The Anatomy of a Candlestick Pattern
About a hundred years after Leonardo de Vinci had developed his myriad mechanical devices and painted the world renowned “Mona Lisa”, a young Japanese Rice Trader realised the sophisticated connections between the Open, High, Low, and Close market prices for the day and depicted them graphically using symbols. These symbols are known today as Candlesticks.
Anatomy of a Candlestick
Consider the above diagram and you will observe that a close that is lower than the open produces a black candle (a bearish candle) and a close higher than the open creates a white candle (a bullish candle). The combination of these black and white candles combined with their size and position are what form the basis of Candlestick Analysis. The longer the body of the candle in either direction, the stronger it’s bearish or bullish attributes are.
Once believed to be overly intricate for the average western mind, Candlestick Analysis is now enjoying a tremendous following, thanks in no small measure to the endeavours of two very high profile Candlestick Analysts; Stephen W. Bigalow and Steve Nisson, who between them have whittled the thousands of Japanese Candlestick patterns down to a few Major Signals that can be used by any trader who takes the time to learn them.
The Japanese Rice Trader mentioned previously, utilised and developed them to generate a rather impressive fortune by employing them in his daily trading on the Rice Exchanges. His family rapidly became the forerunners of today’s billionaire elite and the stuff of legends. A point to consider here is that computers did not exist in those times and therefore all charts and calculations were produced by hand; a quite formidable job for the majority of us nowadays!
By studying the interaction of these candlestick symbols and by using selected western indicators to the charts; a smart and disciplined analyst can foresee, with incredible precision, the movements of any chosen market.
What I am aiming to do in the following paragraphs is to present you with an example of how a signal can pre-empt a reversal of a trend. If you are able to foresee such events then you’re in a really strong position to complete regularly profitable trades. The candlesticks together with selected western indicators will make sure your accuracy exceeds 75% to 85%. That’s one heck of a hit rate.
An illustration of a Candlestick Signal.
To provide an illustration of the way a Candlestick Pattern can trigger a signal to trade; consider the chart below:
A Morning Star
Look at the three candles which are arrowed. This pattern forms what is known as a “morning star” pattern. So named because it’s formed at the bottom of a trough. It’s sister pattern, is referred to as an “evening star” and is formed at a peak.
The initial candle needs to be the colour of the present trend which for the morning star is a bearish trend. Meaning that the candle will be black (or in this case brown). The second candle will be a Doji or Spinning Top, the colour of the body doesn’t matter. In the case of a Doji, the open and close are identical very nearly and the spinning top has a very small body. Both of these candles show indecision, or a battle for control between the bears and the bulls. The 3rd candle will be a white candle (bullish candle) and should really close at least halfway up the body of the first candle.
I can hear you saying “But it doesn’t!!”. True, in this instance it does’nt. Even so, the overall trend of this market was bullish and by understanding the concepts of reading charts you would have noticed that this pattern was signalling an end to the retracement and a continuation of the original trend.
I would stress that this is in no way meant to be an exhaustive review of Candlestick Analysis. I am basically seeking to supply you with a preliminary understanding of how the signal patterns can help you when making a trading decision. They work for me, and that’s why they make up the major part of the trading strategy I teach and use in my personal trading.
