Japanese Candlestick Charting Flashcards
Upper and lower shadow
Upper shadow is the difference between the high and the real body. Lower shadow is the difference between the low and the real body
Takuri
Testing the water- when a lower shadow tests where the critical support level is or the upper shadow tests where the critical resistance is
What is the significance of the length of the shadow
The longer the shadow, the more important the level
Standard line candlestick
Strong real body and small shadows indicates trend continuation
Spinning top candlestick
Small body with long shadows top and bottom. Indicates neutral pattern with no directional conviction
Types of doji
Long legged
Gravestone
Dragonfly
Star
What are doji
Candlesticks that open and close at the same level
Long legged doji
No real body, long upper and lower shadows. Potential turning point, shows indecision
Gravestone doji
No real body, long upper shadow, no lower shadow. Signals the end of a bullish attack. Market rejects the top of the shadow with strong selling pressure
Dragonfly doji
No real body, no upper shadow, long lower shadow. Signals the end of a bearish attack, found at market bottoms. Strong buying at the bottom of the lower shadow
Star doji
No real body, small upper and lower shadows. Strong reversal pattern found at tops and bottoms of markets. A gap between the real body of the previous candlestick and the star increases the significance of it.
Morning star
Bullish reversal
Evening star
Bearish reversal
Types of Umbrellas
Hanging man
Hammer
What does an umbrella look like
Small real body with little or no upper shadow, lower shadow 2-3 times longer than length of real body.
What does the umbrella tell us?
Potential reversal but confirmation is required. Colour of real body not so important. Pay attention to the direction of the closing
Hanging man
Umbrella with prior up-trend. Market shows signs of weakness but closes well above low. Confirmation if there’s a close below support in next 2 periods or a break of a trend line or support level
Hammer
Umbrella with prior downtrend. Strong buying off a low and and close near the high. Long shadow illustrates sentiment shift. Real body colour less important for hanging man
Inverted hammer and shooting star are…
Opposite of umbrellas. They have small real body, small or no lower shadow and a large upper shadow.
Shooting star
Upside down umbrella. Powerful reversal signal in an uptrend but only on a new high.
Inverted hammer
Upside down umbrellas. Indicates potential support in downtrend but needs confirmation.
Marubozu
A candle with no upper or lower shadow. Very strong continuation pattern, most common in short term charts
What does a Bearish engulfing line look like?
Prior upward trend. Next period gaps up but then closes below the real body of the previous candlestick. Shadows aren’t considered.
What does a bearish engulfing line mean for the market.
Strongest reversal pattern, huge sentiment shift.
What does a bullish engulfing line look like?
Prior downward trend. Next period gaps down but closes above the real body of the previous period.
What does Dark cloud cover look like?
Prior upward trend. Next period gaps up but then closes lower than the midpoint of the previous period’s real body. The greater the penetration into the previous period the stronger the signal.
What does dark cloud cover mean for the market?
Quite strong reversal pattern but not as strong as engulfing line
What does bullish engulfing line mean for the market?
Very strong reversal pattern
Trading strategy for bullish engulfing line?
Square trades that are positioned with the prevailing trend and get ready to reverse if second day follows through
Dark cloud cover trading strategy
Close long positions, go short when the trend reversal is confirmed
Piercing patterns
Prior down trend. Price gaps down but then closes above the midpoint of the previous period. The greater the penetration into the previous period’s body the greater the reversal
Trading strategy for piercing patterns
Close short positions, go long when trend is confirmed
How can you add further conviction to candlestick patterns
Use slow stochastics with parameters of 10-6-6 or 10-6-3. Look for reversal candlestick pattern with slow stochastic in an extreme zone. Bullish candle with stochastic <25%. Bearish candle with stochastic >75%
