Japanese candlestick patterns

The candlestick theory was invented by Munehisa Homma, a Japanese merchant in the 1750’s. He used this technique successfully to trade with rice. He continuously observed rates and the behaviour of traders and his technique brought him fortune and fame.

The candlestick chart technique is based on the observation of rate movements in the past that help to predict future price levels. Steve Nison introduced the candlestick charts to the western world, when he first explained them in Futures magazine. In the meantime the technique became a popular trading tool and a main help in trading analysis. Candlestick patterns are a suitable technique for trading any liquid financial asset such as stocks, foreign exchange and futures.

Candles explained

 

Candlestick charts in detail

In the candlestick charts black and white candles are distinguished. Black means daily downtrend, while white refers to raising daily rates. Candlestick patterns show not only the rates but important information about the move of investments. Both the length of the candles and the upper and lower shadows reveal essential information about the mood of the market.

a, A long white body of a candle means that bulls (buyers) were in majority on the certain day, thus the closing price was higher than the opening  price.

b, A long black body of a candle shows the opposite: bears/sellers dominated, the closing price is lower than the daily opening rate.

c, Candlestick patterns with a small body reflect uncertainty. The strength of buyers and sellers is more or less equal; therefore there is no major price change in the daily trading.

d, A long lower shadow means that at the beginning sellers were in majority but during the day the trend changed and buyers prevailed.

e,  A long upper shadow is the opposite of the previous pattern.

f, If a candle has a long upper and lower shadow as well, it reflects obscurity. Both buyers and sellers prevailed for a certain period but none of them could surmount.