The Authority’ on Price Action Trading. Candle wick trading forex 2016, Nial won the Million Dollar Trader Competition.
A Brief History of Japanese Candlestick Charting Patterns. Candlestick charts originated in Japan during the 18th century. Since no defined currency standard existed in Japan during this time rice represented a medium of exchange. Various feudal lords deposited rice in warehouses in Osaka and would then sell or trade the coupon receipts, thus rice become the first futures market. In the 1700s legendary Japanese rice trader Homma Munehisa studied all aspects of rice trading from the fundamentals to market psychology.
Homma subsequently dominated the Japanese rice markets and built a huge fortune. His trading techniques and principles eventually evolved into the candlestick methodology which was then used by Japanese technical analysts when the Japanese stock market began in the 1870s. The method was picked up by famed market technician Charles Dow around 1900 and remains arguably the most popular form of technical analysis chart in use by today’s traders of financial instruments. Candlestick charts show the same information as bar charts but in a graphical format that provides a more detailed and accurate representation of price action.
Candlestick charts visually display the supply and demand situation by showing who is winning the battle between the bulls and the bears. Candlestick formations make all single bar and multi-bar patterns significantly easier to spot in real time, thus increasing your chances of catching high probability trade setups. Western technical signals used on a bar chart can easily be applied to a candlestick chart. Candlestick charts offer everything bar charts do and more, using them is a win-win situation because you can use all the trading signals normally used on bar charts with the added clarity and additional signals generated by candlesticks.
Candlesticks charts are more fun to look at. Candlesticks have a central portion that displays the price distance between the open and the close. This area is known as the real body or simply the body. The highest price paid for a particular period is the marked by the high of the upper shadow. The real body displays the opening and closing price of the security being traded. Closing prices have added significance because they determine the conviction of the bulls or bears.
If the security closed higher than it opened, the real body is white or unfilled, with the opening price at the bottom of the real body and the closing price at the top. If the security closed lower than it opened, the real body is black, with the opening price at the top and the closing price at the bottom. The hammer is a bullish signal that occurs during a downtrend. The lower shadow should be at least twice the length of the real-body. Hammers have little or no upper shadow. Because of the bullish long lower shadow however, this pattern needs bearish confirmation by a close under the hanging man’s real body. This candle has a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session that develops during or after and uptrend.
The Harami is a two-candlestick pattern in which a small real body forms within the prior session’s larger real body. The Doji is a candlestick in which the session’s open and close are the same, or almost the same. There are a few different varieties of Dojis, depending on where the opening and closing are in relation to the bar’s range. The Dragonfly Doji has a long lower shadow, the open, high, and close are at or very near the session’s high. This pattern often signals reversal of downtrend. The Gravestone Doji has a long upper shadow, the open, low, and close are at or very near the session’s low. This pattern often signals reversal of an uptrend.
This candle has a very long upper or lower shadow and a small real body. If the opening and closing price are the same the candle has no real body and is then called a Long-Legged Doji. The first picture is a high wave candle the second is a Long-Legged Doji. The bullish engulfing pattern consists of large white real body that engulfs a small black real body in a downtrend. The bearish engulfing pattern occurs when the bears overwhelm the bulls and is reflected by a long black real body engulfing a small white real body in an uptrend. Spinning tops are simply candles with small real bodies. Inside bars can technically encompass any candlestick pattern because they are simply a series of at least two candlesticks where the first candlestick completely engulfs the entire range of the subsequent candlestick, however, more often than not inside bars end up being spinning tops or dojis.
My fakey setup is essentially a multi-bar pattern that consists of a false break from an inside bar pattern or a key level. The fakey can consist of a number of different candlestick patterns. Candlestick charts offer a more vivid depiction of price action than what a standard bar chart can provide. Candlestick patterns in and of themselves are useful, however there are many different names and interpretations of candlestick patterns which often can induce confusion and can be hard to keep track of. Thanks for your explanation Nial, although I still have to go back to these explanation repeatedly so as to master them.