Japanese candlesticks made easy

Japanese Candlesticks and Candlestick Trading Made Easy need to know is how to recognize the easily-seen signals the Japanese Candlesticks create.
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They indicate a high chance of market prices going in the opposite direction of the shadow. One more thing: the longer the shadow, the more likely prices will move in the opposite direction of the shadow. Pretty simple, huh? But wait!

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Let's talk about multiple shadows next While a single long shadow indicates a likelihood of prices moving in the opposite direction of the shadow, a cluster of multiple shadows indicate that prices are likely to move in the same direction as the shadows. Also note that the closing prices are getting lower and lower.

What this means is that the sellers are aggressively testing the strength of the support level In instances like this, the buyers are looking weak! I would expect the sellers to overpower the buyers soon… 10 Can you understand this concept better now? The important thing here is to understand the reason behind this concept. All right! Allow me to illustrate this with a question: If we look at this single candlestick, we might say that the market is bullish.

However, if we take a step back and look at the candle before it… …then we might come to a completely different conclusion. This is essentially what relative candlestick analysis is about.

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It shows you how current prices are moving in relation to past price movements. The same principle can be applied to relative candle analysis. Prices are still going up, but at a slower pace. Also notice how the bullish candles became shorter. This is an indication of the slowing down of momentum. Now is a good time to consider exiting the trade and taking our profits. Nope, the slowing down of price momentum is not a guarantee that the market is going to reverse. It only indicates a higher chance of prices moving in a different direction.

Sometimes, the prices will reverse; and sometimes the prices will continue to shoot up.

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It depends on your risk appetite and what your technical indicators are telling you. In general, slowing momentum is an indication that the buyers or sellers are losing ground to the sellers or buyers , and a change in price direction may be coming. What does this situation tell you about market prices? Where do you think prices are likely to go? If you did, good job! But although candle 1 shows strong downward momentum, we can see a slowing down of this momentum in candle 2 candle 2 has a smaller real body.

Next, we see candle 3 showing strong upward momentum, as it completely covers the high and low of candle 2.

This is an indication of the weakness of sellers in the market, as the buyers completely overwhelm them. If you notice, the close price of the last bear candle did not go lower than the open price of the first bull candle. A stronger signal for a price reversal would be this: See how the close price for the last bear candle is lower than the open price of the first bull candle? Unfortunately, you can't know for sure. What happened next? The strong downward momentum indicates a good sell signal.

If we had made that Sell trade, we would be in-the-money now!

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But we should be careful because the downward momentum is slowing down… We know that the downward momentum is slowing down because: 1. The bearish candles are getting smaller.

A bullish candle approximately the same size as the previous bearish candle is formed. This indicates a lack of momentum in the market because neither the buyers nor sellers are strong enough to push prices further in their direction. This might be a good time to take our profits in case the buyers start to take over and push prices up. However, if for whatever reason we think that prices might keep falling, we can just place a stop order to secure some of our profits.

Prices might just come down again! Prices are just as likely to go up or down afterwards. And in the last candle, we see two clues indicating the possible start of an uptrend: 1. Prices immediately came down again! Candlestick analysis can be very useful, but sometimes the market price action is simply random.

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At this point, the last two candles indicate to us that the buyers and sellers are fighting with each other. There are two possible Buy trade entries we could have taken along the way: 1. If we had taken either one of the Buy trades, now may be a good time to exit. Are prices are going to go back down?

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However, notice the slowing down of the bearish momentum towards the end. I think you get the idea. As you can see, candlestick analysis is incredibly helpful in predicting short-term future market trends. And the best part is that it can be applied to any trading time frame! No single analysis tool is. Always protect your capital with well placed stop orders, just in case.

In this chart, the yellow circles indicate the times when the sellers tried to push prices further down. However, they were unsuccessful and so we say that the yellow line has become a support level. What about resistance levels? Basically, a resistance level is the opposite of a support level. Simple, eh? For example, when market prices hit the resistance level with a long top shadow, it might be a good idea to consider a Sell trade.

This is because resistance levels and long top shadows both indicate that prices are likely to go down. Both analysis tools are telling you the same thing.

In general, the more analysis tools are in congruence about where prices are headed, the better. It typically forms at market bottoms. Here is what a double bottom looks like: Can you see how prices first hit the support level, went up for a bit, and came back down to re-test the support level again before moving back up? As you can see in the bullish engulfing reversal pattern, the real body of the bull candle completely covers the real body of the bear candle.

Why is this so? Let me give you an example to explain my point: When market prices drop down to an established support level, chances are high that the buyers in the market will come in and attempt to push prices back up again. However, this is not always the case, as prices do break below support levels every now and then.

Sometimes, the buyers are simply too weak to prevent the market price from falling below a support level. On the third try of the support level, we see a bullish engulfing reversal pattern highlighted by the red circle — this means that prices are likely to keep moving up soon… and as you can obviously tell, prices did go up afterwards.