Charts for Japanese candles (and, of course, Japanese spark plugs are not meant here) are plotted according to the same data as regular bar charts, but are presented differently. Their components are the opening price of the trading period and its closing, as well as the maximum and minimum prices for any selected period of time - weekly, daily or intraday.
Using Japanese Candles
The relationship between the initial and final price levels forms the body of the chart. If the last price is lower than the first, then the body is painted black. Otherwise, it is white. These prices are important for analysts using candlestick analysis.
Price movements up and down are called shadows. Depending on how large the distance between the high and low of the price and the body of the candle, the shadows can be long or short.
Technical analysis of Japanese candlesticks indicates either a slowdown in the market trend or its reversal. It is important to understand that there is a relationship between reversal patterns of different types. For example, an analysis of Japanese candlesticks predicts the day of a key trend reversal using a “bullish” or “bearish” capture.
Traders like to work with candles, as they show the behavior of investors in a different but simple price pattern that can easily be combined with other trading tools. Charts can be analyzed without a time delay, and the market can be tracked in relation to the opening, minimum, maximum and closing prices of each candle.
Often observed candlestick combinations work well with Fibonacci trading tools. An interested reader will find many books describing them in detail.
Hammer and the Hanged Man
Japanese candlestick patterns are called a “hammer” if they have a long shadow and a small body (black or white) located close to the daily maximum. At the end of the downtrend, the hammer is considered a bullish reversal signal.
These figures should have a fairly long shadow. In the ideal case, it is three times the length of the body. A long shadow indicates that the market price fell sharply after the opening, and then recovered by the end of the trading day. The initial and final price should be located close to each other, as a result of which the body of the candle on the chart will be small.
At the end of the uptrend, the same model is called the "hanged man." This figure is also an indicator of a reversal. Candlestick signals for sale occur when the market price is trading below the minimum price of the "hanged" in the following days. Sometimes it’s even safer to wait until closing to make sure.
Bullish and Bearish Captures
These are the types of Japanese candles, the opening price of which is very low (bullish) or high (bearish). The longer the body, the higher the likelihood of a trend reversal.
When the starting price of the next day is higher than the long one, it is likely that the market will go up. On the other hand, if it is lower the next day, then traders can expect the market to continue to decline.
"Windows" ("gaps")
“Windows,” as they are called in Japan, or “gaps,” are an important concept in technical analysis. Whenever a gap is formed, that is, the current opening price does not correspond to the previous closing price, this means that there was no price or trading volume in this period.
The gap at the top occurs when the starting price of the second day is higher than the ending of the first. Conversely, a gap below happens when it is higher. Windows can act as a line of resistance while lowering prices and supporting them as they rise. Often, after the gap, prices try to fill it, and then change direction and continue their movement towards the window.
"Two Ravens Rising"
The “gap” at the top with two subsequent black short candles resembling a raven is a “bearish” figure. It occurs when a growing market opens with a “window”, but new highs cannot be held, and the market forms a black candle. The third session draws an even bigger “bearish” picture with a new high and another unsuccessful attempt to keep them until closing. If the next day the prices fail to return the achieved height, then they should be expected to fall.
"Three black crows"
The figure consists of three consecutive black candles with falling opening prices within the body of each previous one. It speaks of a decrease in the market if it arises with prolonged growth or in the field of high prices. There is an option when the opening price of each next candle matches the closing price of the previous one. It is called three identical crows and indicates a particularly strong "bear" market.
Bearish and Bullish Takeover
Along with the single "hammer", "hanged" and "capture" formations, absorption figures always require two Japanese candles to form a combination. A graphical analysis of the “bullish” absorption allows you to determine the moment of a reversal at the end of a downtrend. This happens if the long white body completely covers the body of the previous small black candle. It doesn’t matter if it absorbs the shadow of yesterday or not.
Bearish absorption matters at the end of the uptrend. In this case, a long black candle covers the body of the previous short white.
The figure and the cross "harami"
It is formed by two candles and is the exact opposite of the previous ones. In traditional chart analysis, it is called "inner day."
The “harami" have a small body (of any color) that completely fits in the previous longer one. It does not matter if this condition is true for the shadow. The figure is important if at the end of the downtrend today's body is small in size white and the long previous candle is black. The reversal signal is even stronger when today's body is very small. After the downtrend, the figure may be a “bullish” signal, and at the end of the uptrend - a “bearish” signal.
The cross “harami” is a special form of this figure, when today's candlestick body is extremely short, that is, the starting and ending prices of the trading day almost coincide.
Doji
The doji pattern determines when markets are slowing. Doji candles have a very short body (the starting and ending prices are almost the same), above or below which is a long shadow.
These are Japanese candles, the analysis of combinations of which is interesting only at the end of long ups or downs. They are important when an absorption pattern is formed behind them.
Penetrating line
This figure looks like a bullish absorption model, and acts only at the end of a downtrend, while in the latter, today's long white candlestick covers the previous short one.
The penetrating line signal occurs when today's large white candle covers at least 50% of the previous black. As the percentage of black body overlap with white increases, the strength of the trend change increases.
"The curtain of dark clouds"
These are Japanese candles, the analysis of combinations of which allows you to get a trend reversal signal at the end of the growth period. In this case, a long black should cover at least half of the white formed on the eve. As the share of coverage increases, the likelihood of a trend reversal will increase.
"Star"
A figure is formed when a small body (of any color) is separated from the long candle formed the day before by the price gap. The body may touch the previous shadow, but not the body. If the "star" is not short, but there is a "doji" (equality of initial and final prices), the candle is called a "doji star". Signals an inevitable trend change.
"Morning Star"
"Stars" are Japanese candles, the features of which are as follows. The morning star is a lower reversal pattern formed by three candles. The first has a long black body, because it is part of a downtrend. The second is a star with an extremely short body located below the previous one, not related to it. A long white third covers at least half of a long black body two days ago. Ideally, the 3rd body should be bargained in isolation from the "star" of the previous day. In the event that the 3rd candle is enveloping, it also clearly indicates a trend change.
"Evening Stars"
These are Japanese candles, the analysis of combinations of which predicts a trend reversal after a strong upward trend. They also consist of three candles. The first is a long white. The next one is a “star” with a black or white body without connection with the previous one. The third has a long black body, covering at least 50% of the first. The "star" and the last black long body must also have a gap. If a "bearish" absorption is observed, then this constellation is also a valid signal of a trend reversal.
"Falling star"
It is a strong signal that the rise in prices will abruptly break. This figure should be sought after a long rise, ending with a candle with a black short body. The Shooting Star clearly shows that the market is pausing to think about the current price increase.
Japanese candles: features of application
The figures allow you to visualize the acceleration and deceleration of trends or indicate their change.
- A hammer often appears at the end of a downtrend and is considered a bullish reversal signal. This indicator of Japanese candles suggests the need to buy at the maximum of the previous day. A stop order is set below the minimum value of the day before.
- A “hanged” corresponds to a “hammer” at the end of an uptrend. It should be sold when this figure occurs, if its minimum is broken. The stop order in this case is set to the maximum price of the "hanged".
- A bullish takeover is often found at the end of a downtrend and indicates a reversal. The use of Japanese candles is to buy at the high of the day with a long white body. A stop order is set below the minimum of a large or small candle, depending on which one is smaller.
- A bearish takeover most often occurs at the end of an uptrend. The sell signal is at the low of a long black Japanese candle. A stop order is set above the maximum value, small or large, depending on which one is larger.
- "Harami" - Japanese candles, the analysis of combinations of which allows you to determine changes at the end of an uptrend or downtrend. The figure is not related to current market conditions. At the end of the downtrend, a buy signal will be a breakdown of the maximum of the candle with a white long body. A stop order is placed at the low of this day. If a minimum of a candle with a black long body is broken, this is a sell signal at the end of the uptrend. A stop order is set at the maximum of this particular day.
- The Morning Star indicates an uptrend in the market. You should buy at the maximum of the right candle with a long white body. A stop order is placed at the minimum of a small candle in the middle of the figure.
- "Evening Star" indicates a downward trend. It should be sold at the minimum of the right black candle. A stop order is placed at the maximum of a small figure located in the center.