What is a Japanese Candlestick?
What is a Japanese Candlestick?
While we briefly covered candlestick charting analysis in the previous lesson, we'll now dig in a little and discuss them more in detail. Let's do a quick review first. What is Candlestick Trading?
Back in the day when Godzilla was still a cute little lizard, the Japanese created their own old school version of technical analysis to trade rice. That's right, rice. A westerner by the name of Steve Nison "discovered" this secret technique called "Japanese candlesticks", learning it from a fellow Japanese broker. Steve researched, studied, lived, breathed, ate candlesticks, and began to write about it. Slowly, this secret technique grew in popularity in the 90s. To make a long story short, without Steve Nison, candlestick charts might have remained a buried secret. Steve Nison is Mr. Candlestick.
Okay, so what the heck are candlesticks?
The best way to explain is by using a picture:
Candlesticks can be used for any time frame, whether it be one day, one hour, 30-minutes, 15-10-5-minutes - whatever you want! Candlesticks are used to describe the price action during the given time frame.
Candlesticks are formed using the open, high, low, and close of the chosen time period.
- If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn.
- If the close is below the open, then a filled candlestick (usually displayed as black) is drawn.
- The hollow or filled section of the candlestick is called the "real body" or body.
- The thin lines poking above and below the body display the high/low range and are called shadows.
- The top of the upper shadow is the "high".
- The bottom of the lower shadow is the "low".
Sexy Bodies and Strange Shadows
Sexy Bodies
Just like humans, candlesticks have different body sizes. And when it comes to stock market trading, there's nothing naughtier than checking out the bodies of candlesticks! Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. This means that either buyers or sellers were stronger and took control. Short bodies imply very little buying or-selling activity. In street stock market lingo, bulls mean buyers and bears mean sellers.
Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears' butts big time! Long black (filled) candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body-slamming them.
Mysterious Shadows
The upper and lower shadows on candlesticks provide important clues about the trading session. Upper shadows signify the session high. Lower shadows signify the session low Candlesticks with long shadows show that trading action occurred well past the open and close. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close. 
If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher, but for one reason or another, sellers came in and drove prices back down to end the session back near its open price. If a candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower, but for one reason or another, buyers came in and drove prices back up to end the session back near its open price. 
Doji are important candlesticks that provide information on their own and as components of in a number of important patterns. Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. Alone, doji are neutral patterns. Any bullish or bearish bias is based on preceding price action and future confirmation. The word "Doji" refers to both the singular and plural form. 
The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted. 
Long-legged doji have long upper and lower shadows that are almost equal in length. These doji reflect a great amount of indecision in the market. Long-legged doji indicate that prices traded well above and below the session's opening level, but closed virtually even with the open. After a whole lot of yelling and screaming, the end result showed little change from the initial open. Dragon fly doji form when the open, high and close are equal and the low creates a long lower shadow. The resulting candlestick looks like a "T" with a long lower shadow and no upper shadow. Dragon fly doji indicate that sellers dominated trading and drove prices lower during the session. By the end of the session, buyers resurfaced and pushed prices back to the opening level and the session high.
The reversal implications of a dragon fly doji depend on previous price action and future confirmation. The long lower shadow provides evidence of buying pressure, but the low indicates that plenty of sellers still loom. After a long downtrend, long black candlestick, or at support, a dragon fly doji could signal a potential bullish reversal or bottom. After a long uptrend, long white candlestick or at resistance, the long lower shadow could foreshadow a potential bearish reversal or top. Bearish or bullish confirmation is required for both situations.
Gravestone doji form when the open, low and close are equal and the high creates a long upper shadow. The resulting candlestick looks like an upside down "T" with a long upper shadow and no lower shadow. Gravestone doji indicate that buyers dominated trading and drove prices higher during the session. However, by the end of the session, sellers resurfaced and pushed prices back to the opening level and the session low.
As with the dragon fly doji and other candlesticks, the reversal implications of gravestone doji depend on previous price action and future confirmation. Even though the long upper shadow indicates a failed rally, the intraday high provides evidence of some buying pressure. After a long downtrend, long black candlestick, or at support, focus turns to the evidence of buying pressure and a potential bullish reversal. After a long uptrend, long white candlestick or at resistance, focus turns to the failed rally and a potential bearish reversal. Bearish or bullish confirmation is required for both situations.
Before turning to the single and multiple candlestick patterns, there are a few general guidelines to cover.
A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time. An analogy to this battle can be made between two football teams, which we can also call the Bulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown for the Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to the high, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer the Bears are to a touchdown. While there are many variations, I have narrowed the field to 6 types of games (or candlesticks): 
Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game.
Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game.
Small candlesticks indicate that neither team could move the ball and prices finished about where they started.
A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback.
A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.
A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff.
Look below another list of basic patterns.
Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks (and bar charts) cannot tell us which came first. 
In his book, Candlestick Charting Explained, Greg Morris notes that for a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trend lines, moving averages, peak/trough analysis or other aspects of technical analysis. A downtrend might exist as long as the security was trading below its down trend line, below its previous reaction high or below a specific moving average. The length and duration will depend on individual preferences. However, because candlesticks are short-term in nature, it is usually best to consider the last 1-4 weeks of price action.
A candlestick that gaps away from the previous candlestick is said to be in star position. The first candlestick usually has a large real body, but not always, and the second candlestick in star position has a small real body. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action. The two candlesticks can be any combination of white and black. Doji, hammers, shooting stars and spinning tops have small real bodies, and can form in the star position. Later we will examine 2- and 3-candlestick patterns that utilize the star position. A candlestick that forms within the real body of the previous candlestick is in Harami position. Harami means pregnant in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it's preferable if they are. Doji and spinning tops have small real bodies, and can form in the harami position as well. Later we will examine candlestick patterns that utilize the harami position.
There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow and one short or non-existent shadow. Generally, the long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.
The first pair, Hammer and Hanging Man, consists of identical candlesticks with small bodies and long lower shadows. The second pair, Shooting Star and Inverted Hammer, also contains identical candlesticks, except, in this case, they have small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The Hammer and Inverted Hammer form after a decline and are bullish reversal patterns, while the Shooting Star and Hanging Man form after an advance and are bearish reversal patterns.
The Hammer and Hanging Man look exactly alike, but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the Hammer and Hanging Man require confirmation before action. 
The Inverted Hammer and Shooting Star look exactly alike, but have different implications based on previous price action. Both candlesticks have small real bodies (black or white), long upper shadows and small or nonexistent lower shadows. These candlesticks mark potential trend reversals, but require confirmation before action. 
Candlestick patterns are made up of one or more candlesticks and can be blended together to form one candlestick. This blended candlestick captures the essence of the pattern and can be formed using the following: The open of first candlestick
The close of the last candlestick
The high and low of the pattern
By using the open of the first candlestick, close of the second candlestick, and high/low of the pattern, a Bullish Engulfing Pattern or Piercing Pattern blends into a Hammer. The long lower shadow of the Hammer signals a potential bullish reversal. As with the Hammer, both the Bullish Engulfing Pattern and the Piercing Pattern require bullish confirmation. Blending the candlesticks of a Bearish Engulfing Pattern or Dark Cloud Cover Pattern creates a Shooting Star. The long, upper shadow of the Shooting Star indicates a potential bearish reversal. As with the Shooting Star, Bearish Engulfing, and Dark Cloud Cover Patterns require bearish confirmation. More than two candlesticks can be blended using the same guidelines: open from the first, close from the last and high/low of the pattern. Blending Three White Soldiers creates a long white candlestick and blending Three Black Crows creates a long black candlestick. Basic Candlestick Patterns
Candlestick pattern
In technical analysis, a Candlestick pattern is a movement in prices shown graphically on a candlestick chart that some believe can predict a particular market movement. The recognition of the pattern is subjective and programs that are used for charting have to rely on predefined rules to match the pattern. There are 42 recognized patterns that can be split into simple and complex patterns. Little or no statistical validation of these patterns has been published. What analysis has been done suggests they are no better than chance at predicting stock or commodity movement.
History
Some of the earliest technical trading analysis was used to track prices of rice in the 17th century. Much of the credit for candlestick charting goes to Munehisa Homma, (1724–1803), a rice merchant from Sakata, Japan who traded in the Ojima Rice market in Osaka during the Tokugawa Shogunate. According to Steve Nison, however, candlestick charting came later, probably beginning after 1850
Formation of candlestick
Candlesticks are graphical representations of price movements for a given period of time. They are commonly formed by the opening, high, low, and closing prices of stock.
If the opening price is above the closing price then a filled (normally red or black) candlestick is drawn.
If the closing price is above the opening price, then normally a green or a hollow candlestick (white with black outline) is shown.
The filled or hollow portion of the candle is known as the body or real body, and can be long, normal, or short depending on its proportion to the lines above or below it.
The lines above and below, known as shadows, tails, or wicks represent the high and low price ranges within a specified time period. However, not all candlesticks have shadows.
Simple patterns
Has an unusually long black body with a wide range between high and low. Prices open near the high and close near the low. Considered a bearish pattern.
Has an unusually long white body with a wide range between high and low of the day. Prices open near the low and close near the high. Considered a bullish pattern. Formed when the opening price is higher than the closing price. Considered to be a bearish signal.
Formed when opening and closing prices are virtually the same. The lengths of shadows can vary. Formed when the opening and the closing prices are at the highest of the day. If it has a longer lower shadow it signals a more bullish trend. When appearing at market bottoms it is considered to be a reversal signal. Formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow it signals a bearish trend. When it appears at market top it is considered a reversal signal. Consists of a Doji with very long upper and lower shadows. Indicates strong forces balanced in opposition. A black or a white candlestick that consists of a small body near the high with a little or no upper shadow and a long lower tail. The lower tail should be two or three times the height of the body. Considered a bearish pattern during an uptrend. A black or a white candlestick that consists of a small body near the high with a little or no upper shadow and a long lower tail. Considered a bullish pattern during a downtrend. A black body in an upside-down hammer position. Usually considered a bottom reversal signal. It consists of black or a white candlestick in an upside-down hammer position. A black or a white candlestick is formed with a lower tail that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bullish signal when it appears around price support levels. A black or a white candlestick with an upper shadow that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bearish signal when it appears around price resistance levels. A long or a normal candlestick (black or white) with no shadow or tail. The high and the lows represent the opening and the closing prices. Considered a continuation pattern. A black or a white candlestick that has a small body, a long upper shadow and a little or no lower tail. Considered a bearish pattern in an uptrend. A black or a white candlestick with a small body. The size of shadows can vary. Interpreted as a neutral pattern but gains importance when it is part of other formations. Formed when the closing price is higher than the opening price and considered a bullish signal. A black or a white candlestick with no lower tail. [Compare with Inverted Hammer.] A black or a white candlestick with no upper shadow. [Compared with hammer.] Complex patterns
It consists of an unusually large white body followed by a small back body (contained within large white body). It is considered as a bearish pattern when preceded by an uptrend. It has a large white body followed by a Doji. It is considered as a reversal signal when it appears at the top. It has a long black body followed by three small bodies (normally white) and a long black body. The three white bodies are contained within the range of first black body. This is considered as a bearish continuation pattern. It consists of a long white body followed by three small bodies (normally black) and a long white body. The three black bodies are contained within the range of first white body. This is considered as a bullish continuation pattern It consists of an unusually large black body followed by a small white body (contained within large black body). It is considered as a bullish pattern when preceded by an uptrend. It has a large black body followed by a Doji. It is considered as a reversal signal when it appears at the bottom. It consists of a long white candlestick followed by a black candlestick that opens above the high of the white candlestick and closes well into the body of the white candlestick. It is considered as a bearish reversal signal during an uptrend. It consists of a small white body that is contained within the followed large black candlestick. When it appears at top it is considered as a major reversal signal. It consists of a small black body that is contained within the followed large white candlestick. When it appears at bottom it is interpreted as a major reversal signal. It consists of three candlesticks. First is a large white body candlestick followed by a Doji that gap above the white body. The third candlestick is a black body that closes well into the white body. When it appears at the top it is considered as a reversal signal. It signals more bearish trend than the evening star pattern because of the doji that has appeared between the two bodies.
It consists of a large white body candlestick followed by a small body candlestick (black or white) that gaps above the previous. The third is a black body candlestick that closes well within the large white body. It is considered as a reversal signal when it appears at top level. A window (gap) is created when the high of the second candlestick is below the low of the preceding candlestick. It is considered that the window should be filled with a probable resistance. It consists of a large black body candlestick followed by a Doji that occurred below the preceding candlestick. On the following day, a third white body candlestick is formed that closed well into the black body candlestick which appeared before the Doji. It is considered as a major reversal signal that is more bullish than the regular morning star pattern because of the existence of the Doji.
It consists of a large black body candlestick followed by a small body (black or white) that occurred below the large black body candlestick. On the following day, a third white body candlestick is formed that closed well into the black body candlestick. It is considered as a major reversal signal when it appears at bottom. In a downtrend, it consists of a black candlestick followed by a small body white candlestick with its close near the low of the preceding black candlestick. It is considered as a bearish pattern when the low of the white candlestick is penetrated. In an uptrend, a black candlestick is followed by a white candlestick with the preceding opening price. In a downtrend, a white candlestick is followed by a black candlestick with the preceding opening price. It is considered as a continuation pattern that the trend should resume. It consists of three long black candlesticks with consecutively lower closes. The closing prices are near to or at their lows. When it appears at top it is considered as a top reversal signal. It consists of three long white candlesticks with consecutively higher closes. The closing prices are near to or at their highs. When it appears at bottom it is interpreted as a bottom reversal signal. It consists of two or more candlesticks with matching bottoms. The candlesticks may or may not be consecutive and the sizes or the colours can vary. It is considered as a minor reversal signal that becomes more important when the candlesticks form another pattern. It consists of two or more candlesticks with matching tops. The candlesticks may or may not be consecutive and the sizes or the colours can vary. It is considered as a minor reversal signal that becomes more important when the candlesticks form another pattern. It consists of a black or a white candlestick followed by a Doji that gap above or below these. It is considered as a reversal signal with confirmation during the next trading day.It consists of a black candlestick followed by a white candlestick that opens lower than the low of preceding but closes more than halfway into black body candlestick. It is considered as reversal signal when it appears at bottom A window (gap) is created when the low of the second candlestick is above the high of the preceding candlestick. It is considered that the window should provide support to the selling pressure.
Japanese Candlesticks Cheat Sheet
Did you click here first? If you did, stop reading right now and go through the entire Japanese Candlesticks Lesson first! If you're REALLY done with those, here's quick one page reference cheat sheet for single, dual, and triple candlestick formations to easily identify what kind of pattern you are looking at whenever you are trading. Go ahead and bookmark this page... No need to be shy!
Number of Bars | Name | Bullish or Bearish? | What It Looks Like? |
Single | Spinning Top | Neutral | |
Doji | Neutral | |
White Marubozu | Bullish | |
Black Marubozu | Bearish | |
Hammer | Bullish | |
Hanging Man | Bearish | |
Inverted Hammer | Bullish | |
Shooting Star | Bearish | |
Number of Bars | Name | Bullish or Bearish? | What it Looks Like? |
Double | Bullish Engulfing | Bullish | |
Bearish Engulfing | Bearish | |
Tweezer Tops | Bearish | |
Tweezer Bottoms | Bullish | |
Triple | Morning Star | Bullish | |
Evening Star | Bearish | |
Three White Soldiers | Bullish | |
Three Black Crows | Bearish | |
Three Inside Up | Bullish | |
Three Inside Down | Bearish | |
Quick View Candlesticks patterns and Psychology-
Candlesticks is a Japanese trading technique invented in the 18 century by rice traders. Today this technique is called candlestick charting and is widely used when drawing stock charts.
Candlestick charts use the same price data as bar charts (open, high, low, close). However, candlestick charts are drawn in a much more visually identifiable way typically resembling a candle with wicks on both ends. The high and low are described as shadows and plotted as a single line.
About patterns
Candlesticks form interesting patterns which give excellent clues above market trend and direction. Patterns are independent of time frame and can even clubbed! I have listed my favorites patterns here. These are reliable and the reliability increases dramatically if the previous move is strong.
Bullish Patterns:
 | Morning Star: Occurs after a sustained downtrend. The 2nd day gaps lower, but trades in a small range. The gap-down indicates panic but bulls step in (buy on panic declines) thus limiting the downside. The bullishness of this indecision is confirmed by the higher close of the 3rd day. |
 | Bullish Tristar: Occurs after a sustained downtrend. This formation is rare, so always be suspect of the data. This pattern is not reliable for stocks with low volume. The huge amount of indecision created by these three dojis must not be ignored by traders. This level of indecision strongly suggests that the trend is about to change. |
 | Bullish Doji: The downtrend is in full force with a strong 1st day. All confidence built up by the bears from the 1st day is destroyed when the 2nd day's gap down closes near it's open. Short covering will quickly appear if the next day opens higher. |
 | Bullish breakaway: The down trend is accelerated by a gap down. The next few days trend down, however start to run out of steam. The last day of the formation shows a breakout and close above the previous 3 days, however the gap created on the 1st day remains unfilled. Since the gap is not filled and the trend is obviously deteriorating, this implies the reversal signal. |
 | Hammer: The long tail and small real body at the top of the trading range indicates strong buying by bulls (buy on panic declines). Bears wonder if this is the end of the downtrend and take measures to cover shorts. |
 | Bullish Engulfing: Gap-down opening but close above previous days highs. This damages the spirits of the shorts and brings into question the bear trend which prompts additional buying in the coming days. |
 | Bullish Low: Getting two days with equal closes should alert the shorts that an important support level may have been found. Higher prices may be ahead in the days to come. A higher close the next day would serve as confirmation of the reversal. |
 | Bullish Tails: Alerts to possible bottoming out. Even though markets are making lower highs and lower lows, buying at lower levels kicks in so markets close towards days highs. |
 | 3 Inside Up: Inside day represents volatility compression. Break of 2 day swing high happens on 3rd day which confirms trend reversal. |
 | 3 Outside Up: upside day represents great volatility as bulls and bears get active. Break of days high on 3rd day confirms trend reversal. |
 | Bullish Side-by-Side: The last 2 days price action shows that markets are holding above their previous lows (support). The uptrend remains intact as long as the support holds (stoploss). |
 | Bullish Continuation: Markets take a breather before continuing it's uptrend. Notice that a new low is not seen during the 4 remaining days of this formation. This gives little confidence to the bears, making way for bulls. |
Bearish Patterns:
 | Evening Star: Occurs after a sustained uptrend. The 2nd day gaps higher, but trades in a small range. The gap-up indicates extreme greed but bears step in (sell when others are greedy) thus limiting the upside. The bearishness of this indecision is confirmed by the lower close of the 3rd day. |
 | Bearish Tristar: Occurs after a sustained downtrend. This formation is rare, so always be suspect of the data. This pattern is not reliable for stocks with low volume. The huge amount of indecision created by these three dojis must not be ignored by traders. This level of indecision strongly suggests that the trend is about to change. |
 | Bearish Doji Star: The uptrend is in full force with a strong 1st day. All confidence built up by the bulls from the 1st day is destroyed when the 2nd day's gap up closes near its open. Profit takers will quickly appear if the next day opens lower. |
 | Bearish Breakaway: The up trend is accelerated by a gap up. The next few days trend up, however start to run out of steam. The last day of the formation shows a breakdown and close below the previous 3 days, however the gap created on the 1st day remains unfilled. Since the gap is not filled and the trend is obviously deteriorating, this implies the reversal signal. |
 | Inverted hammer: The long upper shadow and small real body at the bottom of the trading range indicates strong selling by bears. Bulls wonder if this is the end of the uptrend and take measures to protect their gains. |
 | Bearish 2 Crows: The gap created on the 2nd day gets filled by the 3rd day. This quick pull back does not bode well for the bulls. This price action indicates a short term top. |
 | Bearish Engulfing: Gap-up opening but close below previous days low. This damages the spirits of the longs and brings into question the bull trend which prompts additional selling in the coming days. |
 | Bearish Tails: Alerts to possible topping out. Even though markets are making higher highs and higher lows, selling at higher levels kicks in so markets close towards days low. |
 | 3 Inside Down: Inside day represents volatility compression. Break of 2 day swing low happens on 3rd day which confirms trend reversal. |
 | 3 Outside Down: Outside day represents great volatility as bulls and bears get active. Break of days low on 3rd day confirms trend reversal. |
 | Bearish Side-by-Side: The last 2 days price action shows that markets are trading below their previous highs (resistance). The downtrend remains intact as long as the resistance holds (stoploss) |
 | Bearish Continuation: Markets take a breather before continuing it's downtrend. Notice that a new high is not seen during the 4 remaining days of this formation. This gives little confidence to the bulls, making way for the short sellers. |
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What is a Japanese Candlestick?
