Japanese candlesticks are one of the types of exchange indicators in Forex and, at the same time, the name of the interval chart on which they are built. This analytics element is used to fix price changes and quotes observed over the selected period of time (from one minute to one hour and a day).Combinations of Japanese candlesticks appeared long before Forex and stock trading. Initially, they were used for the analysis of data on rice supply contracts, and the first references to such charts date back to 1600 AD. The principle of building a candlestick diagram is quite simple. It shows the key moments of the selected trading period, namely:
- the price at the time of opening;
- a price maximum;
- the minimum price;
- the price at the time of closing.
There are two main types of candlesticks:1) growing/bovine;2) Falling/Bears.The chart, where the price at the time of closing will be higher than the price at the time of opening, i.e. the dynamics of growth will be traced, is called bullish, and the candlestick is displayed in white or green (more often than not, white is not shaded, because the charts are mostly not colored).The chart showing the black/red shaded bull candle shows the dynamics of the price drop. In this case, the price level of the closing level will always be lower than the initial level (prices at the time of opening).Japanese candles: basicsEvery candle has a body. In bulls it is not filled with color (can be painted green on colored charts), in bears it is always filled in/shaded. The body displays the range of price changes within a trading session based on the fixation of price data at the time of closing and opening.Shadows in Japanese candlesticks are thin lines that continue the candlestick body up and down the chart lines. Their length shows the range of prices – from the minimum to the maximum values within the trade. The peak of the upper shadow completion shows the highest value of the price, the point of completion of the shadow located in the lower part of the candlestick is the lowest value.Candle body length is an indicator of pressure, activity of buyers/sellers. Significant length indicators indicate a significant struggle, dynamic development of the market situation. Short candlesticks demonstrate low intensity of the struggle and minimal change in price values during the session.The significant superiority of one of the candlesticks in the length demonstrates the formation of a strong trend, acting over a long period of time. Long candlesticks, formed against the trend, usually demonstrate the stop of price movement and getting a reverse impulse that directs its movement in the opposite direction.
Popular combinations of Japanese candlesBear combinations of Japanese candles1) “Bear Harami” – Behind a very long (non-standardly high) bull candle in this case there is a small candle with a black body, which determines the downward trend in prices, but does not go beyond the length of the bull candle.2) Triple bearish – In this case, three short, empty bullish candlesticks follow the long, filled body of a bearish candlestick, which show the price trend towards growth, but do not go beyond the first candlestick. The combination is completed by another long filled bearish candlestick, which defines further downward trends in price indicators.3) “Harami Crossing” – The long white body of the candlestick in this case has an ideal (in the form of a line) Dodge’s candlestick next to it, indicating the emergence of trends to stop and price reversal to reach the highest values.4) Big bear/black candlestick – Typically bearish model of chart construction, in which a candlestick with a non-standardly high body and a wide range of price indicators is displayed, the levels of ridge and bottom are close to the peak (extremely high and extremely low) values.5) Bear Absorbing Line – If a short white candlestick body on the chart precedes a long black candlestick body with no “tails” beyond its limits, it is an indicator of the impending change of direction of the market, anticipating the formation of a bearish trend.6) “Three Black Ravens” – Three colored candlesticks, one after the other, with a decrease in the closing price level, indicate the formation of a trend towards an upward reversal of the market.7) “On the neckline” – The chart showing a black candle and a candle with a short white body that starts below the level of closing of the previous candle indicates the presence of bearish market trends that promise a further drop in prices in the range of the white candle day.8) “Dark cloud cover” – On the chart, where a long white candle is followed by a long black one, which starts from the middle of the previous one and overlaps it. Such a combination implies opening above the price maximum and closing within the limits of the bullish candle height. This is what the reversal indicator looks like, leading to a decline in price indicators at the current trend to the growth of price values.9) “Turned black hammer” is a typical bearish combination, where the body of a candle is displayed painted and the upper shadow is almost invisible or not at all, with a considerable length of the lower shadow. Such a candle indicates the emergence of prerequisites for a reversal of the market below, with confirmation of forecasts with a delay of one day.Bull combinations of Japanese candles1) “Bull’s Harami” – The formation of a bullish model after a long-term price drop usually looks like a short white candle coming after a non-standardly long painted candle.2) Triple Bull Formation – This construction is shown on the chart by two tall bull candlesticks, between which there are three short bear candlesticks, which do not go beyond the closing level of the first indicator. This option demonstrates the formation of a stable bullish trend, promising further price growth.3) Crossing “Bull’s Harami” – This graph is characterized by the formation of an ideal Dodge’s candle after a disproportionately long candle with a painted body. This is what a price reversal on the chart looks like on the lower values.4) Large white/bull candlestick – Typically bullish chart model, where you can see an obvious upward trend, with closing and opening price levels close to the peak values.5) Bull’s absorbing line – A short bear’s candle that precedes the formation of a high bull’s candle, not going beyond its borders – a sign of an imminent change in the direction of the market below, to the formation of an upward trend.6) “Three White Soldiers” – Three bullish candlesticks arranged one after the other with consistently rising closing price levels – a model that forms the basis for a lower market reversal.7) “Rising window” – The presence of a gap between the crest of the first and the bottom of the second candlestick on the rising chart is an indicator of the trend for further price increase, with the corridor of the gap / window may be a level that provides support.8) “Clearance in the Clouds” – A high bearish painted candlestick and the white candlestick that follows it, which has a price level of opening below the bottom of the previous candlestick and a price level of closing above the middle of the candlestick shows that it has reached the level of the lower market reversal.9) “Hammer” – A bull candlestick displayed on a graph with a short body and an upper shadow of minimum length in the presence of a descending shadow – a classic bull model, displayed when the trend has a strong influence on the decrease. In the upside down position indicates the emergence of prerequisites for a lower market reversal with a delay in the execution of the forecast for the day.Dodge’s Japanese candlesticksThere is a variety of candlestick indicators that differ from all other small bodies and extremely long shadows. They carry the name of Dodge’s candle.On charts they can be displayed as:
- straight line that coincides with the chart lines – no difference in prices at the opening and closing of the session;
- narrow unpainted body shows a slight growth dynamics, the price at the time of closing in this case will be slightly higher than the price at the time of opening;
- Narrow painted body – insignificant dynamics of price decline at the moment of closing relative to the opening price.
Classic Dodge Candle Parameters: Width to Height ratio of 1:5 or more.The ideal Dodge candlestick is the horizontal lines shown on the chart, i.e. it is a candlestick that does not have a clearly expressed body and shows no difference in price indices between opening and closing moments.As for the shadows of Dodge’s candlesticks, their formation is based on the same principles as in the case of other candlesticks.
- Symmetrically arranged shadows indicate the uncertainty of the market situation.
- The small height of the shadows indicates that there is no clear desire on the part of the players to change the situation.
- Multiple shadows demonstrate the struggle of market players directed towards its growth or decline.
Dodge with long symmetrical shadows reflects the situation when the market, experiencing serious price fluctuations, eventually returns to the original price values.The presence of dodgy candles on the chart indicates the absence of obvious market dynamics, its horizontal orientation. But in combination with the white long candlesticks / upward trend, the appearance of Dodge on the chart may signal a reversal of the market or stop the growth of price indicators.Turntable combinations of Japanese candles1) “Evening star” – A candle with a high bull body followed by a candle with a short body followed by a black candle with a closing level that does not go beyond the body of the first bull candle, precedes the change of trend from upward to downward. This is one of the strongest signals of the market reversal from growth to decline.2) “Evening Dodge Star” – If the combination “Evening Star” instead of a short candle between a long white and black candle there is a Dodge’s candle, it should be considered a strong signal to the market reversal at the top.3) “Morning Star” – A graph on which a candle with a short white or black body goes behind a tall bear’s candle at some distance (with a gap), and a tall bull’s candle after it is called “Morning Star”. This indicator indicates the formation of trends for the lower market reversal.4) “Morning Dodge Star” – If in the combination “Morning Star” instead of a short classical candle behind a tall bearish candle is located through the “window” (interval) of the dodge-candle, and closes the combination of a bullish candle, with the level of price closure not overlapping the border of a tall bearish candle – it can be regarded as an obvious signal for the lower price reversal.4) “Pinched tops” – Candles lined up in a line with equipotent tops, regardless of size and color, signal an impending reversal of the market situation, may strengthen this trend by the presence of other supporting signals.5) “Pinched bottoms” – Several candlesticks whose bottoms are located on the same line, regardless of size and color (provided that the candlesticks of the same color are not side by side) form an insignificant reversal signal, which can strengthen other combinations of Japanese candlesticks, also displayed when drawing the chart