NIAL FULLER

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Japanese Candlestick Patterns In Forex Trading

Japanese Candlestick Patterns

• A Brief History of Japanese Candlestick Charting Patterns.

Candlestick charts originated in Japan during the 18th century. Since no de ned currency standard
existed in Japan during this time rice represented a medium of exchange. Various feudal lords
deposited rice in warehouses in Osaka and would then sell or trade the coupon receipts, thus rice
become the rst futures market. In the 1700s legendary Japanese rice trader Homma Munehisa
studied all aspects of rice trading from the fundamentals to market psychology.
Homma subsequently dominated the Japanese rice markets and built a huge fortune. His trading
techniques and principles eventually evolved into the candlestick methodology which was then used
by Japanese technical analysts when the Japanese stock market began in the 1870s. The method was
picked up by famed market technician Charles Dow around 1900 and remains arguably the most
popular form of technical analysis chart in use by today’s traders of nancial instruments.

• Why use Candlestick Charts?

Candlestick charts (http://www.learntotradethemarket.com/forex-japanese-candlestick-charts) show

the same information as bar charts but in a graphical format that provides a more detailed and
accurate representation of price action.

Candlestick charts visually display the supply and demand situation by showing who is winning the
battle between the bulls and the bears.

Candlestick charts reveal another dimension of the given period’s price action by pictorially
displaying the force (or lack of force) behind each price bar’s movement.

Candlestick formations make all single bar and multi-bar patterns signi cantly easier to spot in real
time, thus increasing your chances of catching high probability trade setups. In addition, because
candlestick charts use the same data as bar charts (open, high, low, and close), all Western technical
signals used on a bar chart can easily be applied to a candlestick chart.

Candlestick charts o er everything bar charts do and more, using them is a win-win situation
because you can use all the trading signals normally used on bar charts with the added clarity and
additional signals generated by candlesticks.

Candlesticks charts are more fun to look at.

• The Anatomy of a Candle

Candlesticks have a central portion that displays the price distance between the open and the close.
This area is known as the real body or simply the body.

The price distance between the open and the high for the period being analyzed is called the upper
shadow, sometimes referred to as an “upper wick” as well. The highest price paid for a particular
period is the marked by the high of the upper shadow.

The price distance between the close and the low for the period being analyzed is called the lower
shadow, sometimes referred to as a “lower wick”.

The real body displays the opening and closing price of the security being traded. Closing prices have
added signi cance because they determine the conviction of the bulls or bears. If the security closed
higher than it opened, the real body is white or un lled, with the opening price at the bottom of the
real body and the closing price at the top. If the security closed lower than it opened, the real body is
black, with the opening price at the top and the closing price at the bottom. Depending on the price
action for the period being analyzed a candlestick might not have a body or a wick.
To better highlight or visualize price movements, modern candlestick charts (especially those
displayed digitally) often replace the black or white of the candlestick real body with colors such as
red (for a lower closing) and blue or green (for a higher closing).

• Core Candlestick Patterns

There are multiple forms of candlestick patterns; here is a brief overview of the most popular and
widely used single and multi-bar patterns commonly used today.

Bullish Candle

Signals uptrend movement, they occur in di erent lengths; the longer the body, the more signi cant
the price increase

Bearish Candle

Signals downtrend movement, they occur in di erent lengths; the longer the body, the more
signi cant the price decrease.
Long Lower Shadow

These candles provide a bullish signal, the lower shadow must be at least the size of the real body;
the longer the lower shadow the more reliable the signal.

Long upper shadow

These candles provide a bearish signal, the upper shadow must be at least the size of the real body;
the longer the upper shadow the more reliable the signal.

Hammer

The hammer is a bullish signal that occurs during a downtrend. The lower shadow should be at least
twice the length of the real-body. Hammers have little or no upper shadow. When a hammer occurs
during an uptrend it is known as a “hanging man” and is a bearish signal. Because of the bullish long
lower shadow however, this pattern needs bearish con rmation by a close under the hanging man’s
real body.
Shooting Star

This candle has a long upper shadow with little, or no lower shadow, and a small real body near the
lows of the session that develops during or after and uptrend.

Harami

The Harami is a two-candlestick pattern in which a small real body forms within the prior session’s
larger real body.

Doji

The Doji is a candlestick in which the session’s open and close are the same, or almost the same.
There are a few di erent varieties of Dojis, depending on where the opening and closing are in
relation to the bar’s range.

Dragon y doji

The Dragon y Doji has a long lower shadow, the open, high, and close are at or very near the
session’s high. This pattern often signals reversal of downtrend.

Gravestone doji

The Gravestone Doji has a long upper shadow, the open, low, and close are at or very near the
session’s low. This pattern often signals reversal of an uptrend.
High wave candle / long-legged doji

This candle has a very long upper or lower shadow and a small real body. If the opening and closing
price are the same the candle has no real body and is then called a Long-Legged Doji. The rst
picture is a high wave candle the second is a Long-Legged Doji.

Engul ng candles

The bullish engul ng pattern consists of large white real body that engulfs a small black real body in
a downtrend. The bearish engul ng pattern occurs when the bears overwhelm the bulls and is
re ected by a long black real body engul ng a small white real body in an uptrend.

Spinning tops

Spinning tops are simply candles with small real bodies.

• How Candlestick patterns translate into Nial Fuller’s Price Action Setups

My favorite price action setups (http://www.learntotradethemarket.com/forex-trading-

strategies/price-action-setups-pin-bars-fakeys-inside-bars)consist of the pin bar
(http://www.learntotradethemarket.com/forex-trading-strategies/pin-bars-forex-trading-de nition),
the inside bar (http://www.learntotradethemarket.com/forex-trading-strategies/inside-bar-forex-
strateg), and my proprietary fakey setup (http://www.learntotradethemarket.com/trading-
videos/forex-fakey-trade-setup). The above candlestick patterns can easily be condensed down to
one of my three price action setups or may be applicable to more than one of my price action
(http://www.learntotradethemarket.com/price-action-trading-forex) setups. It can be di cult to keep
track of the various forms of candlestick patterns. This is why I feel like my three main price action
setups (http://www.learntotradethemarket.com/forex-trading-strategies/price-action-setups-pin-
bars-fakeys-inside-bars) do a great comprehensive job of including all the relative candlestick
patterns and make them easier to understand in the context of daily price action. Let’s take a look at
some charts with examples of some of the various candlestick patterns converted into my price
action setups.

Pin Bars

The pin bar (http://www.learntotradethemarket.com/forex-trading-strategies/forex-pin-bar-method-

s-and-r) can include the following previously described candlestick patterns; long lower shadow
candles and long upper shadow candles, hammers and shooting stars, dragon y and gravestone
dojis.
Inside Bars

Inside bars (http://www.learntotradethemarket.com/trading-videos/forex-trading-trade-inside-days)

can technically encompass any candlestick pattern because they are simply a series of at least two
candlesticks where the rst candlestick completely engulfs the entire range of the subsequent
candlestick, however, more often than not inside bars end up being spinning tops or dojis. Note, the
inside bar is di erent from the “engul ng pattern” because it includes the entire range of the bar,
from high to low, where as the engul ng pattern only includes engulfment of the real body of the
candle. I generally trade inside bars (http://www.learntotradethemarket.com/trading-videos/inside-
bar-strategy-on-audusd/) in the context of a strongly trending market as they are often great entry
points into trends. However, often times inside bars (http://www.learntotradethemarket.com/forex-
trading-strategies/inside-bar-forex-strateg) will occur at major market turning points as well as the
trading-course)
previous trend loses momentum, pauses and forms an inside bar, and then changes direction.

The Fakey Setup

My fakey setup (http://www.learntotradethemarket.com/trading-videos/forex-trading-trade-the-

fakey-setup/) is essentially a multi-bar pattern that consists of a false break from an inside bar
pattern or a key level. The fakey (http://www.learntotradethemarket.com/trading-videos/forex-fakey-
trade-setup) can consist of a number of di erent candlestick patterns. Often times the fakey setup
(http://www.learntotradethemarket.com/forex-trading-strategies/recent-fakeys-and-pin-reversal-
forex-trades/) will consist of a bullish or bearish engul ng pattern which is completely engul ng the
range of a spinning top or doji candle which gives rise to a false break bar that can take the form of
any of the candlesticks above that qualify as pin bars.

In Conclusion

Candlestick charts o er a more vivid depiction of price action

(http://www.learntotradethemarket.com/forex-trading-strategies/price-action-price-action-explained)
than what a standard bar chart can provide. Candlestick patterns in and of themselves are useful,
however there are many di erent names and interpretations of candlestick patterns which often can
induce confusion and can be hard to keep track of. You will nd that my price action educational
material condenses all of the important candlestick patterns into 3 simple yet highly e ective price
action setups (http://www.learntotradethemarket.com/forex-trading-strategies/price-action-setups-
pin-bars-fakeys-inside-bars). I feel that my take on candlestick patterns expressed via my proprietary
ideas on price action trading (http://www.learntotradethemarket.com/forex-articles/why-price-
action-will-improve-your-forex-trading/) is a much more e cient, simple, and pro table way to trade
candlesticks and I think after studying my forex trading course
(http://www.learntotradethemarket.com/forex-trading-course) you will feel the same way.

Good trading,
Nial Fuller (http://www.learntotradethemarket.com/nial-fuller-forex-bio?rel=author) – Learn To Trade
Forex (http://www.learntotradethemarket.com)

Copyright  2012  www.LearnToTradeTheMarket.com (reproduction of this content without

persmission is illegal)

8 Comments Sort by Top

Add a comment...

Bilionea Asigwa · Founder and Senior Director at ABC Farms

loved this...
Like · Reply · 2d

Alekhooje Valentine · CEO at Valdek events & Logistic

nice article it enlarge my knowledge of trading
Like · Reply · 7w

Falola Jacob Olalekan · Works at Estudante

good but havent understand better
Like · Reply · 7w

Mbongiseni Madala · Doctor (Dr) at Department of Health

Very useful, thanks as I will try my luck using your techniques
Like · Reply · 16w

Pauline Bennett
thanks. real help to my building blocks of knowledge toward competency when trading.
Like · Reply · 1 · 16w

Valerie Riordan
Explaination is excellent. Thanks Nial.
Like · Reply · 22w

Olanrewaju Shittu · New York Institute of Technology (NYIT)

Perfect
Like · Reply · 22w

Abdul Matheen · Works at Mcx Analyst

GOOD WORK
Like · Reply · 29w

Facebook Comments Plugin

 9 Comments  Leave a Comment

Shahnazshakiba
February 11, 2018 at 4:59 am

dear fuller thanks for you mr fuller for educat forex they are very good exuss me iam dont know english
you are very good i am iranian and love you good by shahnaz iran
 Reply
 Siddharth
February 9, 2018 at 5:47 pm

This looks good !

Is this good enough to detect patterns in real time trading ?
 Reply

Ajit
January 2, 2018 at 9:34 pm

fantastic for newbees

 Reply

Francesca
December 11, 2017 at 12:51 pm

Great explanation with graphics! Others often just explain candles by descriptions, but having it in
graphics makes it more easier to understand.
 Reply

LORRAINE LEBEYA
November 24, 2017 at 4:38 am

BASIC, BETTER AND THE BEST TO MOST I HAVE TRIED TO READ

 Reply

MANOJ
September 10, 2017 at 11:36 pm

EXPLANATION IS GREAT
 Reply

Earnest
March 1, 2014 at 2:09 pm

Loved this so much. Awesome teaching.

 Reply
 Nader
January 25, 2014 at 10:49 pm

Thanks Nial for your help and lucid explanation about every aspect of trading.
I really appreciate your concerns.
Additionally, for a newbie in Forex , what do you recommend in the rst place?
Is studying books a good start in trading career?
Thanks
 Reply

Chayadi
September 7, 2013 at 11:24 pm

good explanation candlestick

 Reply

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