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Nuestra Academia de Negocios y Economía
Japanese Candlestick Patterns: A Beginner's Guide
Candlestick patterns are a type of chart used to represent market psychology and price movements over a specific period of time. Originating in Japan in the 18th century, these patterns have become the cornerstone of technical analysis.
This article explores the main characteristics and types of candlestick patterns, and how traders can use them to make informed decisions.
Japanese Candlestick Patterns: most important features
Before explaining the most important candlestick patterns, it is necessary to know 2 important characteristics:
- Body length: the length of a candlestick body represents the distance between the closing and opening prices during a particular time period. A long candlestick body suggests a strong trend in one direction, while a short body reflects indecision or consolidation in the market.
- Wick length: The length of the wick of a candlestick shows the high and low prices during a particular time period. It is usually analyzed in relation to the position of the body. For example, long upper wicks suggest that investors want to sell and take profits, which can be considered a bearish signal. Conversely, long lower wicks could be a bullish signal, indicating that investors are bidding to buy, which will drive the price higher.
Types of Candlestick Patterns
Candlestick patterns can be classified as single, double and triple, each of which provides different perspectives on the possible direction of the market. There are many options
Simple candlestick patterns
Doji
A Doji is formed when the opening and closing prices are almost identical, resulting in a very small body. It indicates indecision in the market and signals a possible reversal, especially after a strong trend. However, there are different types of doji candlesticks that can provide different alternative stories of price action, depending on the position of the wicks.
Hammer and Inverted Hammer
A Hammer features a small body at the upper end of the trading range with a long lower wick, indicating that sellers pushed the price down, but buyers managed to push it back up; the Inverted Hammer has a small body at the lower end of the trading range with a long upper wick, indicating that buyers tried to push the price up, but were met with resistance. Both patterns signal possible bullish pullbacks.
Hanging Man and Shooting Star
The Hanging Man and Shooting Star have similar patterns and causes to the previous two. However, they signal potential bearish reversals.
Double candlestick patterns
Tweezer Bottom
A Tweezer Bottom forms after a price decline and consists of two candles with bodies at the upper end and long lower wicks of nearly equal lengths. Typically, the first candle is red, indicating a bearish move, followed by a green candle, signaling a bullish response. This pattern suggests that sellers initially pushed prices lower, but were met with strong resistance from buyers. The second attempt by sellers was countered again by buyers, finally pushing prices above the opening price, indicating a possible reversal.
