Also Called Candlestick) Analysis Has Been Used Since the 18Th Century by Japanese Rice Traders to Predict the Rice Price’S Movement
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Chapter Eight Japanese Candle Chart Candle chart (also called candlestick) analysis has been used since the 18th century by Japanese rice traders to predict the rice price’s movement. According to sources, a famous trader named Homma has discovered that studying market emotions could be useful to determine future trends and has developed the candlestick chart. Although candle chart has only been introduced recently to Westerns traders, much thanks to the works of Gregory L. Morris and Steve Nison, the remarkable features of candle chart has gained a swift acceptance since the early 1990’s and the technique has becoming one of the most commonly used chart analysis, especially to predict short-term movement of stock’s prices. Candlestick Basic terms Real body. The Real Body is a bar made by the difference between the open and the close of the stock during the trading day. The body color is white when the stock closes higher and black when it closes lower than its opening. Upper and lower shadows. Shadows of candlestick are the thin lines above and under the real body. The top of the upper shadow is the high of the day session and the bottom of the lower shadow is the low of the day session. Special Candlesticks Long day. A long day is a candlestick that has a large difference between its opening and closing prices, compared to the previous five to ten day sessions. Short day. A short day is opposite of a long day. The difference between opening and closing prices is small, compared to the last five to ten day sessions. Marubozu. A candlestick that has no or little shadow or “wick” at both sides. A white marubozu means that its open is the same as its low and its close is its high of the session. A black marubozu means the opposite, the stock opens at its high and closes at its low of the session. Spinning top. In this case, the body is very small with long upper and lower shadows. Doji. This is an extreme case of spinning stop where the body exists as a line, meaning that the day’s open and close are the same. A long-legged doji has long upper and lower shadows, a gravestone doji has long upper shadow but no lower shadow, a dragonfly doji has a long lower shadow but no upper shadow, and a four price doji has no body, no upper or lower shadows, illustrating the fact that the open, high, low and close are the same. Star. A star has a small body, either black or white with short upper and lower shadows, and gaps above or below a long previous day candlestick. Umbrella and Inverted Umbrella. An umbrella is a dragonfly doji (small body with a long lower shadow and no upper shadow) while an inverted umbrella is similar to a gravestone doji (small body with a long upper shadow and no lower shadow). Appearing after many consecutive up or down sessions, the umbrella and inverted umbrella are strong sign of trend reversal. Some basic patterns Engulfing Bullish A long black day occurs after a downward trend and followed by a long white day that engulfs the previous day. This is a moderate bullish pattern that can be confirmed by a third white day and then becomes the Three Outside pattern, which is a strong bullish indicator. Hammer Bullish The pattern bears the image of a hammer with a small body, either black or white, and a low shadow at least twice the length of the body. The sell off occurs by a downtrend gap but the stock manages to close near its opening, signaling a weakening of the bearish sentiment. A confirmation on the next day is needed for a bullish trend reversal. Piercing Line Bullish The first day is a long black day. The second day is a long white day that opens lower than the previous close but ends up above the midpoint of the previous black body. Following a downtrend, the stock gaps open lower but manages to finish higher than the midpoint of the previous body, suggesting an opportunity for bulls to enter the market and to reverse the trend. Engulfing Bearish The opposite of Engulfing Bullish. The first day is a long white day and the second day is a longer black day that engulfs completely the previous day, suggesting that the bears may have gained strength. A confirmation on the third day is needed for a downtrend reversal. Hanging Man Bearish The pattern bears the image of a “hanging man” with a small body and a long lower shadow at least twice the size of the body. A confirmation on the next day is needed for a bearish sentiment. Shooting Star or Gravestone Bearish This pattern is similar to the Hanging Man but the shadow is an upper instead of a lower one. The shooting star occurs when the day has a body, although very small. When the open and the close are the same, the pattern becomes the Gravestone Bearish. Harami Bearish The first day is a long white day that follows an uptrend. The second day is a small black day that is completely inside the body of the previous white day. By itself, Harami Bearish is a low bearish signal but can be confirmed by the next day and becoming a strong trend reversal pattern such as the Three Inside Bearish. Some bullish candlestick indicators with high reliability Abandoned Baby Bullish The first day is a long black day. The second day is a doji that gaps below the close of the previous day and the third day is a white long day, gapping above the previous close and no overlapping shadows. In a downtrend, the market sells off with a long black day and gaps open on the second day. However, because of lack of sellers, the market closes at or near its open. The third white day with upward gap at the open confirms the trend reversal to bullish. Concealing Baby Swallow Bullish The first two days are Black Marubozu days. The third day is a black day that gaps downward and trades into the body of the previous day. The fourth day is a black marubozu engulfing the third day. The concealing Baby Swallow Bullish indicates that there will be no more sellers and short sellers will start to cover their positions. The market is ripe for a bullish reversal. Kicking Bullish The first day is a Black Marubozu but the second day is a White Marubozu that gaps upward. This indicator is a very strong sign that the market is headed upward, no matter what was the trend before the signal. Kicking bullish appears usually after a very good news occurring after the previous day. Mat Hold Bullish Mat Hold Bullish is a pattern of bullish continuation with high reliability. The first day is a long white day. The second day is a black day that gaps up. The second, third and fourth days have small bodies and follow a downtrend but within the range of the first day. The fifth day is a long white day that closes above the close of the first day. The pattern shows that the bears have failed to reverse the uptrend and the bulls come in stronger to close at new high. The uptrend should continue for a while longer. Morning Star Bullish The first day is a long black day following a downtrend. The second day is a small day that gaps below the close of the previous day. The third day is a long white day. The pattern may be explained as a lack of sellers on the second day that closes at or near its open and shows the potential for a rally. The third white day is a confirmation of the rally. Rising Three Methods Bullish The first day is a long white day, followed by three short days with small bodies either white or black, on a brief downtrend pattern but within the range of the first day. The fifth day is a long white day that closes above the first day’s close. During an uptrend, a long white day occurs and the stock starts to lose steam. The short three-day downtrend is consistent with a take-profit period. The stock resumes its advance on the fifth day by a long white day and the bulls come in strong at a new high. The upward trend is likely to continue. Side-by-Side White Lines Bullish The first day is a long white day, the second day is also a long white day that gaps up, followed by a third long white day about the same size as the previous day. This pattern indicates that the bulls are always in charge and the uptrend momentum is building up strongly. Three Inside Up Bullish The first day is a long black day ending a downtrend. The second day is a short white day within the range of the previous long black day. The two-day event is also called a bullish Harami pattern. The third long white day, closing higher than the second day is a confirmation of the Harami pattern and of the bullish trend reversal. Three Outside Up Bullish The first day is a short black day ending a downtrend. The second day is a long white day engulfing the first day. The two-day pattern is also called a bullish engulfing pattern. The third long white day is a confirmation of the bullish engulfing pattern and of the bullish uptrend reversal.