Japanese Candlesticks provide an excellent piece of the Technical Analysis puzzle. Each candle gives you the opening price, the low of the period, the high of the period, and the closing price. Because markets are fractal (they display similar properties in all time frames) the "period" of an individual candle may be daily, weekly, monthly, and so on. Or, with real time data feeds you can use one minute, five minute, or 10 minute, or hourly candles, etc. What period you choose depends on the time frame you want to trade.
Anatomy of a Candlestick
Below is a graphic showing a white candle and a dark candle.
The white or hollow candle shows a period that has closed above its opening price. The dark candle shows a period that has closed below its opening price. The fat part of the candle (white or dark respectively) is called the Real Body. The skinny part of the candle is called the shadow or wick (or sometimes the tail). The real body of the dark candle may be filled in with black or red. We like to use red because it's more evocative of danger… also 'cause it's prettier… but in this example we use “dark” to contrast with “white.”
Candlesticks are visually useful and appealing. At a quick glance you can see a lot of information. As you get facile reading candlesticks, the flow of buying and selling pressure becomes more obvious and dynamic on a candlestick chart than on a line or bar chart. (A line chart gives you only the closing price and a bar chart gives you only the intraday range and the close.)
Using candlesticks you can see how intense a reaction was to a particular move. For instance, "The stock opened, dipped a bit, then shot up to the high, and backed off only slightly for the close." Or, "The stock opened three points above yesterday's close, moved up to the top of the wick $0.50 higher and then plummeted six points and closed at its low, which was $2.50 below yesterday's low."
Who Controls the Market?
Candlesticks can give you the answer to this question.
A Marubozu candlestick has no upper shadow or no lower shadow. A white marubozu opens at its low and closes at its high. A dark marubozu opens at its high and closes at its low. Who controls the market in each of these cases?
In the white candle above, the stock opened and moved up strongly (the candle is a long white one), never penetrating below the opening price and closing at the high of the day. And in the dark candle the stock did just the opposite, never penetrating up through the opening price and putting in a long dark candle, finally closing at the low of the day. Clearly the bulls controlled the white marubozu and the bears controlled the dark marubozu.
A candle with no lower shadow is said to have a ‘shaven bottom’ and a candle with no upper shadow is said to have a ‘shaven head’. A marubozu has both. But it’s not always that decisive a win for one side or the other.
Who controlled these sessions? The white spinning top shows a slight advantage to the bulls and the dark spinning top shows a slight advantage to the bears. But what’s probably more important about these sessions is that they showed some back and forth, some churn, and didn’t net much movement one way or the other. Spinning tops are smallish candles and show that there was an argument between bulls and bears, and that they had to close the session without a clear-cut winner. It was something of a stalemate. It nets out to indecision, especially if we see light volume.
How about these sessions?
These Doji Candlesticks show an even more extreme version of what we saw in the spinning tops above. Here we have very long upper and lower shadows and teeny little real bodies, with the close virtually AT the opening price. Whether the close was up (white) or down (dark) isn’t what’s most notable here. What’s important is that there was a battle that extended far above and below the open, with one side gaining some large advantage within the candle, and then giving it up and retreating just as far in the other direction, before fighting back to a standoff.
Doji candlesticks can often portend a trend reversal, especially if put in on heavy volume.
There are a lot of individual candlestick formations. At times, though, an individual candle will make a statement, so to speak, that will have ambiguous or context-dependent implications.
Other Exciting News
The Fed, Friend or Foe?
The Federal Reserve has been in the news more than ever lately, yet the true workings of the Fed remain a mystery to most.
Join Avant-Garde Trading with guest host Rob Roy for his FREE educational webinar covering: The Fed, Friend or Foe?
Tomorrow, you could begin doubling your account every single month starting with one letter.
The letter will come from a 20-year trading professional named Ian Cooper. He says, “In 2017, following my trades you would be doubling even tripling your account some months. Let me show you how.”
He will show you exactly what to do... and he’ll give you the blueprint for just $1.
PLEASE READ: Auto-trading, or any broker or advisor-directed type of trading, is not supported or endorsed by TradeWins. For additional information on auto-trading, you may visit the SEC’s website: All About Auto-Trading, TradeWins does not recommend or refer subscribers to broker-dealers. You should perform your own due diligence with respect to satisfactory broker-dealers and whether to open a brokerage account. You should always consult with your own professional advisers regarding equities and options on equities trading.
1) The information provided by the newsletters, trading, training and educational products related to various markets (collectively referred to as the “Services”) is not customized or personalized to any particular risk profile or tolerance. Nor is the information published by TradeWins Publishing (“TradeWins”) a customized or personalized recommendation to buy, sell, hold, or invest in particular financial products. The Services are intended to supplement your own research and analysis.
2) TradeWins’ Services are not a solicitation or offer to buy or sell any financial products, and the Services are not intended to provide money management advice or services.
3) Past performance is not necessarily indicative of future results. Trading and investing involve substantial risk. Trading on margin carries a high level of risk, and may not be suitable for all investors. Other than the refund policy detailed elsewhere, TradeWins does not make any guarantee or other promise as to any results that may be obtained from using the Services. No person subscribing for the Services (“Subscriber”) should make any investment decision without first consulting his or her own personal financial adviser, broker or consultant. TradeWins disclaims any and all liability in the event anything contained in the Services proves to be inaccurate, incomplete or unreliable, or results in any investment or other loss by a Subscriber.
4) You should trade or invest only “risk capital” – money you can afford to lose. Trading stocks and stock options involves high risk and you can lose the entire principal amount invested or more.
5) All investments carry risk and all trading decisions made by a person remain the responsibility of that person. There is no guarantee that systems, indicators, or trading signals will result in profits or that they will not produce losses. Subscribers should fully understand all risks associated with any kind of trading or investing before engaging in such activities.
6) Some profit examples are based on hypothetical or simulated trading. This means the trades are not actual trades and instead are hypothetical trades based on real market prices at the time the recommendation is disseminated. No actual money is invested, nor are any trades executed. Hypothetical or simulated performance is not necessarily indicative of future results. Hypothetical performance results have many inherent limitations, some of which are described below. Also, the hypothetical results do not include the costs of subscriptions, commissions, or other fees. Because the trades underlying these examples have not actually been executed, the results may understate or overstate the impact of certain market factors, such as lack of liquidity. Simulated trading services in general are also designed with the benefit of hindsight, which may not be relevant to actual trading. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. TradeWins makes no representations or warranties that any account will or is likely to achieve profits similar to those shown.
7) No representation is being made that you will achieve profits or the same results as any person providing testimonial. No representation is being made that any person providing a testimonial is likely to continue to experience profitable trading after the date on which the testimonial was provided, and in fact the person providing the testimonial may have experienced losses.
8) The author experiences are not typical. The author is an experienced investor and your results will vary depending on risk tolerance, amount of risk capital utilized, size of trading position and other factors. Certain Subscribers may modify the author methods, or modify or ignore the rules or risk parameters, and any such actions are taken entirely at the Subscriber’s own election and for the Subscriber’s own risk.