Often used in forex technical analysis, the Japanese Candlestick patterns is one of the most popular technical analysis tools used today. Japanese Candlestick patterns were originally invented by Japanese rice traders way back in the 18th century. Over time Japanese Candlestick patterns evolved into what we know today and are widely used in Forex trading.
They are visual patterns easily seen on a trading chart which is usually made up of one or up to three candlesticks in a trading chart. These visual patterns are made up of the relationships between an individual candlestick and doesn’t involve any mathematical calculations. In other words, the Japanese Candlesticks are purely visual and can potentially signal any changes in the market sentiment or even reversal of trends. Learn the basics of reading Candlestick Charts
Thus the popularity of Japanese Candlestick Patterns.
In the same note, a Candlestick pattern with a reversal does not necessarily indicate a complete trend reversal. In fact it could merely suggest a slowdown in trend or sideways trading after a trend is established.
The Japanese Candlestick patterns is made up of around 40 reversal and continuation patterns. All these patterns are used to indicate the probability of the future price direction. Traders can make use of Japanese candlestick patterns alongside other technical analysis indicators such as slow stochastic indicator, RSI or Bollinger bands.
Types of Candlestick Patterns
There are about 21 primary candlestick charts available as mentioned below.
- Long Periods Patterns
- Short Periods Patterns
- Marubozu Pattern
- Doji Shooting Star
- Morning Doji Star
- Evening Doji Star
- Stars and Raindrops
- Paper Umbrella
- Inverted Hammer
- Hanging Man
- Harami Cross
- Shooting Star
- Morning Star
- Evening Star
- Piercing Line
- Dark Cloud Cover
What do the Japanese Candlestick patterns indicate
Individual Japanese Candlestick patterns can be used to indicate either or both bullish and bearish patters which hints at any upcoming price movements. As mentioned earlier, using the Japanese Candlestick charts alone won’t help and must be used in conjunction with other trend indicators to confirm any trading opportunities.
Traditional Japanese candlesticks use black and white bodies. A black body indicates that the close is higher than the open and therefore the price has increased over the period. On the contrary a white body indicates that the closing price is lower than the opening price so therefore the value has decreased over the period.
The Japanese Candlestick patterns can be used in different types of markets and in any type of a chart’s time frame. Although currencies is one of the most popular markets used with Japanese Candlestick Patterns. The Japanese Candlestick Patterns however cannot be used on a line chart as it provides only the close of the chart’s time frame. Finding a Doji or a Dark Cloud cover candlestick pattern is not sufficient to indicate high probability high profit trading opportunity irrespective of the markets you are using them in.
It must be mentioned that making use of just the major types of Japanese Candlestick patterns will provide traders with enough information to identify potential trading opportunities. But at the same time other patterns should not be ignored either as they can be used effectively to produce high profit windows. In reality some of the Japanese Candlestick patterns occur very rarely. The most basic difference between the Japanese candlestick patterns with any other form of chart patterns is that the Japanese candlesticks can be immediately recognized on the basis of price direction and strength.