Candlestick Charts – Stock Market Investors Guide

Japanese Candlestick Charts

Used widely in Japan and gaining a strong foothold in the rest of the world the Japanese Candlestick chart gives an excellent insight into current and future price movement. Named Candlesticks because they look like candlesticks with a wick and a main body.  I use exclusively Candlestick charts when doing analysis, when you get used to the  way they work they provide an unparalled inside into the short term market dynamics on a given stock.

The Good

Gives an excellent view of the Open, High, Low and close of price.  Pictorially illuminating and easy to see trends.  There is a full reference of 1 bar to 4 bar patterns which help us to make judgments on the future direction of price.  They connect the psychology with the price pattern.  An easy to learn system for understanding candlesticks is available in the Liberated Stock Trader PRO Training Course – which includes a video to help you master these charts.  See examples of types of 3 or 4 day patterns there are.

The Bad

Although Candlesticks have many advantages, they can seem like information overload to the beginner.  There are also many Candlestick patterns to learn.

How Candlesticks can be used to predict short term price patterns

 

Further Reading.

This in an excerpt from the forthcoming Liberated Stock Trader Book and Training Course

As we are concerned with spotting changes in price moves we will focus on the Reversal Patterns.  This section is the Bullish Reversal Pattern meaning when a price is moving down and you see this sign, the price may change direction and start moving up in the short term.  These are the most common patterns not an exhaustive list but it will give you an idea of what is common in all patterns.

japanese-candlsticks-bullish-reversal-patterns
The Hammer – this hammer can be either filled or hollow, the Japanese say the price is hammering out a bottom.  What is important here is that at the end of a down move, the buyers and sellers test out an extreme low (the long shadow) however by the closing bell the price has returned higher.

The lows were tested but price found no comfort there, there were enough buyers at this level to move price back up.

Inverted Hammer – this hammer shows that at the end of a downward move the stock gaps significantly down there is much movement throughout the day moving back to fill the gap but the price settles lower for the day.  This shows significant price action and that buyers are showing strong interest in the stock at these levels.


Bullish Engulfing – here we have a negative spinning top or a short day during a down trend, then followed by a long day of real power the long white body tells you something significant has changed and so has the sentiment, a clear trend reversal.


Bullish Harami – during a downtrend we experience a very negative “Long Day” followed by a short positive day.  This indicates the market participants have found a level they are happy with.  Candlesticks are most useful when predicting a change in trend, this might be from an “up” to a “down” trend or from a “down” trend to a “sideways” trend.  In the case of this Harami, the change in trend may be from downwards to sideways.

Piercing Line – this shows a day of real strength following a very negative day.  The White candle gaps down on open but the buyers show real demand throughout the day to retrace more that 50% of the previous day’s losses.

 

 

Summary

Each Candlestick pattern has a specific story to tell.  If you can understand the story being told you do not need to memorize the name of each pattern and the text book meaning.  Re-read this article and try to imagine the story.  Combining the action of multiple days will allow you to understand the current psychology of the market participants therefore giving you an insight into tomorrows price action.

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