Japanese Candlestick charting has really been with us for a while and that’s part of the technical analysis that, even if it’s some professional don’t use it, so far I have only heard and read good things about it. And I suppose this is due to the fact that it really is a really useful tool in technical analysis.
In order to give you a more detailed analysis of Japanese Candlestick charting, how to use it and how to identify patterns on the charts, etc, I will be making my next few posts here about the book „Candlestick Chartings explained” by Greg Morris as the bases plus I will try to give you a lot more information in addition as well. I will also do my best to provide you chart examples as much as possible, will be doing the drawing myself.
Something that needs to be said before going on – there have been rumours that Japanese candlesticks are related to some kind of thousands of years old mysteries....don’t fall into that. Candlesticks are good and have been around for hundreds of years, but no mysteries are involved.
What makes candlesticks different from the usual high low charts? Allegedly it makes it easier to see patterns and data relationships. We’ll see if we agree with that soon. See the image here to see how candlesticks look like.
The box is the candlestick body and this is also the difference between open and close price. If the box/body is filled then it means the close price was lower than the open price. When the body is empty then this means the close price is higher than open price (thus it was an up-day). The thin lines on top and in the bottom of the candlestick represent the high and low prices during that period. These thin lines are called shadows.
Now, lets get aquainted with couple of single-candle lines used in candlestick charts.
Long Day – day when the open and close prices are quite far from each other ( thus the candlestick is a long one ). To determine whether it’s a long day or not, just see what the usual length has been during the past 5-10 days and if it’s considerably longer than usually then we’ve got ourselves a long day.
Short day – just the opposite to long day.
Maribozu – this means that there’s no shadows (thin lines) visible on the candlestick. Filled maribozy is considered an extremely weak line meaning that it’s often part of a bearish continuation or bullish reversal pattern. Empty maribozu is pretty much the opposite. Closing maribozu – if the body is white then there’s no upper shadow (considered strong), if filled there’s no bottom shadow (considered weak). Opening Marobozu – if the body is empty there’s no lower shadow (considered strong), if filled there’s no upper shadow (considered weak). Note that Closing Marubozu is considered stronger.
Spinning tops – candlesticks with small bodies and shadows that are both longer than the body.
Doji – it means that the open and close prices are pretty much the same, thus there is no real visible body except for a thin horizontal line. Often can indicate a change of trend. Gravestone Doji is a doji that has no lower shadow. This is often a bearish indication. Dragonfly dodgy is the opposite again. Four price doji is something that pretty much never happens – it’s when all prices – open close high low are equal.
Stars – if there’s a long body and then the next day there’s a rather small body and the small body starts a bit above or a bit below from the previous day’s body ( so that there’s a gap between ).
Paper umbrella – small body and long-long lower shadow (and no upper shadow).
Coming up next: Candlestick Reversal Patterns