Much study has been devoted to Japanese candlestick charting techniques. Steve Nison originally made detailed analysis of these trading signals and traders ever since have benefited from some form of his work.
In trading software, a chart moves or updates according to the chosen time period and as the candle pattern reflects the ups and downs of the market, in time a trader can learn how to read candlestick charts.
The market is driven by many things, most notably national and international news and economic forecasts. Traders react in certain ways and the chart patterns show up in the candle chart. As candles appear in relation to one another, they form patterns that show trends and thus help traders make decisions of when to enter and when to exit a trade.
In this way, traders get a feel for the market and can make educated determinations as to when to buy or sell. Buying and selling stocks, futures and the Forex market is a difficult business but experienced traders have managed to reduce a certain amount of the risk by using the Japanese candlestick charting techniquesdevised by Homma and brought to the West by Steve Nison.
Here are a few examples of well-known candlestick patterns:
A Hammer candlestick may appear as the market is moving down, indicating a change trend and a possible bottom being put in place. It has a short body with a long wick below the real body indicating a possible rejection of the prices below it. If there are other indications confirming the candlestick pattern, a trader may then decide to enter a long position in the Forex market or buy stock, futures or options.
On the other hand, the Hanging Man (which is the same single candlestick pattern, but occurs while a market is moving up) indicates the opposite – that the trend may change and start going down or bearish.
A Doji is a candle that has no body – the open and close were the same. One may still consider it bullish or bearish depending on the length of the wick (or “shadow”) and whether there is a longer wick above or below the real body, as well as where it occurs in the overall chart pattern.
Another popular candle pattern is the Spinning Top. Here the candle body is small and the wicks on both ends are longer than the body. This pattern indicates uncertainty in the market so the trader will likely wait.
These are only a few of multitudes of candlestick types which play a part in how traders use Japanese candlestick charting patterns to help them make their trading decisions.
Candlestick techniques are just one aspect of technical analysis and so should not be used exclusively to make trading decisions. One must also consider support and resistance, the larger trend, cycles, momentum and other time frames.
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