Japanese candlestick charts originated in Japan in the 18th century where buyers and sellers in the rice markets used them to exchange a form of currency for the rice.
This is pure price action trading and it has really become a lost art. Many traders use too many indicators which hides price action and has you trading an indicator and not the first level — price and the patterns that it forms based on the strength of weakness of market participants.
Japanese candlesticks contain a lot of information in just one candlestick. For example, by scanning your candlestick chart , you can easily see where the high and lows of the day were as well as the open and close price of the trading day.
If price closed higher than the open, it was a bullish trading day and the candlestick, the real body of the candlestick, would close green. This is called a bullish candle. On a bearish trading day, the real body of the candlestick would close red indicating a bearish candle. You can see at a glance who had control going into the close just by looking at the color of the candlestick.
You can also see, through the highs and lows, how much of a battle the other side put up during the trading day. This will give you insight into the strength of the overall winner on the trading day. Yes, there are that many.
What you need is to study and know only the most reliable candlestick patterns and become a master at trading with them. The bullish engulfing candlestick pattern consists of 2 candles. The first candle is a narrow range candle closes red. What this means is that there are lot more sellers than the buyers but because it is such a narrow range candle, it also tells you that the sellers are not that aggressive.
What this means for this second candle is that that the market forces have changed: If you see a bullish engulfing candlestick pattern in a level of support, fibs or pivots, then these can provide a powerful reversal! The bullish hammer is a single candlestick pattern. Note that, this candle can be either red or green.
This is how the candle forms: However, the buyers started buying and pushing back price up and it closes higher than it opened or a bit lower than its opening. The long lower shadow is vital. The longer, the better. Check out the Fakey Trading Strategy for more on this type of candlestick. The bullish harami inside bar trading is a 2 candle pattern. The first candle is is a red candle, which would have a wide range. The second candle would be a green narrow range candle.
Because on the first candle, the sellers were seriously in control. Then on the 2nd candle, a bullish candle, the buyers managed to defeat the sellers and at least got the candle in green. The piercing pattern is a two candle reversal pattern.
The firs candlestick is a red one followed by a green candlestick. Both candlesticks are roughly equal and of the same wide range. It means that in the first candle, the sellers were really in control. When the next candle forms, instead of going down, the opposite happens, it goes up. This means the the buyers or you can also say the bulls! Doji is without doubt, the most popular candlestick pattern. This is what happens in a doji candle: The doji candlestick can both be green or red. It means that the market forces of buyers and sellers are undecided.
It shows a period of indecision by traders questioning the current trend. And if the current trend was bearish, the formation of a doji candle could signal that the bears are having second thoughts and an uptrend in price could result.
The bearish engulfing candlestick pattern is just the complete opposite of bullish engulfing pattern. What happens is that the market is in an upward rally uptrend then the first green candlestick forms. This candlestick is a narrow range candlestick. The fact that the first candle had a short range meant that the bulls may be possibly losing the upward steam. The further confirmation to this was the formation of the 2nd red candlestick.
This is generally a red candle that looks like a shooting star: Note that it can both be red or green. The shooting star is the opposite of bullish hammer. The key point here is that the shooting star candlestick has to form during an uptrend. The shooting star candlestick is characterized by a very long tail and a narrow head. This is what happens in a shooting star candlestick: When this candlestick forms, you always should know that the sellers are dominant.
Note also that the shooting star candlestick can be both red bearish or green bullish but it has to form in an uptrend market. The dark cloud cover candlestick pattern is a 2 candle pattern. The first is a green green candle with a wide range and then followed by a red candle also with a range somewhat similar to the first rand candlestick.
The 2nd candlestick should close at least halfway point down in comparison to the first green candle. This is what happens in a dark cloud cover candle: This tells you that the the sellers are in control. It may also mean that the buyers may have realized that they are on the wrong side of the market and closed their buy positions and taking profits and may have started selling as well pushing the price down.
The bearish doji candlestick pattern is a single candlestick pattern that you should be looking for during an uptrend market. They almost look like a cross. The color of the bearish doji candlestick pattern can be both red or green but it is important that it forms in an uptrend market.
If you use a trading indicator, you are using a derivative of price; meaning the price happens first and the calculation of the indicator uses that price to plot the indicator on your chart. Using candlestick patterns, you are using pure price action to assess the market. There is no lag in price and you are seeing the exact behavior of all market participants during the trading day all in one candlestick.
You see where price opened, how far the bulls or bears pushed price and the winner of the trading session. If you can draw support and resistance zones, you have the makings of a swing trading strategy. Put in your understanding of candlestick patterns and you can look for reversals using these patterns at significant points on the chart.
The biggest problem is not the pattern but traders who search for these patterns any place on the chart. This can cause newbies to start taking trades all over the chart. Wait until these price patterns show up at significant zones on the chart. This is clearly a bearish candle but how it formed can be important information.
One more thing, I would look for these candlestick patterns on higher time frame charts where they will be more reliable than in the churning price action of day trading…especially in Forex.
The reason reversal candlesticks are useful is that certain behavior in the Forex market price produces certain candlestick patterns. Now, if you go and do a historical analysis of these candlesticks, you tend to see a picture regarding these candlesticks. You tend to see things like: So then what happens is that you start to get a picture and feel of what to expect every time you see such a candlestick pattern forming.
This is where reversal candlesticks other candlestick patterns become useful to Forex swing traders. You can use these candlesticks in most Forex trading strategies. You just have to find a Forex swing trading strategy and try to incorporate these candlestick trading techniques into your trading. I am of the opinion that you should not trade candlesticks all alone by themselves. You need to trade them in conjunction with support and resistance levels, Fibonacci levels etc, as indicated above.
There may be some instances where a Forex trading strategy is based entirely on one candlestick and such a case would be like the inside bar trading forex trading strategy here. See chart below for example…. In the stock market, its a different story and I think you will see a lot of gaps on patterns like bullish and bearish engulfing. Thank you for providing this post and your site.
I have found them helpful in trying to learn a new and successful forex trading strategy. I have a question about some of these reversal candlestick patterns. On certain patterns such as bullish or bearish engulfing, piercing line and dark cloud cover, I am wondering about whether or not there needs to be a gap between the close of the first candlestick and the open of the second one. Or is it still a strong and reliable reversal candlestick pattern if the second bullish candlestick opens at the same spot where the first bearish candlestick closed ie.
Thank you very much for your response. That does answer my questions. The reason I asked is because just last week I did my first few trades in a demo account based on bullish engulfing and piercing line, and there were no gaps between the bearish close and bullish open. The first two trades profited and I closed them. The third one is down right now but I am holding it to see if it goes up next week.
This is the strategy I have used for the first few trades I mentioned above. Just wondered if you had any thoughts or additional comments on trading with this type of strategy on daily charts.More...