Back ground to Candlesticks

Candlestick charts have been with us for century’s, and was first used/discovered in
Japan.
In 1700s feudal Japan there were rice markets which acquired a limited number of
people to amass a vast fortune in a warring environment.
So much so that the dominate generals of the time confiscated all their riches to help
finance the internal military conflict.
Skills were need to win battles on the field, of these strategy, withdrawals and
psychology were transferred into Candlestick terminology, and you can find many
battlefield analogies, such as ‘counter attack lines’, ‘advancing three soldiers’ and
‘gravestone’ terms that are used.
The generals took on board the fact that monies could be made through the trading of
rice, and prompted the first futures market to be formed at this time, with
views/positions being taken using Candlestick charts.
These markets were originated in port towns of Osaka and then Edo (now called
Tokyo) where these places of commerce have developed and flourished into
international markets.
Even though Candlestick techniques have this historical background, it was only in
the 1980’s that it first came to the attention to us in the west.
With terms such as ‘Dark Cloud Cover’, ‘Morning Star’ and ‘Tweezers Bottom’ it is
immediately descriptive, and gives insight to the emerging movement.
Candles used in conjunction with traditional charting patterns/technical studies can
give a trader firm reasons through Candle recognition to be happy to initiate, and run
with positions, as well as reversal patterns which would help the trader to decide to
cut/close a position.
Up Day

Down Day
Reversals

T-Note

Hammer: single Candle

Long ‘Lower Shadow’ denotes downward rejection.

Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be
either red or green.
Euribor

Hanging Man: Single Candle

Market posting ‘last gasp’ recovery to the highs.

Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be
either red or green.
S&P

Shooting Star: Single Candle

Long ‘Upper Shadow’ denotes upward rejection.

Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be
either red or green.
Dax

Bullish Engulfing: Single Candle

Body to body pattern.

Second days body should engulf first days body, green body colour.
S&P

Bullish Engulfing
Bund

Bullish Engulfing
Bund

Bearish Engulfing: Single Candle

Body to body pattern.

Second days body should engulf first days body, red body colour.
Schatz

Bearish Engulfing
Jun5 – Mch6 Euribor spread

Inverted Hammer: Single Candle

Same shape as Shooting Star. But Shooting Stars should occur at market tops,
whereas Inverted Hammers should occur at market bottoms.
Length of ‘Shadow’ should be 3 times that of size of body, body colour can be either
red or green.

Bulls failed to sustain early gains as market closed on its lows, with the shorts
supposedly still in control.
But the fact that the market had produced, at one stage, a strong performance should
act as a warning that prices are seeking the opportunity to consolidate.

The opening the next day is all important. If the market posts a weak start then
downward momentum is still in control and setbacks can extend.
But if market marks an unchanged, or better start, and prices remain above the
previous days close, then participants will be more inclined to cover their shorts and
so help prices to grind higher.
Euribor
Crude
Dax

Dark Cloud Cover: Single Candle

Body to body pattern, red body colour.

Market is in an uptrend, and prices make a better, possibly gap open higher start to
keep long holders feeling comfortable.

But this action is not maintained, and weakness sets in, prompting market to eat well
into the previous days up session, overlapping the up days body by at least half way.
Bund

Piercing Pattern: Single Candle

Body to body pattern, green body colour.

Opposite to Dark Cloud Cover.

Market is in a down trend, and prices make a weaker, possibly gap open lower start to
keep short holders feeling happy.

But this action is not maintained, and strength creeps in, prompting market to eat well
into the previous days down session, overlapping the down days body by at least half
way.
Euribor
Ftse
Dax

Bullish Counter Attack: Single Candle.

Body to body pattern, green body colour.

Market is in a downtrend, and gap opens appreciably lower to maintain the down
move. But prices fail to maintain momentum and begin to grind up, pushing past the
opening level, to close on/around the previous days close.
Want a better start the next day to act as confirmation.
B.Pound
Bobl

Bearish Counter Attack: Single Candle

Body to body pattern, red body colour.

Opposite to Bullish Counter Attack. Market is in an uptrend, and gap opens

appreciably higher to maintain the up move. But prices fail to maintain momentum
and begin to slip off, pushing past the opening level, to close on/around the previous
days close.
Want a weaker start the next day to act as confirmation.
Bund
Spot Eurodollar currency

Doji: single Candle Pattern

A Doji is a Candle with which the opening and the closing prices are the same (or
very close to it). It signifies indecision, as prices attempted to go both up, and down,
only to close where it began.

This action should be given greater significance if it were to appear after an extended
movement, as it could signal a change in trend.

But be away that on instruments which normally post a narrow range, like Euribor,
Short Sterling, Eurodollar’s (any STIR market), because of its propensity to produce
small ranges it is more likely to deliver a Doji session, so thereby diminishes its
influence.
Dax

Spinning Top: Single Candle, either red or green body colour.

Spinning Tops are very similar to Doji’s, as the same methodology applies, only that
after attempting to go both up, and down, it closes with a small body.

The small body with the upper and lower Shadows highlight markets indecision, and
again, taken after an extended movement, it should be given greater significance as it
could signal a change in trend.
Nikkei

Grave Stone Doji: Single Candle

Long ‘Upper Shadow’ denotes upward rejection. ‘Grave Stone’ implies death, death
of the upmove.

A rare Candle. Market is in an extended period of expansion, it opens on/close to the

days low and rallies, preferably into new highs for the move before levels reverse and
close, on/around its lows.
The longer the ‘Upper Shadow’, the deeper the upward rejection.
Bobl

Island Reversal: (minimum) 3 day pattern

Island Reversals or Abandoned Babies are rare, though can occur at tops or bottoms.

In this instance, advances are in force, and price gap opens higher (no overlap of
Body or Shadow) to maintain the upmove. Market then gap opens lower (no overlap
in Body or Shadow), to leave the previous days session untouched, or abandoned, as
good retracements ensue.
The above was a 2 day Island or Abandoned Baby, usually only a one day reversal
occurs.
Pit only Eurodollars

Upside Gap Two Crows: 2 day pattern, both red bodies.

Body to body pattern.

Another rare pattern, and only occurs in up trending markets.

In an extended upmove, prices produce a noticeable gap open up start, but fails to
hold and slips back, closing beneath its open to present a red Candle.
But the second day produces a stronger start, and delivers a higher-high than that of
the previous session, before slipping down to post a weaker close.
Want a weaker start the next day to act as confirmation.
T-Notes

Three Black Crows: Body to body pattern, 3 red bodies.

Another rare pattern, only occurring in up trending markets.

Prices have been in an extended uptrend, and then produces three consecutive black
Candles emanating from the market highs. Size and shape of Candles should be
similar, as one day opens around the previous days close to maintain uniformity of
pattern.
Pattern should be taken as initiating a change of trend, and so has longer-term
consequences. Can appear on daily, weekly or monthly charts.
Weekly Dow
Dax

Three Advancing White Soldiers: 3 day pattern, 3 white bodies.

Body to body pattern.

Candles should produce three consecutive days of gains, with each Candle opening
near to the previous session close, and be similar in size and shape.

Can occur at any stage of development in the market, though more can be gathered
from it if it occurs from market lows or after a period of stable prices, as it can
indicate a period of strength ahead.

Once this action has occurred, due to the fact that prices had gained a lot of ground in
a short space of time it is usual that period of consolidation can ensue.
Dow

Stalled Pattern: 3 day pattern, 2 good size green bodies, 1 smaller size body.

Pattern starts off just like the Three Advancing White Soldiers, but fails to improve
much past the second days high as momentum falters and stalls, and can result in a
period of consolidation.
Euro Stoxx

Tweezers Top/Bottom: 2 day pattern

A common pattern, it signifies (in this case) matching highs, taking its name from the
two prongs of a tweezers.

Tweezers occur on nearby (out to around 5 sessions) or consecutive sessions, and on

their own do not hold particular weight. But when seen after an extended
up/downmove or they contain other signals (Harami’s, Doji’s, Hammers, Shooting
Star etc.) then they can take on greater importance.
Dax
Euribor

Harami’s: 2 day pattern.

Body to body pattern, opposite body colours.

A common pattern. Taken literally, Harami means ‘pregnant’.

How it transposes into Candlesticks is that the longer first Candle is the ‘mother’, the
second shorter one is the ‘baby’, with the second days body range lying within the
first days body, a western inside-day.

On its own it is not a particularly powerful signal, but where the market has
experienced a prolonged trend, and then prices provide a large ‘bodied’ day for the
first day, and then the second day is a noticeably small session when the Harami is
formed, it should signal to the trader that prices had ‘overcooked’ things in a
particular direction, and that retracements are likely as a result.
Eurodollar
Morning
&
Evening
Stars
T-Note

Morning / Evening Star’s (minimum) 3 day pattern.

Body to body pattern.

A common reversal pattern. But should only be looked for after an extended
movement/trend.

In this instance, the market is in a downtrend and we see a red body at 1, as bears are
still in control.
2 made a weak open, gap opened, when just looking at 2’s body in relation to the
previous days body, then slid down before recovering to post a softer day close.
On the third day, market gap opened up (in relation to the bodies). This is the signal
that bulls have wrestled control away from the bears, holding prospects that good
advances can ensue.

By 2’s close the trader should be aware that momentum was beginning to wane, as in
this case Candles had produced a Spinning Top/Tweezers Bottom image, and should
be looking to see how market would react on the next days opening, with the
knowledge that a better start would form a Morning Star.
Eurodollar

Morning Star
Dax

In this instance, Candles Doji/Hammer/Tweezers Bottom was the middle part of a 3

day Morning Star, where previously we had been looking at a 1 day Morning Star.
T-Note

Evening Star (minimum) 3 day pattern.

Body to body pattern.

The exact same theory apples to Evening Star patterns.

In the above we can see that Notes are in an extended upmove and that a green
Candled day is produced to maintain the trend.
But the next day, Candles produces a Doji session that incites thoughts of indecision
entering the market, and should prompt the trader to see whether a weaker start is
delivered the next day to produce an Evening Star.
Euribor

4 day Evening Star