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TradingCurrncyOnline.com
Presents...
Japanese Candle Sticks
The sign language of
FOREX part II
Price fell
down, then it raised way back up only to fall back
again. Do you see how the market cannot determine
which way it wants to go?
When you see
a candle like this, it means the market is trying to
decide which way to go next so a reversal in
direction is possible.
Indecision
candles are usually not strong enough to base a
trade on by themselves but when they appear, it
might be a good time to start looking for other
clues, like the candle patterns toward the bottom of
this page.
Seeing
indecision candles does not mean the market is going
to reverse, very often price just meanders for a bit
and then continues in the same direction, however...
Indecision
candle(s) often appear just before the market
reverses which is why this is a good tool to have in
your arsenal.
Note the
bullish decision candle after the Doji. It appears
the market has "made up its mind" and is starting to
go up.
Get to know
the difference between decision candles and
indecision candles.
Good rule of
thumb:
Decision
candle = Higher chance price will continue in same
direction.
Indecision
Candle = Higher chance of a market reversal.
Engulfing
Candles
There are
many different Japanese candle stick patterns
traders watch for, we are going to cover a few of
what are usually considered the most reliable.
The Japanese
candle stick "engulfing" pattern can give insight as
to the direction price is headed.
Japanese
candle stick Bearish Engulfing Pattern.
Market is in
an uptrend, not down or sideways.
 Notice
how the body of the red bearish candle completely
"engulfs" the body of the previous blue bullish
candle.
In this
example the bearish candle engulfed both of the
previous bullish candles, this is an even stronger
pattern and is an indication price may be headed
down.
Japanese
candle stick Bullish Engulfing Pattern
Market is in
a downtrend, not up or sideways.
Notice how
the body of the blue bullish candle completely
"engulfs" the body of the previous red bearish
candle.
In this
example the bullish candle engulfed both of the
previous bearish candles, this is an even stronger
pattern and is an indication price may be headed up.
Don't
include wicks when determining whether there is an
engulfing candle, only the bodies.
Japanese
candle stick Morning Star Pattern
The Japanese
candle stick Morning Star Pattern usually signifies
the end of a down trend and the start of an uptrend.
-
Price is
in a down trend.
-
There is
one last long bearish candle and then a
indecision candle.
-
There
may be one or several indecision candles.
-
Then
there is a long bullish candle that retraces at
least 50% into the last long bearish candle.
What does it
mean?
Price was
going down strong as indicated by the bearish
decision candle.
Then there
was a period of indecision as indicated by the
indecision candle(s).
Then the
market determined the direction as indicated by the
bullish decision candle.
When this
pattern develops it is probable that price will
continue up at least for awhile.
Japanese
candle stick Evening Star Pattern
The Japanese
candle stick Evening Star Pattern usually signifies
the end of a uptrend and the start of a downtrend.
-
Price is
in a uptrend.
-
There is
one last long bullish candle and then a
indecision candle.
-
There
may be one or several indecision candles.
-
Then
there is a long bearish candle that retraces at
least 50% into the last long bullish candle.
What does it
mean?
Price was
going up strong as indicated by the bullish decision
candle.
Then there
was a period of indecision as indicated by the
indecision candle(s).
Then the
market determined the direction as indicated by the
bearish decision candle.
When this
pattern develops it is probable that price will
continue down at least for awhile.
The Japanese candle stick double
or "Tweezer" Top Formation
A Tweezer
Top formation occurs after price has been in an
uptrend.
-
Price
will reach its highest point (first star)
forming a top and then retrace.
-
There
could be one or many candles with lower highs
than the top.
-
Price
will muster steam and head back up toward the
top stopping just one or two pips above, one or
two pips below or at the exact same place as the
previous high.
-
Notice
the wicks are at the same height in our example
above.
-
Price
will then start to retrace again.
What this
means
Price makes
a high and then retests the high only to find too
much resistance at that point.
Tweezer tops
are usually a good sell signal.
If price
tries a third time to get above the high and fails,
this is called a triple top and is even stronger
than the double top.
The Japanese
candle stick double or "Tweezer" Bottom Formation
A Tweezer
Bottom formation occurs after price has been in an
downtrend.
-
Price
will reach its lowest point (first star) forming
a bottom and then retrace.
-
There
could be one or many candles with higher lows
than the bottom.
-
In this
example the very next candle wick reached the
same low and then retraced forming our Tweezer
Bottom.
-
Price
will lose steam and drop back down toward the
bottom stopping just one or two pips above, one
or two pips below or at the exact same place as
the previous bottom.
-
Notice
the wicks are at the same height in our example
above.
-
Price
will then start to retrace again.
What this
means
Price makes
a low and then retests the low only to find too much
support at that point.
Japanese
candle stick tweezer bottoms are usually a good buy
signal.
If price
tries a third time to get below the low and fails,
this is called a triple bottom and is even stronger
than the double bottom.
Understanding Japanese candle stick language is
crucial in FOREX trading. Many FOREX traders simply
wait for Japanese candle stick patterns to form at
Fibonacci levels and then enter the trade
accordingly.
More
Japanese candle stick resources
Stanley
Thompson's
ABC of Candlestick Charting provides a
solid foundation in recognizing Japanese candle
stick patterns and is highly recommended.
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