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So, far, in the previous posts, we have talked extensively about the importance of candlestick patterns in Forex trading. The Japanese candlestick chart, as earlier pointed out, is arguably the most useful tool in the toolbox of any Forex trader. In fact, most Forex trading strategies are based on it.
Hence, the need for this post. The need for you to understand this type of chart and the myriad of ways by which it can be applied. Even though you might have learned some of those ways in the previous posts, there are chances that you might have been completely lost in the details.
Therefore, this post aims to highlight the most important details that you should know. If you have not been paying attention, now you really should. Why? Mastering Japanese candlesticks will go a long way in determining your fate as a Forex trader. So, if you really want to succeed, now take your time.
Understanding the Anatomy of Japanese Candlesticks
– A Japanese candle helps to display prices in a graphic way. There are open price, close price, high price, and low price. For short, these prices are known as the OHLC prices.
– It displays all these prices as formed within a given time frame which can be one minute (M1), five minutes (M5), fifteen minutes (M15), one hour (H1), four hours (H4), one day (D1), one week (W1), one month (M1) and one year (H1).
– A bullish candle has a close price that is higher than the open price. On the other hand, the close price of a bearish candle is lower than its open price.
Bullish and bearish Japanese candlesticks. ©Babypips.com.
– A Japanese candlestick has three main parts: the real body, upper shadow, and lower shadow. The real body is the hollow or filled part of the candlestick. It is either white or green for bullish candles and either black or red for bearish ones.
– The upper shadow is the vertical line that runs between the candle’s high and its close (for bullish candle) and between the candle’s high and its open (for bearish candle).
– The lower shadow is the vertical line that runs between the candle’s low and the open (if the candle is bullish) and between the candle’s low and its close (if it is bearish).
When there is a streak of consecutive bullish candlesticks, the market is said to be forming an uptrend. That is, overall, candlesticks are closing at progressively higher prices. The converse is the case for a downtrend which is formed when candlesticks are progressively closing at lower prices.
– Uptrends are characterised by higher highs and higher lows. Downtrends, on the other hand, have lower highs and lower lows.
Basic Candlestick Patterns
There are three major basic candlestick patterns. They are spinning tops, marubozus, and dojis.
– Spinning tops have long upper shadows, long lower shadows, but small real bodies. The small bodies mean that the candle opened and closed only at slightly different prices. The colour of the real small bodies – whether white or black or green or red – does not matter.
Spinning tops. ©Babypips.com.
– Spinning tops signify a standoff between buyers and sellers. Depending on where they are found, either in an uptrend or a downtrend, they indicate that the market is possibly about to experience a reversal.
– Marubozus are candlesticks that do not have shadows, either upper or lower, hanging from them. They can either be bullish or bearish. A bullish Marubozu, which is either white or green, has an open price that is equal to the low price and a close price that is equal to the high price. That is, the candle opened at the lowest price of the indicated time frame and closed at the highest price of it.
– A bearish Marubozu, on the other hand, with either a black or red real body, has an open price that is equal to the high price and a close price that is equal to the low. This means that the candle, during the time frame, opened at the highest price and closed at the lowest.
– If a bullish Marubozu forms in an uptrend, it means that even though both buyers and sellers struggled, buyers were able to overcome again. So, the trend is likely to continue. On the other hand, if it forms in a downtrend, it also describes that buyers have been able to overcome sellers so the downtrend will soon likely reverse.
A white Marubozu is bullish; a black Marubozu is bearish. ©Babypips.com.
– When a bearish Marubozu forms at the end of a downtrend, the trend is most likely to continue. However, if found at the end of an uptrend, a reversal is most likely in sight.
– Doji candlesticks are used to denote time frames when the market opened and closed at the same price. Even when the market did not open or close at the same price, it opened and closed at very close prices. As a result, Doji candlesticks have small real bodies or no real bodies at all.
– They suggest indecision. That is, they indicate that during the time frame, there was a battle for dominance between buyers and sellers but a standoff resulted. There are four types of them.
Doji candlesticks. ©Babypips.com.
– In interpreting and using the Doji, importantly, like every other pattern, you should first look out for where it is found.
– For example, a Doji candle found among a string of bullish candles indicates that it is buyers that are getting exhausted and a bearish trend might soon result. So, you might want to be looking forward to opportunities to place a sell order.
– Conversely, when a Doji candle is found in the midst of bearish candles, it is the bearish trend that is about to potentially reverse and give way to a bullish one. Hence, you might want to get yourself readied to place a buy order.
Japanese candlestick patterns are a fundamental price action basis on which many signals are identified and interpreted. The other types will also be summarised in the next post. However, you should know that at 1000pipBuilder, we are extensively using those patterns already to generate our signals. So, you should subscribe to our signals right away here.
