The Japanese candlesticks are perhaps the most convenient graphical indicator of the price dynamics of financial markets, an assumption confirmed by their widespread popularity throughout the world. Analyst Steve Nison introduced the Europeans to candlestick analysis in his manual on the use of the method, which became a bestseller in just a few weeks. Nison still bears the laurels of the title, “The Godfather of Candlestick Analysis.
Japanese candlesticks are popular because of their simplicity and clarity. Each candlestick consists of a “body” and an upper and a lower shadows (shadows may be absent). The body of the candlestick reflects the price range for a certain time interval, and the shadow is its maximum and minimum value for the same period.
The indicator is the color of the candlestick itself. With an upward trend, when the closing price exceeds the opening price, the bullish candlestick is painted white or green. If the position closes lower than it opened, the candlestick becomes bearish, signaling a downtrend and is painted black or red.
When analyzing the graph, traders compare the sizes of the candlesticks and their shadows, and also consider combinations of Japanese candlesticks.
Understanding the basic candlestick patterns will help one navigate the current mood of the market, so let us look at a couple of examples:
“Three White Soldiers” and “Three Black Crows” are reflected on the chart as bullish and bearish candlesticks, absorbing the values of the previous ones (promising a rise after the previous fall or, conversely, a decline after a previously positive trend).
The appearance of such a candlestick formation indicates the incompleteness of the trend.
But the antagonists, the “Inverted Hammer” and “Falling Star,” on the contrary, signal a possible change of trend or the completion of a correction.
The hammer appears on a downward trend and represents a bullish candlestick with a long upper shadow. As a rule, it is preceded by a bearish candlestick with a long body and a short shadow, but the hammer puts an end to attempts by the bears to maintain the market.
The reverse situation develops when a falling star appears on the charts as a bearish candlestick with a short body and a high “tail” (shadow). The emergence of the falling star is a clear signal to the fact that the price of the asset is starting to decline.
Most effective are the hammer and the star next to the levels of support and resistance, and special attention should be paid to the length of the tail. The longer it is, the louder the candlesticks scream about an upcoming reversal.
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