Lets take a look at a great example of how Candlesticks work, casting an eye back to June 2010.
It was a flat day on the market. One thing that certainly stood out to me was the chart pattern for the day. The day was extremely uneventful, with the market participants backing away from the higher prices. Volume was lower than the previous day suggesting traders pausing for breath.
What is interesting is to look at the price pattern using Candlestick analysis.
The Doji is a Candlestick pattern that suggests indecision in the marketplace.
The Open and Close prices are very close yet there is a longer distinguishable wick.
Above is a 3-month chart of the DJ-30.
13 Point Analysis
I have picked out some of the more notable signs of indecision, Dojis, Hammers, Spinning Tops and Long Legged Dojis (also known as a Rickshaw Man):
- The first arrow shows price trending up during April 2010.
- Next, we see a Doji occur.
- Price then proceeds to move downwards.
- Price moves aggressively downwards and halts at 9875,
- Price begins to recover.
- Then we see a Spinning Top.
- 2 days later the trend changed and move down again.
- Then a Hammer occurs, and the trend changes to short term positive.
- Then at the Start of June we see a Doji
- The following day the price moves down again.
- We then see an Inverted Hammer.
- Price moves up again.
- Then yesterday – June 16th 2010 we see a Long Legged Doji.
As you can see the Doji is a famous and very practical usage of Japanese Candlesticks.
So on this basis, we will probably see another sideways move over the next few days, followed by another downturn in the trend.
It is possible that the market may continue this small uptrend, Candlesticks are not 100% correct. But the probability of a short-term trend change is there. At least we see this from the last 3 months worth of data.
May the trade be with you.