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Japanese Candlestick Patterns – Doji & Spinning Tops

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).

Doji Candles

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.

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!

Posted in Japanese Candlesticks, Technical Analysis

The Anatomy of a Japanese Candlestick

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.

Posted in Japanese Candlesticks, Technical Analysis