Chapter 12 Japanese candlesticks

Bars and candlesticks A white (black) body means that the close price was higher (lower) than the open price. (Figures 12.1-2) 台: 紅(黑) 美: Green(Red) Shadows (wicks, hairs) : Small lines above and below the body.

Bar chart vs. candlestick chart

Candlestick: body and shadow

Long days, spinning tops, doji Long (short) days: Days in which the difference between the open and close prices is great (small). (Figures 12.3) Spinning tops (days of indecision) are days in which the candlesticks have small bodies with upper and lower shadows that are of greater length. (Figures 12.4) Doji lines: when the open price and close price are equal. Doji candlesticks can have shadows of varying length. (Figures 12.5) Long-legged doji: indecision Gravestone doji: bearish 墓碑 Dragonfly doji: bullish 竹蜻蜓

Candlestick: long days, short days, and doji

Candle pattern analysis: <Reversal pattern> You must determine the trend before you can utilize Japanese candle patterns effectively. Once the short term (10 periods) trend has been determined, Japanese candle patterns will significantly assist in identifying the reversal of that trend. Reversal: Dark cloud cover (2) Figure 12.6 Piercing line (2) Figure 12.7 Evening star (3) Figure 12.8 Morning star (3) Figure 12.9 A star is a small body day that gaps away from a long body day.

Dark cloud cover (2) / Piercing line (2) Evening star (3) / Morning star (3)

Dark cloud cover (2) The first day is a long white candlestick. The next day opens above the high price of the previous of that trend. However, trading of the rest of the day is lower with a close price at least below the mid-point of the first day’s body. (significant blow)

Piercing line (2) The first day is a long black day. The next day price opens at a new low and then trade higher all day and close at least above the mid-point of the first day’s body.(significant change)

Evening star (3) The first day is a long white candlestick. The second (star) day is a small body day that gaps away from a long body day. The third (last) day opens with a gap below the body of the star and close below the mid-point of the first day.

Candle pattern analysis: <Continuation pattern 16> A candle pattern that helps identify the fact that the current trend is going to continue is more valuable than may first appear. There are 16 continuation patterns. A bullish continuation pattern can only occur in an uptrend and a bearish continuation can only occur in a downtrend.

The rising three pattern The first day is a long white day which fully supports the uptrending market. (Period of Rest) Over the course of the next 3 trading periods, small body days occur which, as a group, trend downward. They all remain within the range of the first day’s long while body, and at least 2 of these 3 small days have black bodies. The fifth day is a long white day which closes at a new high, which finally breaks out the 3 short trading range.

Flexibility of the rising three pattern Within the first day’s 「high-low range」 in stead of the body range The small reaction days 「do not always have to be predominated black」. “Period of rest” could include 「more than 3」 reactions.

*%D filter (in pre-signal area) for candle reversal patterns Greg Morris (1991) proposed candle pattern filtering to improve the overall reliability. ( Figure 12.12) Candle patterns are considered only when %D is in its pre-signal area. Also, only reversal patterns are considered using this concept.