3.3 SR Chart Patterns – Japanese Candles

Additional reading about japanese candles

Japanese Candlestick Chart Patterns

In order to create a candlestick pattern, a trader must have data that contains open, high, low and close values for each time period he wants to display.

Compared to traditional bar charts, many traders consider candlestick chart patterns more visually appealing and easier to interpret. Each candlestick pattern provides an easy-to-decipher picture of price action. A trader can immediately compare the relationship between the open and close as well as the high and low. The relationship between the open and close is considered vital information and forms the essence of candlesticks patterns. Hollow candlesticks, where the close is greater than the open, indicate buying pressure. Filled candlesticks, where the close is less than the open, indicate selling pressure. Long white candlesticks show strong buying pressure. Long black candlesticks show strong selling pressure.

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 long shadows show that prices extended well past the open and close.

Japanese candles - text version

Candlestick chart patterns

Back in our introduction to Japanese candles, we saw how differently shaped candles reflected market sentiment for the duration of the candles. For example:

A candle like this one, with a long body and little or no wick means that there was no indecision about price. During the period this candle covers, traders were selling and price was heading lower from the start.

Conversely, a candle like this one indicated that traders couldn’t make up their minds. Price gyrated around its opening level and after lots of movement wound up virtually unchanged.

Similarly, whole sequences of candles can form shapes or patterns that suggest both what markets are feeling about a given currency pair (or other asset) and where price is likely to go in the future.

We can see one type of candlestick chart pattern in figure 3.5, shown below.

A candle like this one, with a long body and little or no wick means that there was no indecision about price. During the period this candle covers, traders were selling and price was heading lower from the start.

Conversely, a candle like this one indicated that traders couldn’t make up their minds. Price gyrated around its opening level and after lots of movement wound up virtually unchanged.

Similarly, whole sequences of candles can form shapes or patterns that suggest both what markets are feeling about a given currency pair (or other asset) and where price is likely to go in the future.

We can see one type of candlestick chart pattern in figure 3.5, shown below.

In a previous lesson, we mentioned how some of the different candlestick  shapes and combination shapes hinted at what traders were thinking and thus how price might move in the near future.

When using chart patterns, it is easy to forecast how price would move at some future date. If it moves lower, we can offer a few reasons why this move could have been predicted based on the information we had up to that point.

In fact, often the shape of the candle pattern can suggest a coming move downwards. They would form a “bearish head and shoulders pattern,” which is similar to a “W” with a higher center peak that is reminiscent of a head flanked by two shoulders.

When this pattern appears during an uptrend, it often signals that this uptrend is about to reverse.

A full treatment of the different candlestick chart patterns could cover several lessons. We’ll cover these in greater depth later. For now, just know that these patterns exist and are another tool for identifying support / resistance levels and where price is likely to pause or reverse its direction.

Instructor's notes

This lesson’s video aims to explain:

• Candles that close very near their highs tend to indicate bullishness, especially if they follow another similar candle
• Candles that close very near their lows tend to indicate bearishness, especially if they follow another similar candle
• The Head & Shoulders chart pattern: it is recommended not to put too much weight on this exact pattern as a predictor of price movement. However, in an uptrend, a failure to make a higher high followed by a lower low is indicative of a trend change, and vice versa in a downtrend