Candlestick Trading – The Language of Japanese Candlesticks

In my opinion, You are better Teacher than Al Brooks. Others often just explain candles by descriptions, but having it in graphics makes it more easier to understand. Their huge popularity has lowered reliability because they've been deconstructed by hedge funds and their algorithms. Brief History of Japanese Candlesticks. Candlestick patterns capture the attention of market players, but many reversal and continuation signals emitted by these patterns don't work reliably in the modern electronic environment. This means that after a Spinning Top candle, the price might either increase or decrease, depending on the context of price action at the time. To learn more, take a look at Advanced Candlestick Patterns.

Japanese 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.

What are Japanese candlesticks?

If not, you may want to visit this post and then come right back. Like most formations, these can form as either a bullish or bearish signal. As a general rule, the tail should make up at least two-thirds of the entire pin bar. Notice how the tail on the two pin bars in the illustration above are much more pronounced than the rest of the structure. Next is the body. The body represents the open and close of a pin bar and can vary in size.

The first rule about the tail should help keep you in line. The nose of the pin bar , which is sometimes nonexistent, is important only as it relates to the tail and body.

This pattern triggered a sharp move higher back to previous swing lows, which acted as resistance. On the second retest of resistance, sellers came out in force and eventually formed a bearish pin bar.

I wrote a more detailed lesson on the pin bar where I get into what makes a tradable setup as well as where to place your stop loss and target. This observation is especially true for those trading anything less than the daily charts.

Take a peek at the video below where I explain the characteristics of the inside bar and an easy way to determine if one is bullish or bearish. When it comes to Forex candlestick patterns, the inside bar is my second favorite pattern to trade.

Notice how the inside bar in the chart above formed during a strong uptrend. An established trend is a requirement for trading this particular candlestick pattern. The reason for this is that the inside bar is nothing more than consolidation. So we have a strong trend followed by consolidation which leads to a breakout in the prevailing direction.

Note that the pair had been in a downtrend for several months, therefore these are bearish continuation patterns. You could make the case that the first signal in the chart above was also a pin bar, and I would agree. The combined rejection of former support and consolidation made for an incredibly profitable trade setup. Last but not least is the engulfing candlestick. Unlike the inside bar that we just studied, this formation most often signals a reversal in the market.

Because it takes more than an engulfing candle to warrant a position. To be considered tradable, an engulfing candle must develop at a key support or resistance level and after an extended move up or down. While the video above only addresses the bearish engulfing candle, the same rules apply for its inverse, the bullish engulfing. For it to be profitable, an engulfing pattern must form at a swing high or low. Only then can it be used to formulate a trade idea.

Hence the name, this is the most prominent and significant feature of this pattern. While the engulfing bar pattern is my third favorite in this lineup, it can be extremely telling if properly utilized. The two bearish signals formed at resistance, creating two profitable opportunities.

Know that the first candlestick in the chart above is also a bearish pin bar or at the very least a bearish rejection. Always remember that a bullish engulfing pattern at a swing low is a sign of potential strength. It signals that the current downward momentum is likely coming to an end.

Alternatively, a bearish engulfing pattern at a swing high is a sign of potential weakness. If you see one form in this manner, the chances are good that an increase in selling pressure is on its way. Last but certainly not least, both candlestick patterns must form at a key level to be tradable.

Otherwise, you may find yourself trading a lot of false positives. Whether you trade using raw price action or some other means of identifying favorable setups, the three candlestick patterns above will surely improve your trading. As lucrative as these formations can be, always remember that there are never any guarantees.

Just like any other Forex trading strategy, the three above can and do fail, so always protect yourself. Last but not least, the pin bar, inside bar and engulfing pattern are most useful when combined with other confluence factors. Then you definitely want to download the free Forex candlestick patterns PDF that I just put together. It contains all three formations above and shows you the exact characteristics I look for when developing a trade idea.

I notice you talk about inside bars and pin bars do you trade the engulfing pattern as well or no? Forex candlestick patterns are special on-chart formations created by one, or a few, Japanese candlesticks. There are many different candlestick pattern indicators known in Forex, and each of them has a specific meaning and tradable potential. Forex traders constantly use candlestick chart patterns for day trading to foretell potential price moves on the chart.

Forex candlesticks help them guess where the price will go and they buy or sell currency pairs based on what the pattern is telling them. Therefore, you should also spare the time to examine the best candlestick patterns for intraday trading if you want to be a successful Forex trader. There are two types of Forex candlestick patterns for day trading — continuation and reversal candle patterns. Continuation Forex candle patterns are the ones that come after a price move and have the potential to continue the price action in the same direction.

The truth is that continuation candle patterns are not very popular in Forex trading. The reason for this is that there are not many of them.

In comparison, reversal candlestick patterns dominate the Forex charts. The reversal Forex candle patterns are the ones that come after a price move and have the potential to reverse the price action.

In comparison with continuation candle patterns, the reversal candle pattern indicators represent the majority of the candle patterns you will meet on the Japanese candlestick charts. So, you should not be surprised that the best 5 candlestick patterns for day trading are reversal patterns.

The Doji candle family consists of single candle formations where the price action opens and closes at the same price. Every Doji candlestick symbolizes the equalization of the bearish and the bullish forces.

This means that the current price trend is becoming exhausted and it is likely to be reversed. The Doji Forex pattern could appear after bullish moves as well as after bearish moves. Despite that, the function of the pattern — to reverse the price action — stays the same. As the Doji candle closes at the same level as it opened, the candle looks like a dash. Yes, but this is not the only Doji candle pattern known in Forex trading. There are other Doji candlesticks too.

Below you will find the most popular Doji candlestick pattern types. The confirmation of all of the Doji patterns comes when with the finish of a candle that closes in the direction that is opposite to the trend. This candle is the first indication that the reversal is beginning. The Tweezer Tops is a double candlestick pattern Forex indicator with reversal functions. The pattern comes at the end of bullish trends and signals the beginning of a fresh bearish move.

The first candle of the Tweezer Top candlestick formation is usually the last of the previous bullish trend. The second candle of the Tweezer Top pattern should have an upper shadow that starts from the top of the previous shadow.

At the same time, the upper shadows of the two candles should be approximately the same size. The Tweezer Tops has its opposite equivalent, called Tweezer Bottoms. The Tweezer Bottoms Forex pattern has a completely opposite structure. The pattern comes after price drops and signals upcoming bullish moves. The first candle of the Tweezer Bottom is usually the last candle of the previous bullish trend.

The second candle of the Tweezer Bottom pattern should have a lower shadow that starts from the bottom of the previous shadow. The confirmation of the Tweezer Candlesticks comes with the candle that manages to close beyond the opposite side of the pattern.

This candle is a strong indication that the trend is reversing. The Hammer candlestick pattern is a single candle pattern that has three variations depending on the trend they take part in. Every Forex candlestick that belongs to the Hammer family has a small body and a big upper or smaller shadow.

At the same time, the other shadow is either missing or very small. If you are wondering if the name of the Hammer candle family comes from the structure of the candles, you are correct. The candles in the Hammer family are four, and they all have reversal character. I have shown the bullish and the bearish version of each candle. The meaning is the same. The first candle on the sketch is the Hammer candlestick chart pattern.

The candle emerges during bearish trends and signalizes that a bullish move is probably on its way. The Hammer candle has a small body, a long lower shadow and a very small or no upper shadow.

Traders use the Hammer candlestick to open long trades. The Inverted Hammer candle has absolutely the same functions as the Hammer candle, but it is upside down. The Inverted Hammer has a small body, a big upper shadow, and a small or no lower shadow. Same as the Hammer candle, the Inverted Hammer candlestick comes after bearish moves and signalizes that a fresh bullish move might be emerging.

Traders use the Inverted Hammer pattern to open long trades. The Hanging Man candlestick is absolutely the same as the Hammer candlestick pattern. It has a small body, a long lower shadow and a very small or no upper shadow. However, the Hanging Man Forex pattern occurs after bullish trends and signalizes that the trend is reversing. As a result, the Hanging Man candle pattern is used by traders to open short trades. The Shooting Star candle pattern has the same structure as the Inverted Hammer candle.

It has a small body, a long upper shadow and a tiny or no lower shadow. However, the Shooting Star Forex candle comes after bullish trends and signalizes that the bulls are exhausted. As a result, a reversal and a fresh price decrease usually appear afterward.

Therefore, Shooting Star candlestick chart patterns act as a signal to short Forex pairs. The confirmation of the Hammer, Inverted Hammer, the Shooting Star and the Hanging Man comes with the candle which closes in the direction opposite to the trend.

This candle is likely to be the first of an eventual emerging trend.

2. Nothing Says Continuation Like the Inside Bar

In the next following sections, we will take a look at specific Japanese candlestick pattern and what they are telling us. Hopefully, by the end of this lesson on candlesticks, you will know how to recognize . Japanese Candlestick charts reveal another dimension of the given period's price action by pictorially displaying the force (or lack of force) behind each price bar's movement. Japanese Candlestick Trading Patterns on Forex Charts show the same information as bar charts but in a graphical format that provides a more detailed and accurate representation of price action. As you can see, trading Forex with Japanese candlestick patterns could be very profitable. Japanese candlesticks are the preferred way to display Forex charts, because of .