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Japanese candlesticks (I)

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Japanese candlesticks

Where did the Japanese candlesticks come from? In ancient times, when Godzilla was just a little lizard, a man from Japan called Homma developed the method of futures market analysis for forecasting prices on riсe contracts. Later on, this method was studied by a man from the West, Steve Nison, and developed in the theory of the Japanese candlesticks as we see it today.

Every candlestick in the chart of the Japanese candlesticks is a graphical representation of the four trading session components: opening price, closing price, low price and high price. The Japanese candlestick consists of the real body and the shadows.

Japanese candlesticks are plotted on the chart one after another, creating different patterns. According to the theory, several patterns can determine, to some extent, the change of the appeared trend, its confirmation or the uncertainty on the market. A number of Japanese candlesticks patterns presuppose that the closing price of a trading period and the opening price of the next period can be different. Such behaviour is true for exchange markets such as futures and stock markets where the trading session duration is defined by the exchange working hours. Forex market is a currency market without evidently curved trading sessions. Here, the closing price of one trading period almost corresponds to the opening price of the next trading period. Thus, many patterns described in the theory of the Japanese candlesticks cannot be applied to currency Forex market completely. However, for the sake of completeness, they will also be discussed in this chapter.

Japanese candlesticks differ in sizes of bodies and shadows. If it has a long body and relatively short shadows, it is classified as a long body. If a candlestick has a short body and short shadows, it is classified as a short body. When it has long shadows, it is called long shadows. Studying Japanese candlesticks patterns, it is necessary to accustom to their strange names, because most of them are borrowed from the Japanese language. Thus, the candlesticks without shadows are called Marubozu. Such candlesticks serve as a good uptrend or downtrend confirmation signal. It should be noted that all of them can be candlesticks of the price increase (fair, green), as well as price decrease candlesticks (dark, red).

The candlesticks, which almost have no bodies (the opening price equals to the closing price), are called Doji. Depending on the position of such invisible body towards the candlestick’s shadow, different subtypes can be distinguished. Thus, the Long-Legged Doji of the upper and the lower shadows have almost the same length. This candlestick shows that the strength of bulls and bears is balanced and soon a new trend can appear. The high price of the candlestick Dragonfly Doji corresponds to the opening and the closing prices. It shows that soon a downfalling trend can emerge. The minimal price of the candlestick Gravestone Doji corresponds to the opening and closing prices. It denotes the possibility of the uptrend. There is another candlestick, which resembles the Long-Legged Doji but has a short body. This type is called the spinning top. It also signifies the uncertainty of the market, and the longer its shadows are, the higher the possibility of a new trend formation is.

The following candlesticks can be called differently, depending on the trend type, in which they appear. They are called Hammer, Hanging Man, Inverted Hammer and Shooting Star.

If a candlestick has a very short upper shadow, a long lower shadow and a mid-sized body, it is called a Hammer or a Hanging Man, depending on the previous trend, in which it occured (the down- or uptrend correspondingly). The type of the candlestick (the dark or the fair) has no significance. These candlesticks denote further trend change to a certain degree. But to make a final decision about the position opening or closing a confirmation of additional technical analysis indicators is needed. If a candlestick has a long upper shadow and a very short lower shadow, it is called an Inverted Hammer or a Shooting Star, also in accordance with the prior trend. The type of the candlestick (fair or dark) is not important either.