Candlesticks are your friends!

(Part 1)
By now the origin and history of the Japanese candlestick charting should be perfectly clear and should
not need to be discussed further. Now the patterns associated with this charting technique will be
touched on and should be memorized. The patterns presented are the most important and occur most
often.

But before we begin the patterns a quick touch on the structure,

The candle on the left represents a BULLISH day where the close is ABOVE the open. The right one is a
BEARISH day where the close is BELOW the open.

The first major pattern is the Doji.

Upside tail

Downside tail

The Doji is represented by the smaller candle in the picture and features a small or no body with
significant tails at either the high or low sides of the candle. So, why is a Doji important?

They identify points where the momentum of the market may be slowing leading to a potential reversal.

How?

In order to determine the significance or “strength” of the Doji one must look at the tails.
Below is an example of a Doji bottom,

When searching for a bottom the more and longer the tails are to the downside the more significant and
the more likely a bottom has been established. Tails to the downside mean that sellers tried to push
prices down further, but buyers have now caused the momentum to shift in the opposite direction. In
this case there are few candles with tails to the upside which indicates a possible change in momentum
and a bottom was indeed established. The opposite is true for finding tops. For example,
There are smaller tails to the downside and larger ones to the upside indicating a top and a shift in
downward momentum.

Dojis are especially helpful in timing tops and bottoms when taking the “what goes up must
come down” approach to trading.