
When
close = high
&
Close, >, open
Black
closing marubozu
- weak
When
close = low
&
Close, <, Open
Spinning
Tops: - Spinning tops are candlestick lines that have a very small
real body with upper and lower shadows that are of greater length than
the body's length. This represents indecision between bulls and bears. The
colour of the body of a spinning top along with the actual size of the
shadows is not important. The small body relative to the shadows in
which makes the spinning top.
White
spinning top - when close,
>, open
Black
spinning top - when
close, <, open
DOJI:
- When the body of a candle is so small that the opening and closing
prices are equal, they are called as Doji lines. In other words Doji
occurs when closing price equals to the opening price. Doji reflects the
indecision and would not be significant to forecast a trend.
Long Legged Doji: - (Cross):-
The long legged Doji has long upper and lower shadows in the
middle of the days trading range. The market price volatility is higher
but closing price is equal or nearer to the opening price. It is called
as Cross.
Gravestone Doji: -
In bar chart it is called as key
reversal top or one day
reversal top pattern. Gravestone Doji is another form of a Doji day.
It develops when Doji is at low or nearer to low of the day. Prices move
higher all the day and closed with the lowest price of the day.
This indicates a bearish signal if occurred in a bull market.
Suppose it occurs after a long bearish trend then it reflects a
sense of indecision.
Dragon Fly Doji: -
It is opposite to the Gravestone Doji. It is known in bar charts
as key reversal bottom or one-day reversal bottom. Dragon Fly Doji
generally appears at the market turning points say when the market is
bottoming out.
There is an important point we have to understand it is not
explained in any analysis clearly. In a bear market continuance, if
prices suddenly breakout to again / extreme lowest price and again
recovers immediately then it is heavy bullish clue. Thereafter prices
may zoom to dizzy levels say 2 to 10 times. But it may take some time to
gain momentum or it may lay bearish for some time before a rally. The
time is not the matter here. The bull signal is certain.
In candlesticks a very long shadow is called a Takuri line. A
Takuri line at the end of a downtrend is extremely bullish.
Four
Price Doji: - It is nothing
but all the prices are equal or traded for a single price quotation all
the day. Say open = close = high = low. It occurs in illiquid scrip,
closely held companies and rarely in many companies when the market is
dull or slump. It actually indicates that there are a very few buyers and
sellers for the scrip.
Stars:
- A star appears
whenever a small body gaps above or below the previous day's long body.
Generally a gap shall encompass the shadows. Stars are normally reversal
patterns and indicates uncertainty in the market.
Morning
Doji Star: -
The morning star is a bullish reversal pattern. It has a long black body
followed by a small body, which gaps lower. The third day is a white
body that moves into the first days black body. Morning star is ideal
when there are clear or more gap before and after the middle (star)
day's body. The second day small body candle is a sign of indecision.
The third day white body that closes higher closes the pattern and
confirms a bullish trend.
Evening
Doji Star: - It is the
bearish counter pattern of the morning star. In both stars actually the
colour of the middle star does not matter / has any individual values.
The evening star appears during an up trend. The first day is a long
white candle. Then the second day is a small body (either white or
black), which gaps higher from the white candle. Then the third day gaps
down with a black candle and closes down even lower. The smaller body,
which appears in the second day, is the first sign of indecision. The
third day's black candle which closes again lower completes the pattern
and confirms the bearish trend.
Hammer
and Hanging Man: -
Hammer and hanging man have long lower shadows and small real
bodies that are at the top of their daily trading range.
Hammer:
- When the market is in
bearish trend the prices go lower and lower. However some times prices
move lower and again closing higher levels very near to opening price.
It is nothing but a higher opening, lower low and higher close. This
causes uneasy between the bear operators. The next day higher closing
may confirm the bullish trend.
Hanging
Man: - The market starts with a bullish trend and afterwards prices move
much lower than that of the opening price but closing price settles at
higher levels but slightly lower than opening price. This reflects the
market begins to sell off. The lower closing of the next day may confirm
the bearish trend.
Engulfing
Patterns: -
Engulfing Bullish Engulfing
Bearish
The Engulfing pattern consists of two candle bodies of opposite
colour. The second day’s candle body engulfs the previous day body. In
other words we can say the second day embraces the previous day candle.
When this occurs near the market top it indicates the changes of
sentiment to selling pressure. Engulfing bullish indicates the
development of buyer sentiment and Engulfing bearish indicates the
selling sentiment.
Harami:
-
Bullish
Harami
Bearish Harami
In a downtrend a long black day indicates the perpetuation of the
bearish trend. The next day
the prices opens at higher level which create panic to bears and the
rapid short coverings cause the prices rise further to some extend. This
is the situation of the bullish harami
In case of bearish harami, in a bull trend prices rise and forms a long
white candle. Suddenly
prices open lower and stay / close at lower range. This deteriorates the
trend and results a panic selling between traders and pushed down the
prices further to some extend.
Harami
Cross:- The
harami have a long body followed by a small body. The relative size of
the candle bodies makes harami more valuable signal.
Generally in Doji days opening and closing prices are equal and
it signals an indecisive trend. The more indecision, confusion and
uncertainties the more chances for trend reversal. Harami cross is such
a signal seems with more weightage than normal harami signals.
Invertedhammer Shooting star
Inverted hammer is a bottoming out signal indicator. But it is
not a powerful signal and so it needs further verification. We can say
in other words it implies but does not confirm the trend reversal.
Shooting
star is similar to hammer but appears to indicate bullish reversal
signals. The more long leg and the less / no difference between closing
and low price will result a more powerful down move or crash.
Piercing Line
Dark Cloud Cover
Piercing
line pattern is a reversal signal in a bearish trend. The second day
closing price stands at higher level creates a buying sentiment. One may
wait for further one or two days to confirm.
The
dark cloud cover is bearish reversal pattern and it happens in a bull
trend. In a bullish continuation when the prices close at lower level
then a bearish sentiment starts developed and prices react in a bearish
way.
Doji Star:
In Doji Morning star signals when a doji appears then the trend
will become indecisive and move in uncertainties.
Then in third day the prices closes at higher level and confirms
a bullish trend. In case of an Evening doji star signal it confirms a
bear signal.
 Morning
Star
Evening Star
Morning star is a
bullish reversal pattern. When a morning star appears in a bear trend
then it develops buying sentiments. It is same as a morning doji signal
but instead of a doji there is small body of candle appears.
Evening star is bearish reversal patterns and it appears in a
rising market and dampens the sentiment and selling pressure starts.
Conclusion:
To the best of my view all the studies and even still
more we can do in bar chart studies. Candlestick studies are a different
way of technical analysis and one can follow the analysis, which is easy
for them. All analysis has the same type of merits and drawbacks and one
has to decide individually depending upon their investment risk and long
/ short term holding nature.
-----------Elliott
Wave Consultancy------------------
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