Candlesticks

Introduction to Candlesticks by John Martin

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Table of Contents
1. Introduction

2. The Japanese Candlestick

a) Why use Candlestick Charts

3. Types of Candlesticks
a) The Doji
The Long-Legged Doji
The Dragonfly Doji
The Gravestone Doji
 The 4-Price Doji

b) Common Candlesticks
Dark Cloud Cover Candlestick
Engulfing Candlestick
Evening Star Candlestick
Evening Doji Star Candlestick
Hammer Candlestick
Hanging Man Candlestick
Harami Cross Candlestick
Inverted Hammer Candlestick
Marubozu Candlestick
Morning Star Candlestick
Morning Doji Star Candlestick
Paper Umbrella Candlestick
Piercing Line Candlestick
Raindrops Candlestick
Star Candlestick
Shooting Star Candlestick
Shooting Doji Star Candlestick
Spinning Top Candlestick

4. About the Forex market

5. Summary
 Introduction

Over two hundred years ago the Japanese developed the candlestick charts as a
means to analyse the rice market. Since no defined currency standard existed in
Japan during this period rice represented a medium of exchange. Rice would be
deposited in warehouses in Osaka and would then be sold or the receipts would be
traded, thus rice become the first futures market.

The technique evolved over time into what is now the candlestick technique used in
Japan and indeed by millions of technical traders around the world.

The Candlesticks are more attractive than standard bar and line charts and they make
for a clearer market reading, once understood.

We have taken 22 candlesticks and show each one in a graphical form followed by
an explanation of each candlestick.

The Japanese Candlestick

The candlestick can be broken down into 3 main
components, the upper and lower wicks and the body,
traditionally the body was a black or white rectangle, a
white body means that the closing price is higher than the
opening price (bullish, the price has increased), if the body
is black then the opening price is higher than the closing
price (bearish, the price has dropped). The body can also
be represented in colour, the white rectangle can be green
and the black rectangle red, different brokers may use
different colours.
The upper and lower lines or wicks also known as shadows are the upper wick and
the lower wick or upper and lower shadows, the upper wick shows the highest price
reached, and the lower wick is the lowest price over the period, a trading period can
be a week, a day, an hour or even less.
It is entirely up to you to determine the length of the period you want to analyse. For
stock markets this might be using a daily chart, whereas for currency markets, it
could be an 8 hour, 4 hour or 1 hour chart.
Why use Candlestick Charts
Candlesticks charts are a graphical representation of the price action, they show the
same information as a bar chart but with a bit more detail, they are in fact a more
accurate representation.. For a given period candlesticks give a further dimension to
the price action by graphically representing the movement of each bar.
 Types of Candlesticks

Long periods Candlesticks

There is a large gap between the opening price and the
closing price during the trading period, the shadows are
usually quite short, indicating that the market movement was
primarily one-directional during the same period.

Short Period Candlesticks

There is a small gap between the opening price and the
closing price during the trading period, the shadows are
usually quite short, indicating that the market movement was
small and usually in one direction during the period.
The Doji
The opening and closing price are the same, there are several variations of Doji as
shown in the images below.
The Long-Legged Doji
A Long-Legged Doji has long shadows this indicates
indecision during the course of the trading period.

The Dragonfly Doji

A Dragonfly Doji has only one long shadow, this indicates
that the price activity is on the lower side of the opening
price, this is a sign of a bearish reversal, the price will
move up.

The Gravestone Doji

A Gravestone Doji has one long shadow to the high side,
this indicates that the price activity is on the high side of the
opening price, this is a sign of a bullish reversal, the price
will move down.

The 4-Price Doji

A 4-Price Doji is a rare event, the opening and close price
are the same and there are no shadows, this would only
show when trading is suspended.
Common Candlesticks

Dark Cloud Cover Candlestick

This occurs in an upward trend only, it can be recognised by a
long bullish body followed by a long bearish body where the
price peeks on the bearish body before falling sharply to
below the mid-point of the previous bullish period.

Engulfing Candlestick
When the body of the previous trade is smaller than the trade
period to its right it is said to engulf it, this is a trend reversal
indicator, if a bullish body engulfs a bearish body from the
previous period then this would indicate a bullish trend, if a
bearish body is engulfed by a bullish body of the previous
period then this indicates a bearish trend

Evening Star Candlestick

The first of a 3 period pattern consisting of the first periods
long bullish body followed by a period with a shorter bullish
body followed by the third candle which is bearish and closes
with the price below the mid-point of the first bullish candle.

Evening Doji Star Candlestick

Similar to the evening star the first of a 3 period pattern
consisting of the first periods long bullish body followed by a
period with a short Doji followed by the third candle which is
bearish and close with the price below the mid-point of the
first bullish candle.
Hammer Candlestick
Hammer: This is an important indicator that a bullish trend is
on the way, it does not matter if the body is bullish or bearish.
Hanging Man Candlestick
The Hanging Man only occurs during an upward trend, it is a
very good indicator of a trend reversal to a bearish market.
The hanging man can be recognised by the very little or no
shadow to the upper side of a small body, and the lower side
shadow is 2-3 times the size of the body.
Harami Cross Candlestick
Harami Cross Indicates a significant trade reversal, the right
side body is over shadowed by the previous trading periods
body (ie: the body on the left), if the previous trade period was
bullish then the body on the right will be bearish, if it was
bearish then the right hand periods body will be bullish. This
is the same as the Harami except the right
Inverted Hammer Candlestick
Inverted Hammer: This can indicate a trade reversal, usually
occurring at the bottom of a downward trend. It can be
recognised by a small body at the bottom of the previous
periods price range, it has a large upward shadow, it only
shows on a downward trend and it is opposite to the body
preceding it, ie:if the body on its left is bullish then it will be
bearish and visa versa.
Marubozu Candlestick
Marubozu: A Marubozu has a long body with no shadows, it
usually comes at the start of a continuation trend, if it is green
then it will be a bullish trend and proceed upward (ie: the
closing price will be higher than the opening price). If it is red
then it will be bearish trend (ie: the closing price will be
lower than the opening price.
Morning Star Candlestick
Morning Star: This is a bullish indicator pointing to a trend
reversal, consisting of a long bearish body followed by a short
bullish body and finally a long bullish body confirming the
trade reversal. Only happening during a down trend the
morning star is separated below the long bearish body of the
previous period it has a small bullish body, the third candle
confirms this movement upwards and closes above the mid-
point of the bearish period of the first candle.
Morning Doji Star Candlestick
Morning Doji Star: Similar to the morning star and indicates a
reversal following a downward trend, it has a long bearish
body followed by a doji below the bearish body of the first
candle and finally a long bullish body of the third candle
which is above the mid-point of the first candle confirming the
trend reversal.
Paper Umbrella Candlestick
Paper Umbrella: It does not matter if this is bullish or bearish
it is a strong reversal indicator, the shadow shows a long
downward move which will eventually fail and the bearish
movement will reverse.
Piercing Line Candlestick
Piercing Line: A bullish indicator of a trend reversal, a long
bearish body followed by a long bullish body with the bullish
closing price above the mid-point of the previous bearish body

Raindrops Candlestick
Raindrops: A Rain Drop appears when a small body gaps
below the previous period long body. Rain Drops are part of
more complicated candlestick patterns, especially the reversal
patterns. The long bearish body first period is followed by the
gaped short bodied second period, the second period can be
either bearish or bullish but the first candle has to be bearish.
Star Candlestick
Star appears when a small body gaps above the previous
period long body. Stars are part of more complicated
candlestick patterns, especially the reversal patterns. The long
bullish body first period is followed by the gaped short bodied
second period, the second period can be either bearish or
bullish but the first candle has to be bullish.
Shooting Star Candlestick
Shooting Star: Following a period with a long bullish body the
shooting star can be recognised by a short bullish body with a
long upward shadow, this happens during an upward trend
indicating that the market rallied upwards before settling back
significantly at the end of the period.
Shooting Doji Star Candlestick
Shooting Doji Star: During a downward trend, the long bearish
body is followed by a doji, indicating a trend reversal, this is
a bullish doji star. During an upward trend, the long bullish
body is followed by a doji, indicating a trend reversal, this is
a bearish doji star.
Spinning Top Candlestick
Spinning Top: A Spinning Top indicates that the market is
undecided, the shadows are longer than the body, there is
usually no trend associated with this candlestick even though
the shadows may indicate a high or low spike.
 About the Forex market

Unlike other financial markets that operate at a centralized location (i.e. stock
exchange), the worldwide Forex market has no central location. It is a global
electronic network of banks, financial institutions and individual traders, all
involved in the buying and selling of national currencies. Another major feature of
the Forex market is that it operates 24 hours a day, corresponding to the opening and
closing of financial centres in countries all across the world, starting each day in
Sydney, then Tokyo, London and New York.
At any time, in any location, there are buyers and sellers, making the Forex market
the most liquid market in the world.
Traditionally, access to the Forex market has been made available only to banks and
other large financial institutions. With advances in technology over the years,
however, the Forex market is now available to everybody, from banks to money
managers to individual traders trading retail accounts.
 Summary
Currency trading
Trading successfully is no easy task, it requires a lot of work, patience, discipline,
and education.
I would suggest taking a course on the subject and try training with one of the training
accounts you can open with any descent broker, by completing the steps outlined in
the Forex course, you will have a chance to produce profitable results.

Bonus
After you read 'Forex Trading' you may increase your chances of being able to trade
on the market more effectively. Unlike the stock market, in the Forex markets, you do
not trade ownership in a business. Rather, you are trading the value of money, based
on the ups and downs of the currencies of the market.