What are the Candlesticks Charts?

Candlestick charts originated in Japan over 100 years before the West developed the bar and
point-and-figure charts. It’s a visual form for displaying charts invented in the 18 thcentury by a
Japanese rice trader named Munehisa Homma. Candlesticks visually representing the size of
price moves with different colors. They differ from bar charts and line charts, because they give
more information and can be more easily read. Let’s take a look at the image below:

This simple sketch points out all the information a candlestick chart will give you. Candlestick
chart represent market’s price daily that shows the market's open, high, low and close price for
the day. The two candles displayed are a bullish (green) and a bearish (red) candle. Each candle
shows the price at which the candle (the time frame) was opened, the price at which the candle
was closed, the highest and the lowest price reached. Note that the bearish candles (red) move
downwards, so “close” and “open” places are switched. Now look how Japanese
candlesticks looks on a price chart.
Much better than the bar or line chart, don’t you think?

How to use Japanese candlesticks?

A Japanese candlestick chart provides the trader with crucial information

about price action at any given point in time. Traders often confirm their
signals with Japanese candlestick patterns, improving the odds of success
on a trade.

Trading price action using candlestick analysis alone is a very common

trading technique. Yet, candlestick trading tends to be the most powerful
when confirmed with additional indicators or when combined with Support
and Resistance zones.

Candlestick patterns in Forex are specific on-chart candle formations,

which often lead to certain events. If recognized on time and traded
properly, they can assist in providing high probability setups.

Forex candlestick patterns are classified within two types – candlestick

continuation patterns and candlestick reversal patterns. We will now go
through the most common reversal and continuation patterns and we will
discuss their potential.

Single Candlestick Patterns

 Doji (reversal / indecision)

Doji is a very easy to recognize candlestick. We have a Doji whenever the

price closes at the exact same level where it has opened. Thus, the Doji
candle looks like a dash with a wick.

Note that sometimes there are cases when the price doesn’t move at all
from the opening. In these cases the Doji candle is simply a dash with no
wicks. Take a look at this image:

The Doji candle has a reversal character when it is formed after a prolonged
move. The reason for this is that during a bullish (or bearish) market, the
occurrence of a Doji candle indicates that the bulls are losing powers and
the bears start acting with the same force.
Thus, the candle closes wherever it was opened. Just remember: when you
get a Doji on the chart after a prolonged move, there is a chance that the
price will reverse its direction.

 Spinning Tops (undefined)

This candle could be bearish and bullish. It has a very small body and
longer upper and lower candle wick, which have approximately the same
size. Have a look at the image below:

The Spinning Tops have undefined character.

The reason for this is that this candle indicates that buyers and sellers are
fighting hard against each other, but none of them could gain dominance.

Nevertheless, if we get this candle on the chart during a downtrend, this

means that the sellers are losing steam, even though buyers cannot prevail.

 Marubozu (continuation)

This is another easy to recognize candle. The Marubozu candlestick has a

body and no candle wick as shown below:
The Marubozu candle is a trend continuation pattern. Since it has no wicks,
this means that if the candle is bullish, the uptrend is so strong that the
price in the candle is increasing and never reaches below the opening of the
bar

 Hammer and Hanging Man (reversal)

The Hammer candle and the Hanging Man candle have small bodies, small
upper wick and long lower wick. These two candles look absolutely the
same. Here they are:
These two candles are classified as reversal patterns. The difference
between them, though, is that the hammer indicates the reversal of a
bearish trend, while the hanging man points to the reversal of a bullish
trend.

 Inverted Hammer and Shooting Star (reversal)

The Inverted Hammer and the Shooting Star are the mirror images of the
Hammer and the Hanging Man. They have small bodies, small lower candle
wick and long upper wick as shown below:
The Inverted Hammer and the Shooting Star both exhibit reversal
behavior, where the Inverted Hammer refers to the reversal of a bearish
trend, while the Shooting Star indicates the end of a bullish tendency.

Double Candlestick Patterns

 Bullish and Bearish Engulfing (reversal)

The Bullish Engulfing is a double bar candlestick formation, where after a

bearish candle we get a bigger bullish candle. Respectively, the Bearish
Engulfing consists of a bullish candle, followed by a bigger bearish candle.
Have a look at this image:
The two Engulfing candle patterns indicate trend reversal. In both the
Bullish and Bearish Engulfing pattern formation the second candle engulfs
the body of the first. The Bullish Engulfing indicates the reversal of a
bearish trend and the Bearish Engulfing points the reversal of a bullish
trend.

 Tweezer Tops and Bottoms (reversal)

The Tweezer Tops consist of a bullish candle, followed by a bearish candle,
where both candles have small bodies and no lower candle wick. The two
candles have approximately the same parameters.

At the same time, the Tweezer Bottoms consist of a bearish candle, followed
by a bullish candle. Both candles have small bodies and no upper candle
wick as shown in the image below:

As we said, the two candles of the Tweezers have approximately the same
size. Both candlestick patterns have reversal character. The difference
between these two formations is that the Tweezer Tops signal a potential
reversal of a bullish trend into a bearish, while the Tweezer Bottoms act the
opposite way – they could be found at the end of a bearish trend, warning
of a bullish reversal.

Triple Candlestick Patterns

 Morning Star and Evening Star (reversal)
The Morning Star candlestick pattern consists of a bearish candle followed
by a small bearish or bullish candle, followed by a bullish candle which is
larger than half of the first candle.

The Evening Star candle pattern is the opposite of the Morning Star
pattern. It starts with a bullish candle, followed by a tiny bearish or bullish
candle, followed by a bearish candle which is bigger than half of the first
candle. The image below will illustrate the two formations:

Both of these candlestick groups have reversal character, where the Evening
Star indicates the end of a bullish trend and the Moring Star points to the
end of a bearish trend.

 Three Soldiers (reversal)

The Three Soldiers candlestick pattern could be bearish or bullish. The

Three Bullish Soldiers consists of three bullish candles in a row:

 A smaller bullish candle

  A bigger bullish candle, which closes near its highest point
 An even bigger bullish candle, which has almost no candle wick

At the same time, the confirmed Three Bearish Soldiers should have the
following characteristics:

 A smaller bearish candle

 A bigger bearish candle, which closes near its lowest point
 An even bigger bearish candle, which has almost no candle wick

The image below displays a valid Three Bullish Soldiers and Three Bearish
Soldiers:

The Three Soldiers candlestick pattern has a reversal character.

The Three Bullish Soldiers candlestick pattern can end a bearish trends and
can bring about a new bullish movement. At the same time the Three
Bearish Soldiers could be found at the end of bullish tendencies, signaling
an upcoming bearish move.

Candlestick Chart Analysis

Now that we have gone through some of the more reliable candlestick
patterns in Forex trading, we can now see how some of these patterns look
on a price chart and how we can use them as part of a price action trading
strategy! Have a look at the chart below:

This is the daily chart of the EUR/USD for the period Jul 21 – Oct 8, 2015.
Our candlestick chart analysis shows three successful bearish chart
patterns. The first one is an evening star. As we already mentioned, the
Evening Star candlestick chart pattern has a bearish character. This is
exactly what happens on our chart. We get four bearish candles which
corresponds to a drop in price of 126 pips. The second pattern we get from
our candlestick analysis is the Hanging Man candle at the end of a bullish
trend. After the appearance of the Hanging Man candle, the price of the
euro decreased versus the dollar about 387 pips for three days! The third
candlestick pattern on our chart is another Evening Star. At the end of the
bullish trend, the Evening Star pattern followed thru with a drop of 40 pips
for one day.

Let’s now go through another chart example illustrating other Japanese

candlestick patterns:

This is the 4-hour chart of the USD/JPY for the period Aug 28 – Sep 28,
2015. As you see, this chart image is pretty rich with Japanese candlestick
patterns. We first start with a Doji candle after a strong price decrease. We
get the Doji reversal pattern and we record an increase of 97 Pips. The next
candlestick pattern we get is the Three Bullish Soldiers, which appears after
a slight price retracement. After the Three Soldiers reversal pattern the
USD price increases about 86 pips versus the Yen.

The third candle pattern on the chart is the Spinning Top, which as we said
has undefined character. 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. In our case, the price reverses its direction on the
following bar, which also forms a Morning Star pattern, and we observe an
increase of 138 pips. The price increase after the Spinning Top is
immediately followed by another Doji reversal pattern. As a result of that,
we get a rapid drop of 182 pips. The last candlestick pattern on the chart is
a single Hammer candlestick after a bearish trend. We confirm our
Hammer and the price of the dollar increases about 163 pips.

Let’s now go to the USD/CHF, where we will mainly discuss the bullish and
bearish Engulfing Pattern:

So, above we have the 4-hour chart of the USD/CHF for Jul 22 – Aug 21,
2014. We start with a small Doji candle after a trend correction. The result
we get after the Doji is a rapid price increase of 62 pips. Then after a period
of price consolidation, we get a Bearish Engulfing. A single candle drop of
39 pips appears on the chart right after the Engulfing! Not long after, we get
another Bearish Engulfing, which comes after a correction in a bearish
trend. The price of the USD decreases with 50 pips for about 12 hours after
this Bearish Engulfing. 10 days later, we spot a Bullish Engulfing on the
chart, which comes after a bearish trend. This is the most profitable price
move on this chart, which leads to an increase of 100 pips for three days.
This bullish trend finishes with the last chart pattern on the image – a third
Bearish Engulfing. This again results in a price reaction to the downside.
The overall result from these five price movements is equal to 264 pips.
Let’s analyze another Forex chart using candlestick patterns!

This is the 4-hour chart of the Aussie (AUD/USD) for the period Sep 17 –
Oct 19, 2015. We start with a Bearish Engulfing after a price increase. We
confirm the pattern and we observe a steady price decrease equal to 284
pips for 6 days. Now that’s a strong reaction! The bearish trend ends with a
morning star, which points to an eventual reversal. The reversal of the
trend follows in more of a consolidation phase. The increase in price from
the morning star is equal to 46 pips. The price decreases to the same level
and we get another reversal pattern – a Bullish Engulfing! A strong bullish
trend emerges after the Bullish Engulfing pattern. We could have traded
the first increase of 110 pips until we get a Doji reversal candle, which
resulted in a 66 pip correction.

Soon afterward we see another Bullish Engulfing formation. The price

records dramatic increases on strong momentum. Furthermore, after a
short corrective movement, the bullish trend gets confirmed by the Three
Bullish Soldiers candle pattern, which is another confirmation that the
bulls definitely dominate! We stay in the market until we get the Bearish
Engulfing at the end of the trend. The overall price increase equals 384
pips. After the Bearish Engulfing we get a decrease of 160 pips. Then, after
a new increase, we get the Hanging Man candlestick pattern, which is
followed by a new price decrease of 80 pips. The total price action in this
example equals about 1,000 pips for 1 month, More than enough
opportunity to make high probability trade setups using candlestick
patterns.

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 the depth of information it provides. Although we
discussed 13 successful candlestick pattern trades, there can be many fake
signals that show up as well. Therefore, it is always good to match your
candlestick pattern signal with an additional trading tool.

This could be a moving average, a volume indicator, a momentum

oscillatoror Support and Resistance levels based on previous swings.
Fibonacci Retracement levels are another good trading tool to confirm
candlestick patterns. Try to use uncorrelated technical confluence when
trading candlestick signals in order to eliminate as many false signals as
possible. When adding an additional layer of confirmation to your
candlestick trading strategy, you might even increase your candle pattern
success rate to more than 60-65 %.

Description[edit]
Candlesticks are usually composed of the body (black / white or green / red), and an upper and a
lower shadow (wick). The area between the open and the close is called the real body, price
excursions above and below the real body are shadows. The wick illustrates the highest and lowest
traded prices of a security during the time interval represented. The body illustrates the opening and
closing trades.
If the security closed higher than it opened, the body is hollow or unfilled, with the opening price at
the bottom of the body and the closing price at the top. If the security closed lower than it opened,
the body is solid or filled, with the opening price at the top and the closing price at the bottom. A
black (or red) candle represents a price action with a lower closing price than the prior candle's
close. A white (or green) candle represents a higher closing price than the prior candle's close. Thus,
the color of the candle represents the price movement relative to the prior period's close and the "fill"
(solid or hollow) of the candle represents the price direction of the period in isolation (solid for a
higher open and lower close; hollow for a lower open and a higher close). A candlestick need not
have either a body or a wick.[6]
In trading, the trend of the candlestick chart is critical and often shown with colors.

To better highlight price movements, modern candlestick charts (especially those displayed digitally)
often replace the black or white of the candlestick body with colors such as red (for a lower closing)
and blue or green (for a higher closing).

Candlestick patterns[edit]
Further information: Candlestick pattern
In addition to the rather simple patterns depicted in the section above, there are more complex and
difficult patterns which have been identified since the charting method's inception. Complex patterns
can be colored or highlighted for better visualization.
Rather than using the open-high-low-close for a given time period (for example, 5 minute, 1 hour, 1
day, 1 month, 1 year), candlesticks can also be constructed using the open-high-low-close of a
specified volume range (for example, 1,000; 100,000; 1 million shares per candlestick).
Generally, the longer the body of the candle, the more intense the trading. A hollow body signifies
that the stock closed higher than its opening value. A filled body signifies the opposite.

Usage[edit]
Candlestick charts are a visual aid for decision making in stock, foreign exchange, commodity,
and option trading. For example, when the bar is white and high relative to other time periods, it
means buyers are very bullish. The opposite is true for a black bar. Candlestick charts serve as a
cornerstone of technical analysis. The main usage of a candlestick patterns is to identify trends.
Looking at a candlestick, one can identify an asset’s opening and closing prices, highs and lows, and
overall range for a specific time frame.[7]