Japanese Candlesticks

Falling Three Method and Rising Three Method

2013-03-16T09:15:00.000-04:00

The Three Method patterns look similar to the flag or pennant chart formations.

Falling Three Method

Bearish continuation pattern
Appears in a downtrend
Marks a pause before resuming the downtrend
Pattern composed of 4 or more candle lines
1st candle is a long bearish candle
Follows 2 to 5 or small candles of either color (ideally green) rising within the 1st candle's high/low range
The shadows of the small candles can extend the 1st candle's range but not their real body
Last candle is a long bearish candle
Last candle should gap down at open and close below the 1st candle's close

Rising Three Method

Bullish continuation pattern
Appears in an uptrend
Marks a pause before resuming the uptrend
Pattern composed of 4 or more candle lines
1st candle is a long bullish candle
Follows 2 to 5 small candles of either color (ideally red) falling within the 1st candle's high/low range
The shadows of the small candles can extend the 1st candle's range but not their real body
The small candles range should be within the high/low range of the 1st candle
Last candle is a long bullish candle
Last candle should ideally gap up at open and close above the 1st candle's close

Below is a chart example of the Falling Three Method pattern

Price Gaps

2012-12-21T12:03:00.000-05:00

Price gaps are areas on a chart where no trading activity has taken place between the close of a session and the open of the following session.
The significance of price gaps varies depending on their location on a price chart.

Breakaway Gap

A Breakaway Gap appears when price breaks out of a congestion area or trading range. Volume is higher than usual. This type of gap marks the start of a new trend and is often event triggered (news, earnings). The gap is usually not filled.

Continuation Gap
A Continuation Gap is also called a Runaway or Measuring Gap. It appears in the middle of the trend. This type of gap confirms the strenght of the ongoing trend. Prices continue making new highs or lows without filling the gap. Volume should be average. The gap can be considered a good entry point.

Exhaustion Gap

An Exhaustion Gap signals the end of an extended market move. It follows a rapid advance or decline. Associated with heavy volume and usually followed by a reversal. The gap is expected to be filled fairly quickly.

Common Gap

Also called a Trading Gap or Area Gap. The Common Gap is the most frequently seen gap and usually appears in a trading range. Associated with low volume, the gap is usually small in size and is expected to be filled fairly quickly.

Spinning Top and High Wave

2012-12-10T15:43:00.000-05:00

For the Japanese, the real body is the essence of price action and gauges the force of the trend.
Spinning Tops and High Waves candles, with their small real body, appear in a market where supply and demand are almost the same, it shows a lack of consensus among the traders.

Spinning Top

Spinning tops show the indecision among traders
The size of the real body shows the lack of consensus among traders to sustain the current trend
Indicates an early sign of a possible shift in the current uptrend or downtrend
Ignore in a trading range: price is pausing before breaking out
The candle has a small real body of either color
The size of the shadows is not important
Caution is recommended when encountering such candles

High Wave

High Wave candles show the confusion among traders
The size of the real body shows the lack of consensus among traders to sustain the current trend
Indicates an early sign of a possible shift in the current uptrend or downtrend
The candle has a small real body of either color
The size of both shadows are particularly long, but are not required to be the exact same length
Ignore in a trading range: price is pausing before breaking out
Caution is recommended when encountering such candles

Long upper shadows imply selling pressure while long lower shadows imply buying pressure.
A Paper Umbrella is a candle line with a small real body and a long lower shadow which appears at the high of a trading range.
Hanging Man and Hammer candles are both Umbrella Lines.

Descending Hawk and Homing Pigeon

2012-12-10T08:22:00.002-05:00

Similar to the Harami pattern but both real bodies of the candles share the same color.

Descending Hawk

Bearish reversal pattern
Appears at market tops
1st candle is a long bullish candle in the direction of the trend
2nd candle is a short bullish candle gapping down at open
Both candles are the same color
2nd candle's body is inside the previous candle
A close below the 1st candle's open confirms the pattern

Homing Pigeon

Bullish reversal pattern
Appears at market bottoms
1st candle is a long bearish candle in the direction of the trend
2nd candle is a short bearish candle gapping up at open
Both candles are the same color
2nd candle's body is inside the previous candle
A close above the 1st candle's open confirms the pattern

Dumpling Top and Frypan Bottom

2012-12-09T17:56:00.001-05:00

The Dumpling Top and Frypan Bottom are powerful candle patterns.
The small candles represent a period of low volatility.
The Window or gap is key to this pattern.
A Window or gap is a space between the real bodies of 2 candles where shadows
do not overlap in any way.

Dumpling Top

Bearish reversal pattern
Looks similar to the Rounding Top price pattern
Pattern is shaped in a convex manner
Appears at the end of an uptrend
Price holds new high with a series of candles with small bodies
Small candles can be spinning tops and doji of either color
They show the confusion of the market at this point
Price gaps down with a long bearish candle confirming the pattern
The gap down or Falling Window now acts as resistance

Frypan Bottom

Bullish reversal pattern
Looks similar to the Rounding Bottom price pattern
Pattern is shaped in a convex manner
Appears at the end of a downtrend
Price holds new lows with a series of candles with small bodies
Small candles can be spinning tops and doji of either color
They show the confusion of the market at this point
Price gaps up with a long bullish candle confirming the pattern
The gap up or Rising Window now acts as support

Piercing Line

2012-08-12T16:05:00.003-04:00

The Piercing Line pattern is the opposite of the Dark Cloud Cover.
The pattern gives a weaker signal than the Bullish Engulfing pattern.

Bullish bottom reversal pattern
Follows a downtrend
1st candle is a long red body
2nd candle is a long green body
2nd candle opens below the previous day's low
2nd candle closes above midpoint of the previous candle
The deeper the 2nd candle closes into the 1st one, the stronger the signal
The lowest low of the 2 sessions is considered support
Confirmation is suggested in the form of a higher close or a gap up on the next candle

Below is a chart example of the Piercing Line pattern on a 5 min Gold /USD chart.

Double Bottom and Double Top

2012-08-12T14:38:00.002-04:00

The Double Bottom and Double Top are one of the most frequently seen price patterns.

Easy to recognize on the price chart.

Double Bottom

Bullish reversal chart pattern
Forms after an extended downtrend
Also called a "W" formation
Consists of 2 symmetrical troughs separated by a reaction high (neckline)
1st trough should be on increased volume at the lowest low of the current trend
2nd trough should be on declining volume
Both troughs should ideally be at the same or slightly higher price level
Both troughs should be symmetrical in terms of height and length in time
High between the 2 troughs must be 10-20% advance of the 1st trough
Breakout is confirmed on higher volume with a close above the neckline
Projected price target is the height of the pattern (measure from the low to the neckline)

Double Top

Bearish reversal chart pattern
Forms after an extended uptrend
Also called a "M" formation
Consists of 2 symmetrical peaks separated by a reaction low (neckline)
1st peak should be on increased volume at the highest high of the current trend
2nd peak should be on declining volume
Both peaks should ideally be at the same or slightly lower price level
Both peaks should be symmetrical in terms of height and length in time
Low between the 2 peaks must be 10-20% decline of the 1st peak
Breakout is confirmed on higher volume with a close below the neckline
Projected price target is the height of the pattern (measure from the high to the neckline)

Abandoned Baby

2012-06-25T13:09:00.000-04:00

The Abandoned Baby pattern is a variation of the Evening and Morning star patterns.
It's a major reversal pattern, similar to the island reversal chart pattern.
The key to this pattern is the Doji gapping away from the candles on both sides.

Bearish Abandoned Baby

Bearish reversal pattern
Appears after a strong uptrend
Formation of 3 candle lines
1st candle is a long green candle in the direction of the trend
2nd candle is ideally a Doji or a candle with a very small real body gapping away from the candles on each side
There must be no shadows or body overlapping the Doji
3rd candle is a long red candle

Bullish Abandoned Baby

Bullish reversal pattern
Appears after a strong downtrend
Formation of 3 candle lines
1st candle is a long red candle in the direction of the trend
2nd candle is ideally a Doji or a candle with a very small real body gapping away from the candles on each side
There must be no shadows or body overlapping the Doji
3rd candle is a long green candle

Tweezer Candles

2012-04-05T16:06:00.000-04:00

Tweezer candles imply that the trend is being pinched.
Tweezers can be composed of real bodies, shadows or doji.
If the Tweezers also form a reversal pattern (Engulfing+/-, Harami+/-, Hanging Man, Hammer) it adds more value to the pattern.

Appears at market bottoms
Bullish reversal pattern
Matching lows or almost
Composed of 2 or more candles of either color
Candles can be consecutive or nearby
Ideally the 1st candle is a long body and 2nd candle is a short body

Appears at market tops
Bearish reversal pattern
Matching highs or almost
Composed of 2 or more candles of either color
Candles can be consecutive or nearby
Ideally the1st candle is a long body and 2nd candle is a short body

Below is a chart example of a Tweezers Top

Bullish Separating Lines

2012-04-05T14:35:00.000-04:00

The Bullish Separating Lines is a rare candlestick pattern.
The market makes a short pullback before resuming its trend.

Bullish continuation pattern
Appears in an uptrend
Both candles share the same opening price
1st candle is opposite color of the trend in progress
1st day is ideally a tall red candle
2nd day is ideally a tall green candle in the form of an opening Marubozu (opens at its low, closes near its high)
Confirmation is suggested on the next day with a gap up or a higher close

Below is a chart example of the Bullish Separating Lines pattern.

Identical Three Crows

2012-03-25T10:19:00.000-04:00

The expression depicts a group of crows perching at the top of a high tree.
Identical Three Crows signals intense selling pressure.
The pattern is more bearish than the Three Black Crows.

Bearish reversal pattern
Follows an uptrend
Pattern composed of three consecutive long red bodies
Each candle opens at or near the previous close
The candles close at or near their lows
Each candle closes lower than the previous one
Be careful, because the market may be overextended to the downside due to heavy selling

Below is a chart example of the pattern with the EUR/USD 1 hour chart.
The Identical Three Crows pattern appears at a previous resistance point (Bearish Engulfing).

Harami patterns

2012-02-02T13:28:00.000-05:00

Harami means pregnant in Japanese

The Harami pattern is the opposite of the Engulfing pattern

The patterns illustrates a mother candle and a baby candle inside the 1st one

Bearish Harami / Bullish Harami

Appears at market tops or bottoms
Reversal pattern
1st candle is a long (mother candle) 2nd candle is small (baby candle)
2nd candle can be either color
2nd candle size ideally 25% or less of 1st candle
Baby candle's body is inside the mother's candle body, the shadows can exceed

Bearish Harami Cross / Bullish Harami Cross

Same criterias as above except the baby candle is a Doji
More powerful signal than a regular Harami

Three Inside Down / Three Inside Up

Confirmation of the Harami pattern
3 candles pattern
1st 2 candles exactly the same as the Harami
3rd candle on the bearish side closes lower than the prior candle and on the bullish side closes higher than the previous candle

Below is a chart example of the bearish Harami pattern

Bearish and Bullish Squeeze Alert

2012-02-02T13:07:00.000-05:00

The Squeeze Alert pattern looks similar to a triangle.
Triangles often precede price volatility.

Bearish Squeeze Alert

Bearish reversal pattern
Appears in an uptrend
1st candle is a tall green candle in the direction of the trend
2nd and 3rd candles form successive inside candles
2nd and 3rd candles make both higher lows and lower highs than the previous candle
Size of the 2nd cand 3rd bodies do not matter
2nd and 3rd candles can be either color
Wait for a confirmation on the breakout candle in the form of a gap down at the open or a lower close on the next candle

Bullish Squeeze Alert

Bullish reversal pattern
Appears in a downtrend
1st candle is a tall red candle in the direction of the trend
2nd and 3dr candles form successive inside candles
2nd and 3rd candles make both higher lows and lower highs than the previous candle
Size of the 2nd and 3rd bodies do not matter
2nd and 3rd candles can be either color
Wait for a confirmation on the breakout candle in the form of a gap up at the open or a higher close on the next candle

Below is a chart example of a Bullish Squeeze Alert pattern.

Euro

2011-11-04T11:04:00.001-04:00

The Euro is the official currency of the 17countries that form the Eurozone. Its population is estimated at roughly 332 million people. Estonia recently joined the Euro in 2011.

The Euro began trading virtually as a currency 1 January 1999, later, 1 January 2002, bank notes and coins were introduced to the 11 initial country members of the Eurozone.

The European Central Bank (ECB) located in Frankfurt, Germany is responsible for the monetary policy of the Eurozone and its current president is Mario Draghi.

According to the december 2010 BIS Triennial Central Bank Survey, the Euro was the second most traded currency in the world being part of 39,1% of the transactions after the US dollar with 84,9%.

The EUR/USD pair is the most traded currency pair in the world. It has a very high level of liquidity, makes strong trends and has a low spread.

Member countries of the Euro Zone

Japanese Candlesticks History

2011-10-28T15:04:00.005-04:00

Munehisa Homma (1724-1803) born in Sakata, Japan is the father of the Japanese Candlesticks. He was a successful rice trader at the Osaka Rice Exchange in Japan. Rice was at the base of Japan's economy during that period.

Homma was reported to have 100 consecutive winning trades and was considered the God of markets. He was raised to the rank of Samurai and became a financial advisor for the government.

Sakata's Method refers to the 160 rules Homma wrote. These rules form the base of Japanese candlestick patterns we know today . He created the candlestick patterns taking into account the open, high, low and close of the price. The candlestick's names often refer to the war which was a reality of that time, for example : Rest after Battle, Three White Soldiers, Gravestone Doji etc.

More recently, Steve Nison was the first to introduce the ancient art of Japanese candlesticks to the western world where it was still unknown by most traders.

It was back in 1987 when he first noticed Japanese candlesticks on the charts of a Japanese broker who worked at Shearson Lehman Hutton in New York, where he worked in an office down the hall. He became immediately fascinated by them and started the research work which lasted for 3 years before he published his first book on the subject.

The very first article to be written on Japanese candlestick analysis in the U.S. was published in Futures Magazine (December 1989) "Learning Japanese-Style Candlestick Charting" by Steve Nison.

Steve Nison is a CMT (chartered market technician), holds a MBA in Finance and Investments. He also worked as a senior analyst at Merryl Lynch. He is president of Candlecharts.com which offers seminars, educational products and advisory services.

Books by Steve Nison

Japanese Candlestick Charting Techniques (1991)
Beyond Candlesticks (1994)
Japanese Candlestick Charting Techniques, Second Edition (2001)
The Candlestick Course (2003)
Strategies for Profiting with Japanese Candlestick Charts (2011)

Bullish and Bearish ABCD Harmonic pattern

2011-10-28T09:36:00.000-04:00

The ABCD chart pattern is also nicknamed "Lightning Bolt".
The key to the ABCD Harmonic chart pattern is price symmetry where AB segment is equal to CD segment.

Bullish ABCD
AB = CD

Bullish reversal harmonic chart pattern
Each point (ABCD) represents a significant high or low
3 consecutive price swings forming a geometric pattern
AB and CD segments are called "legs" and BC segment is called a retracement
AB and CD segments are of equal lenght
AB segment is equal in time to CD segment
Point C is .618 / 786 Fibonacci retracement of AB segment
Point C is lower than point A
Point D is .127 / 1.618 Fibonacci extension of BC segment
Point D is lower than point B
Buy signal at point D

Bearish ABCD
AB = CD

Bearish reversal harmonic chart pattern
Each point (ABCD) represents a significant high or low
3 consecutive price swings forming a geometric pattern
AB and CD segments are called "legs" and BC segment is called a retracement
AB and CD segments are of equal lenght
AB segment is equal in time to CD segment
Point C is .618 / 786 Fibonacci retracement of AB segment
Point C is higher than point A
Point D is .127 / 1.618 Fibonacci extension of BC segment
Point D is higher than point B
Sell signal at point D

Dark Cloud Cover

2011-09-25T14:10:00.003-04:00

The Dark Cloud Cover pattern is the opposite of the Piercing Line.

The pattern gives a weaker signal than the Bearish Engulfing pattern.

Bearish top reversal pattern
Follows an uptrend
1st candle is a long green body
2nd candle is a long red body
2nd candle opens above previous day's high
2nd candle closes below midpoint of the previous candle
The deeper the 2nd candle closes into the 1st one, the stronger the signal
The highest high of the 2 sessions is considered resistance
Confirmation is suggested in the form of a lower close or a gap down on the next candle

Below is a 5 min chart of the EUR/USD featuring a Dark Cloud Cover.

Symmetrical Triangle

2011-09-25T10:16:00.000-04:00

The Symmetrical Triangle is considered a neutral price pattern.

Usually a continuation pattern
Also called a "Coil"
Represents a period of price consolidation
Formed of 2 converging trendlines (ascending and descending)
Consists of 2 lower highs and 2 higher lows
Volume is lighter as the trading contracts
Don't anticipate the breakout side
Breakout occurs at the apex of the triangle and can be upward or downward
Volume expands with the breakout
Price target: the widest part of the triangle is projected at the apex

Doji

2011-09-24T10:10:00.000-04:00

Doji candles warn us of potential reversal...
Always consider the trend preceding the Doji.
Doji represent indecision between the bulls and the bears.
Doji are more significant at market tops than bottoms.

Doji Star

A smaller range Doji that gaps up at open,where the open and the close are

situated in the middle of the candle's range. Significant at top following a long

white candle.

Four Price Doji

When the open, close, high and the low are all equal.
Represents a lack of liquidity or a period of inactivity.

Long-Legged Doji

A Doji where the open and the close are situated in the upper
range of the candle. The long shadows reflect indecision.

Rickshaw Man

A variation of the Long-Legged Doji where the open and the
close are situated in the middle of the Doji.

Dragonfly Doji

A Doji where the open and the close are situated at the top of the
candle's range. More powerful than the hammer at bottoms.

Gravestone Doji

A Doji where the open and close are situated at the bottom of the
candle's range. More powerful than the shooting star at tops.

Related Doji candle patterns

Harami Cross + /-
Morning Doji Star
Evening Doji Star
Tri-Star Doji + /-
Gravestone Doji + /-
Dragonfly Doji + /-

Trading the Doji

Ignore Doji during consolidation or in a box range
Take notice of Doji at horizontal support / resistance levels
Take notice of Doji at Fibonacci retracement levels
Take notice of Doji at market tops : Doji star after long white candle and Long-Legged Doji or Rickshaw Man.

Metatrader Chart

Descending and Ascending Channel

2011-07-05T09:09:00.000-04:00

Descending Channel

Bullish continuation chart pattern
Negative slope
Parallel trendlines
Upper falling trendline is the resistance
Lower falling channel line is the support
Prices make lower highs and lower lows
Price travels within the channel
To be valid the pattern needs at least 2 touching points on both lines
The failure of prices to reach the bottom of the channel indicates a shift in the trend
Breakout occurs with a close above the upper falling trendline
Price target: Add the width of the channel to the breakout point

Ascending Channel

Bearish continuation chart pattern
Positive slope
Parallel trendlines
Upper rising channel line is the resistance
Lower rising trendline is the support
Prices make higher highs and higher lows
Price travels within the channel
To be valid the pattern needs at least 2 touching points on both lines
The failure of prices to reach the top of the channel indicates a shift in the trend
Breakout occurs with a close below the lower rising trendline
Price target: Add the width of the channel to the breakout point

Japanese Candlesticks Tutorial

2011-06-25T08:26:00.000-04:00

If you are familiar with technical analysis, chances are you might be using Japanese candlesticks in your trading.
Japanese candlesticks show price action in a more intuitive way.
This is a short tutorial to learn the basics about Japanese candlesticks.
Japanese Candlesticks

Measured Move

2011-06-10T13:32:00.000-04:00

The Measured Move is also called the Swing Measurement.
Illustrates how the market has a propensity to retrace half of the move before resuming the ongoing trend.

Bullish Measured Move

Bullish continuation chart pattern
Pattern has 3 waves: AB - BC - CD
Forms at the end of a downtrend
Price makes an advance ideally forming a channel : AB wave
Corrective BC wave: price retraces a third to a half of the prior advance
CD wave: price resumes the uptrend duplicating the size and slope of the first AB wave
CD wave is parallel to AB wave
Volume should increase at the beginning of both AB and CD waves and decrease at the end of the retracement BC wave
Price entry: break of the high of the AB wave

Bearish Measured Move

Bearish continuation chart pattern
Pattern has 3 waves: AB - BC - CD
Forms at the end of an uptrend
Price makes an decline ideally forming a channel : AB wave
Corrective BC wave: price retraces a third to a half of the prior decline
CD wave: price resumes the downtrend duplicating the size and slope of the first AB wave
CD wave is parallel to AB wave
Volume should increase at the beginning of both AB and CD waves and decrease at the end of the retracement BC wave
Price entry: break of the low of the AB wave

Bullish and Bearish Gartley Harmonic pattern

2011-05-23T13:49:00.000-04:00

Bullish Gartley "222 pattern"

Bullish reversal harmonic chart pattern
Appears at major market bottoms
Looks like a "M" on the chart
Pattern starts at a significant low : point X
AB = CD pattern observed
B is the connecting point of 2 triangles
A point is the highest of the pattern
B point is .618 Fibonacci retracement of XA leg
D point is higher than point X
C point is .382 / .886 Fibonacci retracement of AB segment
AD segment is .786 Fibonacci extension of XA leg
Buy signal at point D

Bearish Gartley "222 pattern"

Bearish reversal harmonic chart pattern
Appears at major market tops
Looks like a "W" on the chart
Pattern starts at significant high: point X
AB = CD pattern observed
B is the connecting point of 2 triangles
A point is the lowest of the pattern
B point is .618 Fibonacci retracement of XA leg
D point is lower than point X
C point is .382 / 886 Fibonacci retracement of AB segment
AD segment is .786 Fibonacci extension of XA leg
Sell signal at point D

Shooting Star

2011-05-11T13:14:00.000-04:00

A Shooting Star displays market rejection of higher prices
The japanese would say : "There is trouble overhead"
Not as strong of a signal as the Bearish Engulfing or the Gravestone Doji

Bearish reversal pattern
Must appear after an uptrend
Small real body green or red
Stronger signal if the body gaps up from the previous candle
Upper shadow at least twice the size of the real body
Lower shadow very small to non existent
Red Shooting Star slightly more bearish
The high of Shooting Star is considered resistance
Needs confirmation with a bearish candle closing lower or gapping down the next session

Below is a Shooting Star at resistance followed by a red Marubozu

Forex Trading Hours

2011-05-01T13:29:00.012-04:00

The Forex market operates 24/7, 5½ days a week from sunday 5pmET to friday 4pm ET.
Trading begins in Wellington (New Zealand) then to Sidney (Australia) continues to Tokyo (Japan) moves to London (England) and finally ends in New York (USA).

Sydney session 5pm - 2am ET (Eastern Time)
Tokyo session 7pm - 4am ET
London session 3am - 12pm ET
New York session 8am - 5pm ET

Market overlaps are the busiest times as there is more trading volume.

Since the Forex market is decentralized, different broker plaforms display charts using different timezones for their server which will make candlestick patterns appear different from one broker to another, especially on the smaller timeframes like the 1 min or the 5 min TF.

From my experience I prefer using GMT+0 charts (server time) of the chart provider, which is the London market, the largest dealing center in the world where most Forex transactions take place.

Also, I prefer 4 digit display of candlestick patterns with charts (ex: EUR/USD 1, 3155). I find it makes it easier to spot certain candlestick patterns like Tweezer tops and bottoms and Bearish and Bullish Engulfing patterns.