Japanese Candlestick Patterns trace their origins back sometime in 18th, or 19th century Japan. It is believed that the candlestick charts were developed by Japanese rice traders. Most notable among them is Munehisa Homma 1724 – 1803, often regarded as the father of the candlestick chart.
The Candlestick Patterns were introduced to the Western world by Steve Nison in the early 1990s. Prior to their introduction, the standard chart used by traders in the Western world was the Bar chart. By the early 2000s however, traders quickly realized the supremacy of the Candlestick chart over the Bar chart and as a result, Candlesticks have now completely overtaken Bar charts as the most widely used type of chart by traders.
Basics of Candlestick charts
A candlestick chart gives all relevant information about a given trading session, just like a bar chart does.
A candlestick chart shows the open, close, high and low for a given trading session. A true advantage of the candlestick chart, however, is the visual representation of the psychology behind a market move.
Each candle bar is constructed of an upper shadow, a lower shadow, and a real body. The real body reflects the opening and closing prices for a particular market session. The visual value from the candles comes from the color of the actual body, which is represented in two different colors depending on whether the market moved higher or lower during the session.
For example, in the classic black scheme bullish candle (goes up) has a black body, bearish candle (goes down) has a white body.
On most trading platforms traders will have the option to choose custom colors for their candlestick charts. The most commonly used sets of colors for candlestick charts are: green and red, white and black and to a lesser extent blue and red. Green, white, and blue are used for bullish candles, while red and black are used for bearish candles.
Essentially, the color of a candle bar is determined by the opening and closing price for that session. For example, if the close is higher than the open then the real body of the candle will be depicted in some of the bullish colors like green or white. If however, the close is lower than the open then the color of the real body will be bearish for example red or black.
Basic candlestick patterns
Traders use the different appearances of the candles to analyze and trade the market. These various appearances are called candlestick patterns. Each candlestick pattern can be a reversal or a continuation pattern. Furthermore, there are multiple types of candlestick patterns based on the number of bars needed to complete the pattern, from single line patterns to complex multiline patterns.
Maine types of Single candle patterns
Single lines candlestick patterns are formed with only one candle bar.
Tall real body with no or small shadows
A candle bar with a tall body and no shadows is called a Marubozu, and it indicates a strong momentum in the direction of that candle. There can be either a bearish or a bullish Marubozu.
Therefore, if a candle with a tall real body appears inside of a trend indicates continuation in the direction of the trend, even if that candle has small shadows.
Spinning top – Small real body
A spinning top is just a candle with a small read body and small shadows on both sides. It carries no particular implications for the trend when it appears by itself.
High wave candle – Small real body with long shadows
The high wave candle is the same as a spinning top, only with significantly bigger shadows than the body. This type of candle indicates strong indecision in the market and high volatility for that particular session. Traders are confused.
Doji – No real body
The Doji is formed when the opening and closing prices for the session are the same. Therefore there is no real body of the candle.
The Doji indicates equilibrium in the market, but depending on where it appears on the chart, it can be a reversal pattern of just a pause to the trend. If the Doji has long upper and lower shadows, then it will indicate high uncertainty in the market.