Knowledge, tools, technical analysis indicators need to be mastered when participating in the stock market - Part 5: Japanese Candlestick chart

June 26, 2021

What is Japanese Candle?

Candles are an ancient tool used by the Japanese to trade rice. It was Steve Nison who discovered this secret while working with brokerage firms in Japan. And since then, people see Japanese candlestick charts as a tool in financial trading and use them very widely.

In finance, Japanese candlesticks are defined as a tool to describe price action, or exchange rate movements, as well as describe a trader's sentiment in a given trading session.

Candle color can be set on trading instruments. Each exchange has a different color setting. But most common for bullish candle is Green, bearish is red.

Applications of Japanese Candles

Candlesticks have many applications in trading because of its immediacy, intuitiveness and ease of use.

If the Japanese candlestick is considered as a technical indicator, it is definitely the most used indicator in the world.

In addition, the application of Japanese candlesticks also helps in drawing accurate support and resistance. Without a Japanese candlestick, using a line chart would be difficult to draw support and resistance.

Because of the popularity of Japanese Candlesticks, candlestick charts are the most accurate psychological gauge in the financial market for all investors.

Japanese candlesticks can tell you price reversal signals, accumulation areas as well as signs to buy or sell.

How to read Japanese candlestick.

Japanese Candlesticks have 2 main components, which are the Candle Body and the Candle Shadow.

In the Japanese candlestick chart, each candle represents the price movement in a certain time frame.

The opening price is lower than the closing price, the candle will be green => Indicating an increase in price.

The opening price is higher than the closing price, the candle will be red => Indicating a decrease in price.

5 basic types of Japanese candles

5 basic types of Japanese candles

Below we will also learn how to read the 5 most basic types of Japanese candlesticks, including:

Standard candles.

Strength candle.

The candle has a long beard below.

The candle has a long beard above.

Candle hesitation.

Standard candles

Structure: This is a candle with a long body, the upper and lower shadows are shorter than the body.

Meaning: Represents the current trend going on. The blue candle is an uptrend, the red candle is a downtrend.

Strength Candles

Structure: This is a candle with only a body without a shadow.

Meaning:

Shows strong buying or selling force appearing in the market.

Signals trend continuation or reversal.

For reversal signals:

If a red strength candle appears after an uptrend => Signals a reversal to a downtrend.

If a strong green candle appears after a downtrend => Signals a reversal to an uptrend.

For continuation signal:

If in an uptrend appears a green powerful candle => Signaling continuation of the uptrend.

If in a downtrend appears a red powerful candle => Signaling continuation of the downtrend.

Candle with long beard below

Structure: This is a candle with a small upper body and a shadow that is 2-3 times longer than the lower body.

Meaning: Shows the price being pulled down very deeply by the selling team, but then pulled back by the buying team.

Candles with long antennae below are trend reversal candlesticks.

If in an uptrend appears a candle with a long beard below red => Signaling a reversal to a downtrend.

If in a downtrend appears a candle with a long beard below the green color => Signaling a reversal to an uptrend.

Candle with a long beard above

Structure: This is a candle with a small lower body and a shadow that is 2 3 times longer than the upper body.

Meaning: Shows the price that the buying team pulled the price up, but then the selling team pushed the price back down.

The candle with the long beard above is a trend reversal candle:

If in an uptrend appears a red long bearded candle => Signaling a reversal to a downtrend.

If in a downtrend appears a green long bearded candle => Signaling a reversal to an uptrend.

Indecision candle (very short body or no body)

Structure: This is a candle with a small or almost no body and a very long shadow. (close and open prices are almost equal).

Meaning: Shows the tension between the buying team and the selling team but not yet determined.

Indecision candle is a candle that does not carry a signal - need to wait for a confirmation candle behind.

In addition, a type of candle that also signals indecision of the market is the DOJI candle, which is considered an important reversal signal at the top of the uptrend and the bottom of the downtrend.

For a trader who is executing a trade and the price is moving in the right direction, then a DOJI candlestick pattern appears, the trader may consider exiting part of the trade and placing a tighter stop loss, because the market is gradually losing its momentum.

The DOJI candlestick pattern does not always warn of a market reversal, but it does represent a slowing down of the trend.

Candle combination properties - Combination candles

A combination candle is the formation of a larger candle from multiple component candles. When combining, pay attention to how to combine time frames.

The structure of the combination candle includes:

The opening price is the opening price of the first candle.

The closing price is the closing price of the last candle.

The highest and lowest prices are the highest and lowest prices in the component candles.

2 candlestick pattern

Bullish Engulfing Pattern

The Bullish Engulfing pattern (bullish engulfing pattern) is a double opposite candlestick pattern and is often seen in a downtrend. Thus, this model will have the following identifying characteristics:

Appears at the end of a downtrend.

Is a pair of 2 candles, giving signal that the price may increase strongly.

This pattern occurs when a bearish candle appears, but is immediately followed by a very large bullish candle and completely “submerges” the bearish candle ahead.

This shows that the bulls have decided to push the price up after a period of decline or sideways.

Bearish Engulfing

Unlike Bullish Engulfing, Bearish Engulfing pattern (bearish engulfing pattern) is an opposite double candlestick pattern and is often seen at the end of an uptrend. Thus, this model will have the following identifying characteristics:

Appears at the top of an uptrend.

It is a pair of 2 candles, showing a strong bearish signal.

This pattern occurs when a bullish candle appears but is followed by a very large bearish candle that appears after completely engulfing the previous bullish candle.

This shows that bears have taken full control and a sharp decline is possible.

Piercing Pattern

Piercing Pattern is a double candlestick pattern that signals a trend reversal that usually occurs at the end of a downtrend. Some recognizable features:

Candle 1 is a strong bearish candle, candle 2 is a strong bullish candle.

The opening price of candle 2 must be below the low of candle 1 and closing inside the body of candle 1.

Dark Cloud Cover

Dark Cloud Cover is a reversal candlestick pattern that occurs at the end of an uptrend. Identifying features:

Candle 1 is a long bullish candle and candle 2 is a long bearish candle.

The opening price of candle 2 must be above the top of candle 1 and closing price within the body of candle 1.

3 candlestick pattern

Morning Stars

Morning Stars is a 3-candlestick pattern that appears at the end of a downtrend, signaling a strong bullish reversal.

Structure:

Candle 1 is a long bearish candle, showing the continuation of the previous downtrend.

Candle 2 is a small body candle, it can be a bearish, bullish or DOJI candle.

Candle 3 must be a strong bullish candle, the closing price of candle 3 closes at least 1/2 higher than candle 1.

Do not enter an order when the Morning Star pattern has just formed but wait for a few more candles to confirm the trend (Stoploss below the shadow of candle 2).

Evening Stars

Unlike Morning Star, Evening Stars is a 3-candlestick pattern that appears at the end of an uptrend, signaling a strong bearish reversal.

Structure:

Candle 1 is a long bullish candle, representing the continuation of the previous uptrend.

Candle 2 is a small body candle, it can be a bearish, bullish or Doji candle.

Candle 3 must be a strong bearish candle, the closing price of candle 3 closes at least 1/2 of candle 1.

Three White Soldiers

The Three White Soldier is a 3-candlestick pattern that appears in a downtrend and signals a bullish reversal.

The 3 candles in the pattern must all be bullish candles and have long bodies and short shadows.

The opening price of the following candle must be above or equal to the closing price of the previous candle.

Three Black Crows

The Three White Soldier is a 3-candlestick pattern that appears in an uptrend and signals a bearish reversal:

All 3 candles in the pattern must be bearish and have long bodies and short shadows.

The opening price of the following candle must be below or equal to the closing price of the previous candle.

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