Japanese Candlesticks - Reversal Patterns

Prior Trend
For a pattern to qualify as a reversal pattern, there should be a prior trend to reverse. Bullish reversals require a preceding downtrend and bearish reversals require a prior uptrend. The direction of the trend can be determined using trendlines, moving averages, or other aspects of technical analysis.

Long Shadow Reversals
There are two pairs of single candlestick reversal patterns made up of a small real body, one long shadow and one short or non-existent shadow. The long shadow should be at least twice the length of the real body, which can be either black or white. The location of the long shadow and preceding price action determine the classification.

The first pair, hammer and hanging man, are identical with small bodies and long lower shadows. The second pair, shooting star and inverted hammer, are also identical with small bodies and long upper shadows. Only preceding price action and further confirmation determine the bullish or bearish nature of these candlesticks. The hammer and inverted hammer form after a decline and are bullish reversal patterns, while the shooting star and hanging man form after an advance and are bearish reversal patterns.

Hammer and Hanging Man
The hammer and hanging man look exactly alike, but have different implications based on the preceding price action. Both have small real bodies (black or white), long lower shadows and short or non-existent upper shadows. As with most single and double candlestick formations, the hammer and hanging man require confirmation before action.

The hammer is a bullish reversal pattern that forms during a downtrend. It is named because the market is hammering out a bottom.

After a decline, hammers signal a bullish revival. The low of the long lower shadow implies that sellers drove prices lower during the session. However, the strong finish indicates that buyers regained their footing to end the session on a strong note. While this may seem enough to act on, hammers require further bullish confirmation. The low of the hammer shows that plenty of sellers remain. Further buying pressure is needed before acting. Such confirmation could come from a long white candlestick.

Recognition Criteria:
• The long shadow is about two or three times of the real body.
• Little or no upper shadow.
• The real body is at the upper end of the trading range.
• The color of the real body is not important.

The hanging man is a bearish reversal pattern that can also mark a top or resistance level. Forming after an advance, a hanging man signals that selling pressure is starting to increase. The low of the long lower shadow confirms that sellers pushed prices lower during the session. Even though the bulls regained their footing and drove prices higher by the finish, the appearance of selling pressure raises the yellow flag. As with the hammer, a hanging man requires bearish confirmation before action. Such confirmation can come from a long black candlestick.

Recognition Criteria:
• A long lower shadow which is about two or three times of the real body.
• Little or no upper shadow.
• The real body is at the upper end of the trading range.
• The color of the body is not important, though a black body is more bearish than a white body


Inverted Hammer and Shooting Star
The inverted hammer and shooting star look exactly alike, but have different implications based on whether you’re in a downtrend or uptrend. Both candlesticks have small real bodies (black or white), long upper shadows and small or non-existent lower shadows. These candlesticks mark potential trend reversals, but require confirmation before trading.

The shooting star is a bearish reversal. It occurs in an upper trend which indicates that the price opens at its low, rallies and pulls back to the bottom. A shooting star can mark a potential trend reversal or resistance level. The resulting candlestick has a long upper shadow and small black or white body. After a large advance (the upper shadow), the ability of the bears to force prices down raises the yellow flag.

To indicate a substantial reversal, the upper shadow should relatively long and at least 2 times the length of the body. Bearish confirmation is required after the shooting star and can take the form of a long black candlestick.

The inverted hammer looks exactly like a shooting star, but occurs after a downtrend. Inverted hammers indicate a possibility of the reversal of the downtrend.

After a decline, the long upper shadow indicates buying pressure during the session. However, the bulls were not able to sustain this buying pressure and prices closed well off of their highs to create the long upper shadow. Because of this failure, bullish confirmation is required before trading. An inverted hammer followed by a long white candlestick could act as bullish confirmation.

“Shoot for the moon. Even if you miss,

you'll land among the stars.”
Les Brown

Japanese Candlesticks - Basic Patterns

Marubozu
Marubozu means there are no shadows from the bodies. The high and low are represented by the open or close

A White Marubozu is a long white body with no shadows which indicates a bullish trend. It forms when the open equals the low and the close equals the high. This indicates that buyers controlled the price action from the first trade to the last trade. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.

A Black Marubozu is a long black body with no shadows. It forms when the open equals the high and the close equals the low. This indicates that sellers controlled the price action from the first trade to the last trade. It usually implies bearish continuation or bearish reversal.

Spinning Tops
Candlesticks with a long upper shadow, long lower shadow and small real body are called spinning tops. The color of the real bodies are not very important. The pattern indicates the indecision between the bullish and bearish trends.

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both bulls and bears were active during the session.

Even though the session opened and closed with little change, prices moved significantly higher and lower in the mean time.

Neither buyers nor sellers could gain the upper hand and the result was a standoff.
After a long advance or long white candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend.

After a long decline or long black candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend.

Doji
Doji lines are patterns with the same open and close price.

Ideally, the open and close should be equal. While a doji with an equal open and close would be preferred, it is more important to capture the essence of the candlestick.

Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level. The result is a standoff.

Neither bulls nor bears were able to gain control and a turning point could be developing.

Determining the importance of the doji will depend on the price, recent volatility, and previous candlesticks. Relative to previous candlesticks, the doji should have a very small body that appears as a thin line.

A doji that forms among other candlesticks with small real bodies (such as spinning tops) would not be considered important. However, a doji that forms among candlesticks with long real bodies would be deemed significant.

There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.

Doji and Trend
The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken.

After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation is needed.

After an advance or long white candlestick, a doji signals that buying pressure may be thinning and the uptrend could be coming to an end.

Where a price declines simply from a lack of buyers, continued buying pressure is needed to sustain an uptrend. Therefore, a doji may be more significant after an uptrend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This can come as a long black candlestick or a decline below the long white candlestick's open.

After a decline or long black candlestick, a doji indicates that selling pressure may be diminishing and the downtrend could come to a close.

Even though the bears are starting to lose control of the decline, further buying strength is required to confirm any reversal. Bullish confirmation could come from a long white candlestick or advance above the long black candlestick's open.
Before turning to the reversal candlestick patterns, there are a few general guidelines to cover.

To be continue.....Reversal Patterns

Japanese Candlesticks

While we briefly covered candlestick charts in the previous lesson, we’ll now dig in a little and discuss them more in detail. First let’s do a quick review.
What is a candlestick?

More than 200 years ago, the Japanese were using their own style of technical analysis in the rice market. This style evolved into the candlestick technique now used worldwide. Candlestick charts are a useful stand alone tool.
They can be merged with other technical tools to create the ultimate fighting technique. Certain candlestick combinations may imply a period of consolidation. Others may hint of a forceful price move.

Candlesticks are formed using the open, high, low and close. If the close is above the open, then a hollow candlestick (usually displayed as white) is drawn. If the close is below the open, then a filled candlestick (usually displayed as black) is drawn. The hollow or filled portion of the candlestick is called the body (also referred to as the "real body"). The long thin lines above and below the body represent the high/low range and are called shadows(also referred to as wicks and tails). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow.

And knowing this provides you with important information about price action and forms the essence of candlesticks.

Long versus Short Bodies
The longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent indecision between the bulls and the bears. Bulls are buyers and bears are sellers.

Long white candlesticks show strong buying pressure. The longer the white candlestick, the further the close is above the open. This indicates that prices increased considerably from open to close and buyers were aggressive. In other words, the bulls are kicking the bears’ butts big time.

Long black candlesticks show strong selling pressure. The longer the black candlestick, the further the close is below the open. This indicates that prices fell a great deal from the open and sellers were aggressive. In other words, the bears were grabbing the bulls by their horns and body slamming them.

Long versus Short Shadows
The upper and lower shadows on candlesticks can provide valuable information about the trading session. Upper shadows represent the session high and lower shadows the session low.
Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.

Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session and bid prices higher. However, sellers later forced prices down off of their highs and the weak close created a long upper shadow.

On the other hand, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower. However, buyers later resurfaced to bid prices higher by the end of the session and the strong close created a long lower shadow.

To be continue...