What are the characteristics of Japanese candlesticks?
Candlestick patterns in Japan are a visual representation of market price changes. They are one of the most well-known elements of technical analysis because they allow investors to swiftly receive price-related information from a few price bars.
The focus of this essay is on a daily chart, with each candlestick representing an intraday trade. There are three basic qualities of each candle:
1. The body, that indicates the open to closed range.
2. The wick, or shadow, which reflects the intraday ups and downs.
3. The market movement’s trend is indicated by the hue. A rise in prices is indicated by a green (or white) body, whereas a price decrease is indicated by a red (or black) body.
Individual candlesticks form patterns over time, which investors can use to identify key support and resistance levels. There are a variety of candlestick patterns that suggest a market opportunity. Some of them provide insight into the buying and selling pressure balance, while others indicate market continuation patterns or indecision.
Before you start trading, you must understand the basic principles of candlestick patterns and how they can assist you in making judgments.
There are six different ascending candlestick patterns
Ascending patterns can appear after a market decline and imply a price reversal. They serve as a signal for investors to consider taking a long position in order to profit from any rising trend.
Hammer
This pattern is toward the end of a downtrend and has a small body with a long lower wick. A hammer indicates that, despite the fact that there was selling pressure during the day, the price eventually reversed due to a large amount of purchasing pressure. Green hammers, on the other hand, suggest a stronger bull market than red hammers.
Inverted hammer
The inverted hammer is a similar rising design. The only difference between the two is that the upper wick is longer and the bottom wick is shorter. This shows that there is a lot of purchasing pressure followed by weak selling pressure, which hasn’t pushed market prices down. The inverted hammer indicates that the market will soon be controlled by investors.
Bullish engulfing
Two candlesticks make up the engulfing candlestick pattern. A small red body is entirely encircled by a huge green candle. Even though the second day begins lower than the first, the bull market drives prices higher, resulting in a profit for investors.
Penetrating
A pattern with two candles is also included, consisting of a long red candle followed by a long green candle. Between the first closing price of the candle and the green opening price of the candle, there is normally a big bearish gap. As the price increases to or above the previous day’s mid-price level, this indicates strong buying pressure.
Morning Star
In a market decline, the morning star pattern is regarded as a promising indication. It’s a three-candle arrangement with one with a small body sandwiched between a large red and a green one. Because market gaps exist on both the open and close, the “star” will not typically dominate the massive body.
This is a hint that the first day’s selling pressure is easing, and a bull market is on the way.
Three white soldiers
And over course of three days, the three white soldiers pattern occurs. It’s made up of a sequence of enormous green (or white) candles with small wicks (shadows) that close and open higher each day than the day before. This is a significant bullish signal following a downturn, indicating a continuous increase in buying pressure.
Six Candlestick Patterns that are Descending
After an uptrend, descending candlestick patterns generally appear and suggest a moment of resistance. When investors are pessimistic about the market price, they frequently close their long bets and initiate a short position to profit from declining prices.
Hanging man
The hanging man is the bearish version of the hammer: it has the same shape, but it forms at the end of an uptrend. This indicates that there has been a significant level of selling during the day, but buyers have been able to get the price higher. A significant level of selling is usually considered a sign that the uptrend is fading in the market. The bearish variant of the hammer is the hanging man, which has the same shape as the hammer but appears at the end of an upswing. This suggests that there was a lot of selling going on during the day, but purchasers were able to get a better deal. A considerable amount of selling is frequently taken as an indication that the market’s uptrend is weakening.
Shooting Star
The shooting star is similar to the inverted hammer in shape, but it develops in an upward trend, with a small body and a huge upper wick. Like a shooting star descending to the ground, the market will typically open with a little gap to the upside, followed by a rise higher into the intraday before closing slightly above the open price.
Bearish Engulfing
At the ending of an uptrend, a bearish engulfing pattern appears. The first candle has a small green body that is absorbed by a larger red candle that follows. It indicates a price peak or slowdown and is a warning indicator of an oncoming market disaster. The lower the second candle drops, the more likely the trend is significant.
Evening star
The evening star is a three-candlestick pattern that is the bullish morning star’s counterpart. A little candle is wedged between a large green candle and a large red candle in this arrangement. It denotes a reversal of the uptrend, and it’s especially significant when the third candle wipes out the profits made by the first.
Three black crows
Three large red candlesticks with short or no wicks make up the Three Black Crows motif. Each session begins with a price that is identical to the previous day’s, but selling pressure drives the price to fall further with each closing. When the number of sellers outnumbers the number of purchasers for three days in a row, investors see this as the start of a downtrend.
Dark cloud cover
A negative reversal is shown by a dark cloud above the previous day’s optimism, indicating a bearish reversal. It consists of two candles: a red candle that opens at a higher price than the previous day’s green body and a blue candle that closes below its midpoint. This indicates that the downtrend has gained control of the session, resulting in a big decline in prices. If the wicks of the candles are short, it indicates that the decline was strong.
Four Candlestick Continuation Patterns
A continuation pattern is found when a candlestick pattern does not indicate a change in market direction. This can assist investors in identifying a period of market rest, when there is market hesitation or a price movement that is neutral.
Doji
The candle resembles a cross or plus sign when a market opens and closes at about the same price. Investors should search for a body that is either non-existent or has varying length streaks. The doji pattern depicts a battle between buyers and sellers that results in neither party making a profit. A doji is a neutral indication on its own, but it is frequently seen in reversal patterns like the bullish morning star and bearish evening star.
Spinning tops
A short body rests in the center of equal-sized strands in these patterns. The pattern implies market indecision, implying that there has been no meaningful price change: the bulls have sold at the high price, while the bears have decreased it again. Spins are typically thought of as a time of consolidation or rest, followed by an upswing or decline.
The spin is a very neutral signal on its own, but it can be read as a hint that things are about to start happening because it signals that the current market pressure is losing control.
Triple bass formation
This pattern is used to forecast whether the current trend will continue up or down. The “bearish triple formation” is the name for the bearish pattern. It consists of a long red body, three little green bodies, and a third red body. The green candles appear in the bearish body’s range. This indicates to investors that the bulls lack the necessary strength to turn the trend around.
Triple bull formation
This pattern, known as the “bullish triple formation,” is the polar opposite of the preceding one because it is bullish. Three short red candlesticks are wedged between two long green candlesticks. Despite selling pressure, the pattern shows that buyers remain in control of the market.