Lesson 30: Trading Strategy for Japanese Candlesticks

You already know how to read Japanese chandelier charts, but do you know that the Japanese candlesticks themselves can be interpreted as a method of analysis in their own right? This is what we will explain in this lesson.

How to read a candle?

At the fence of a candle, a new candle appears. This new candle appears on its opening threshold. During the period of time necessary for the closing of this candle, the course will oscillate and the imprint of this variation is memorized by the wicks of the candle. If the price is below the opening threshold, the candle will be bearish and vice versa.

Body and Shadow Size

The larger the candle's body, the greater the pressure of the market, the candles with important bodies and the lower waists of their bodies are indicative of steering movement.

Contrary to this type of candle, there are also, formed of small bodies and long shadows, these candles induce a phase of hesitation of the courts, they are called spinning tops. Two interpretations are possible, either one prepares a reversal, or one is in the consolidation phase. In both cases, there will be some uncertainty.

The dojis

The point common to all dojis, and also what makes them also distinct, is that these candles have their opening course exactly placed in the same place as their closing price.

All translating a strong hesitation, there are however some presenting certain peculiarities, here are some representations

The water carrier

It is simply formed by a horizontal bar located in the middle of the vertical segment, in a way it represents the most complete hesitation since neither the bullies nor the bearers gain anything on this candle.

Doji dragon

Devoid of a high wick, this rare candle is composed by a long low wick and a threshold of opening / closing located at the highest. In a bearish phase it will be bullish reversal signal, the strength of the signal will be all the more increased as the low wick will be long.

The tombstone

Exactly opposite the dragon, the headstone will be devoid of low wick, in a bullish phase it will mark a bearish signal.

Doji cross

The cross doji has a low wick at least twice as large as its high wick. General sign of hesitation, placed in a rise it will be a bearish signal.

Doji cross inverted

As its name indicates, it is the inverse of doji in the cross, its high shadow will be at least twice as big as its low shadow. In the same way, it is a candle of hesitation but placed in a drop it constitutes a bullish signal.

Other special candles

The marobozu

They are candles without wicks and with a large body. In the case of a white marobozu, one notices that the bulls exerted their pressures from the beginning to the end of the session without leaving a crumb to the sellers. Therefore, whether it is white or black it is a very strong trend signal.

Hammers and hangers 

The hammer and the hanged man are the same figures, their colors being of little importance. Characterized by a small body without high shadow (or very short) and by a long low shadow.

Although the hangman and the hammer are perfectly similar, they can be differentiated in practice from their position in a movement.

The hammer

It is necessarily in a bearish phase and represents a good uptrend signal.

Inverted hammers and shooting stars 

They are the figures opposed to hangmen and hammers. They have a small body, have no shade (or very short) and are provided with a large high shadow.

In the same way as before, even if they resemble each other, we can differentiate them from their relative position in a movement.

The shooting star

Placed in a bullish phase, it constitutes a bearish signal.

Figures made up of two candles

Swallowing or encompassing

Figure simply formed in two candles, its characteristic being that the first candle is included in the second. The color of the first candle does not matter, it is that of the second which determines the meaning. This figure gives excellent input signals.

The Harami

This figure is opposite to the swallow, it is characterized by a second candle included in the first. As before, the color of the first candle does not matter. This figure is less reliable than swallowing.

Figures of three candles

The Evening Star

A very well-known figure made up of three candles, it forms a sort of peak. A schema will be better explained than a paragraph.

As you can see, the color of the central candle does not matter. This is a good bearish turnaround figure.

The Morning Star

Figure, again opposite the previous one. It is a bullish signal.

NB: Regarding the evening stars as well as the morning stars, a doji on the second candle clearly reinforces the predictive power of the figure.

The three white soldiers

They are characterized by a succession of three white candles with relatively large bodies and the weakest possible shadows.

More precisely, the second candle must necessarily be larger than the first so that the figure remains valid.

The three black crows

Unlike the 3 white soldiers, they have the same technical characteristics as the candles are black.

NB: The first candle of these figures, called "turning candle" will validate the figure all the more if it belongs to a swallow.

Conclusion on the figures of Japanese candlesticks

In conclusion of this course we made a first approach to graphical analysis through the reading of Japanese candlesticks.

As simple as it seems, the good reading of a candlestick can lead you to achieve beautiful performances.

Candles reflect best the market sentiment.

By mastering the different figures you will be able to predict any type of scenario, going from a simple consolidation to a reversal of trend, nothing will escape you.

Despite the presence of countless forex tools in technical analysis, reading candlesticks often remains one of the tools favored by the biggest traders.