Japanese Candlestick Tutorial Part 2

Notice the 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 discussed further below.

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.

Recommended Candlestick Course >>>>

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 Morning Star Candlestick 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 this means

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 this means

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.

Being fluent in "candlestick language" is a basic perequisite for FOREX trading.

There are many more candlestick patterns beyond what we have discussed here, the following two resources are recommended for further education on this subject.

FOREX Candlesticks Made Easy

Candlestick Trading For Maximum Profits

<<< Japanese Candlestick Tutorial Part 1