Japanese Candlesticks

In the seventeenth century, Japanese rice traders have developed a new method to analyze the market, which is still used very successfully today by traders across the world.  Personally, I prefer this method of displaying the market data, because it gives a more complete picture of the balance of power between bulls and bears, and more importantly, may provide additional information in the form of patterns which described in great detail in the literature.

I am not going to bore you with the anatomy of the candle – you can find that information readily available on the internet.  In this section I wanted to describe some of the high-probability patterns that would help you better see the market.  It should be noted, however, that below are the classic description of the patterns.  In the gold market, apart probably from the “hammer” formation, they look a little different.

 bullish patterns bw

The Hammer is a classic reversal candle that occurs on a falling market.  It has a long shadow, and a small real body with a close at the high.  Here the market opened, went down considerably, but the selling dried up, bulls bought out the fall and kept on buying. The lack of the upper shadow tells us that the market closed at the high.  This is a very serious reversal candle that very often appears at the bottom of down trends.

Bullish Engulfing is probably one of the more powerful ones out there.  If it appears at the bottom of a trend, it is a very strong reversal sign.  The small red (black) candle was dominated by the bears, the market opened even lower on the next candle, but the bulls reappeared and aggressively bought with the candle closing near the top.  If you were short, you might want to consider closing your position. 

Bullish Continuation pattern usually appears in the middle of an up trend and points at the fact that the trend is going strong and will continue.

Bullish kicker is a reversal formation at the bottom of a down trend.   

Finally, I would like to mention Bullish Harami and Piercing.  These are also reversal formations, and even though they are less reliable than the ones mentioned above, they are still worth keeping an eye out for. There are many more patterns described in the literature (Doji, Evening Star, Three White Soldiers, etc…), here I have mentioned only the more reliable ones. At any rate, I would not recommend anyone trade based on the candlestick analysis alone, the candlestick patterns should only serve the purpose of an additional confirmation to the trader.  Below I have listed the bearish equivalents of the patterns described before. They are the mirror image of the bullish ones.    

bearish patterns bw

  I invite you to spend some time to find these patterns on the charts.  The eye needs to get used to seeing these formations.