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Once you understand the anatomy of a Japanese candlestick, it’s time to start learning some candle signals. Certain candlesticks have names. By learning certain types of candlesticks, you can start to see patterns when the candlesticks appear in formations. By getting good at spotting these patterns, you’ll become a much more powerful trader!
A candlestick, when viewed alone, will tell you whether the bulls or the bears won that trading period. Each candlestick measures price fluctuations within a certain time frame.
Viewed together, candlesticks can alert you to potential trend reversals. There are two candlestick formations in particular that can be very useful tools for spotting coming reversals: the morning star (evening star) and the tweezer top (tweezer bottom).
The Doji - Japanese Candlestick Signal
While the morning star (evening star) and tweezer top (tweezer bottom) formations indicate a trend reversal, individual candlesticks can also reveal important information about traders’ sentiment.
For example, a doji candle is a candle that has a very small body (or no body at all). This candle reveals that prices during the trading session vacillated between distinct highs and lows but closed at or very near the opening price.
The fact that the session closed at or near the opening price makes the doji candle’s body either extremely thin or nonexistent (in the case that the doji’s body is nonexistent you will see a horizontal line, reflecting the fact that the session opened and closed at the same price).
It makes sense that this candle reveals indecision on the part of traders: the bulls brought prices up during the session, and the bears brought them down, but neither team could really decide what it wanted to do, so in the end, prices closed near the open.
The Spinning Top - Japanese Candlestick Signal
Spinning Top Candles
A candle known as a spinning top also reveals indecision. A spinning top is very similar to a doji except that the spinning top candle’s body is somewhat larger than that of a doji (where there is perhaps no body at all).
Still, a spinning top’s body is small compared to its wicks (the length of the wicks make up 60% or more of the total candle’s length). The candle’s name is appropriate: with a small body and long upper and lower wicks, it looks like the spinning toys children play with.
A spinning top represents a near tie in the session’s tug-of-war between the bears and the bulls: each team managed to drag the market to high and low prices, but neither team could keep the market at the high or the low until close.
There are other patterns of Japanese candlesticks in forex price charts that you also need to be aware of. I’ll be discussing the most important ones in the next few blog posts!
It’s now 12:30 pm in Hawaii and a Tsunami is expected to hit any any moment.The tsunami heading for Hawaii is the result of a massive 8.8 earthquake in Chile earlier this morning. This story has received nationwide news coverage, and you can learn more about the details of the chile earthquake hawaii tsunami at cnn.com.
Fortunately, I live in the mountains with a nice safe view of the impending tsunami. As the tsunami heads for me in Hawaii, it causes me to think about the implications of the forex market.
Currently the forex market is closed since it’s saturday. The forex is so huge that the tsunami will likely not directly affect the exchange rate of the USD (us dollar). If the tsunami does massive damage (in the Billions) then there could be an impact when the foreign exchange market opens tomorrow.
Riding The Wild Wave
Just like the ocean, price movement in the forex market moves in waves. The market moves in normal waves. Occasionally there is a major event (a forex equivalent of an earthquake) that causes a MASSIVE change in the forex market. After the impact of this MAJOR event happens, the prices will settle down and stabilize.
In the FOREX, any MAJOR news can cause a forex tsunami. Of course this news isn’t always predictable, but when it happens you need to be able to go with it (or else it’ll wipe you out).
Surfers attempting to surf the hawaii tsunami wave
As the tsunami approaches towards Honolulu, Hawaii you can see several surfers out in the water trying to “catch the big wave.” While it is a safe bet in the forex market to avoid the tsunami, it can be a great thrill to try and ride the wave. Capturing an insane forex price movement would be just as exciting as riding that big tsunami wave heading towards me now…
Fortunately for us forex traders, we can anticipate forex tsunami’s on a regular basis. While we can’t predict MAJOR news events like earthquakes or political chaos, we can follow fundamental announcements that are known to repeatedly cause major forex price movements.
When the US non-farm payroll payroll information is released (usually the first friday of each month), the EUR/USD will often react wildly and unpredictably. There are other economic events that cause major forex price actions to occur (you can look at the major ones at this forex economic calendar.
I’ll be sharing more about the Hawaii tsunami and fundamental forex announcements on this blog. If you register for the free 20 part eCourse at the upper right of this website, you’ll learn more about how to trade forex economic announcements.
In this blog post, I’ll continue to explain how Japanese candlesticks work. As a forex trader, it’s essential that you understand how this works. Soon I’ll show you how you can trade the forex market by using the wealth of information available in each candle at a mere glance.
At first glance, candles tell you which team won the period’s tug-of-war. That is, a candle will tell you whether the bulls succeeded in getting the market to close at a higher price than it opened, or the bears succeeded in getting the market to close at a lower price than it opened.
You can identify the game’s winner by its candle – specifically, whether its body is filled in or not.
Looking more closely, the candle offers additional information. Not only will it reveal whether prices closed lower or high than they opened, but it will also give you an idea of the period’s high and low prices.
The high and the low prices are revealed in the candles upper and lower wicks. If the candle has a very long upper wick, for example, then prices went very high during that period’s trading but returned back to a much lower close. If the candle has a very long lower wick, then the opposite is true.
Take a look at Figures 1 and 2, which reiterate the anatomy of a bullish candle and a bearish candle:
A candle, then, can tell you a lot about the trading activity that occurred in a given period (again, candles can represent periods of one minute, five minutes, fifteen minutes, one hour, one day, one week, etc.).
The benefit of candles over bars or lines is precisely that – that each candle reveals so much information about a period’s trading in a very clear, succinct way.
For example, imagine that you are looking at a chart displaying one minute candles. Looking at the chart, you can easily identify minutes where the bulls won (unfilled, outlined in blue) and where the bears won (filled and outlined in red).
You can see from the length of the upper and lower wicks how high and low prices went during the session, and you can see the distance between the session’s opening and closing prices. All this information is summarizing what is actually going on within that one minute period. Within that period prices are going up and down, higher and lower, moving in a bunch of vertical lines.
If you were looking simply at those lines (as you would be if you were looking at a line chart) it would be very hard to break apart the one minute sessions and determine whether the bulls or the bears won, how high and low prices went, and at what price the market closed an opened during that one minute. Instead, this nice little candle figures all of that out for you and presents it to you in a very readable, friendly way.
What About Bar Charts?
Bar charts have benefits similar to candles, in that they represent the trading activity during a given period in a very succinct, readable way. A bar represents price movement with a vertical line (compared to the candle, which represents price movement with the candle body and wick).
The top of the bar’s vertical line indicates the high price during that trading period (just as the top of the candle’s upper wick indicates a high). The bottom of the bar’s vertical line indicates the low price during that trading period (just as the bottom of the candle’s lower wick represents a low).
On a bar chart, the period’s opening and closing prices are displayed by horizontal ticks jutting out from the bar’s vertical line. The ticks jutting out to the left represent the opening price, while the ticks jutting out to the right represent the closing price.
The downside to bar charts is that you have to look much closer to determine whether the market closed higher than it opened (bulls won) or closed lower than it opened (bears won); because, on a bar chart the open and close are marked by lines jutting out from the bar’s body to the right or the left. The fact that a candle is filled or unfilled depending on which team won the session makes it much easier to read and understand at a glance.