Japanese candlesticks intraday trading
It took nearly two centuries for candlestick charts to make the leap to the Western hemisphere from Japan — and just a quarter century to become the preferred charting technique of traders from Wall Street to Main Street. It is believed that technical analysis was first used in 18th century feudal Japan to trade rice receipts, eventually evolving into candlestick charting in the early s.
Steve Nison, founder of Candlecharts. Part of their appeal to technical analysts is their visualization of market behavior at key turning points. Technicians also like their flexibility.
If the close is above the open, the candle is left open, or white; if the close is below the open, the body is colored in. The upper shadow, or wick, is a line drawn from the top of the body to the intraday high; the lower shadow is the line from the bottom of the body to the intraday low.
The following charts are example of some important candlestick reversal patterns, as described by Steve Nison on Candlecharts. Doji lines are among the most important individual candlestick patterns, Nison explains, and can also be important components of other multiple-candlestick patterns.
If a doji appears after an uptrend, and especially if it follows a long white-bodied candle, it represents indecision at a significant high, at a time when bulls should still be decisive. It can also be read as a sign that supply and demand have reached equilibrium. Either way, it is seen as a warning that the uptrend is ending. If it appears after a long decline, it warns that a downtrend is ending. A gravestone doji is when the open and close are at the low of the day.
The above chart would help define a bottom. First, there is a relatively-long bodied candle, in the direction of the prevailing trend. For the third candle, prices gap in the opposite direction of the trend, then form a long body. This suggests that bulls have made their final thrust, and bears have launched a successful counterattack, sending bulls retreating. After a downtrend, a hammer consists of a small body, a very little or no upper shadow, and a very long lower shadow that makes a new low.
The lower shadow should be at least twice the length of the body. Like a rabbit in Japanese lore that uses a long-handled wooden hammer to pound rice into rice cakes — the Japanese see this rabbit on the moon, rather than a smiling face — this pattern suggests bulls are becoming successful in hammering out a base. But when it appears after a rally, it becomes a bearish reversal pattern. Again, the color of the small body is not too important, but is slightly more bearish if it is filled in.
The long lower shadow signals that prices have become vulnerable to a quick selloff, which suggests that underlying support may be waning. The pattern was named hanging man because it looks like a person hanging from a high level, their feet dangling below.
A harami cross is when the fetus is a doji. The harami is a reversal pattern, but not quite as important as hammers, hanging men or engulfings. Still, it suggests prices will begin to separate from the trends that preceded them, which could include coming to a lull.
It tends to have better predictive powers at tops, Nison has said. The above chart shows bearish harami patterns, if they appear after an uptrend. In a bullish harami, the body of the first candle would be colored in. Nison likened the star patterns to a traffic light. It starts at green, the long body in the direction of the trend; turns yellow with the small second candle, implying indecision; and, finally, turns red with the big countertrend move.
Like all candlestick reversal patterns, the success rate can be improved if they combine with other technical signals. A bearish engulfing at a resistance level, with a bearishly diverging relative-strength indicator , would be a stronger sell signal than a bearish engulfing by itself. By using this site you agree to the Terms of Service , Privacy Policy , and Cookie Policy. Intraday Data provided by SIX Financial Information and subject to terms of use.
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how to use candlestick patterns for day trading
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