If you are not familiar with the three types of Forex charts, you should read about them here before you continue.

Candlestick Charting

Candlestick charting as a tool for technical analysis was invented by the Japanese a very long time ago. They used it for trading rice. Thanks to a man by the name of Steve Nison, it was introduced to the Western world and it has gained popularity ever since.

The anatomy of a candlestick

As you can see in the above example, candlesticks indicate price points for the open, high, low and close.

• If, as seen in the candlestick on the left, the closing price is above the opening price, a hollow (white) “real body” (or just “body”) is automatically drawn by the charting software.
• If, as seen in the candlestick on the right, the closing price is below the opening price, a filled-in (usually black) “body” is automatically drawn by the charting software.
• The vertical lines that extend above and below the body indicate the high/low range, respectively, and are called shadows.
• The very top of the upper shadow indicates the highest price point.
• The very bottom of the lower shadow indicates the lowest price point.

The next lesson is Candlestick Trading.

If you have not read Introduction To Japanese Candlesticks yet, you should do so here before you continue with this lesson.

Candlestick Bodies

• The length of a candlestick body tells us the strength or weakness of the buying or selling pressure of a currency during the time frame represented by the candlestick body.
• Long bodies tell us that there is strong buying or selling happening. The longer the body, the more buying or selling pressure.
• Short bodies tell that there is not much buying or selling activity. The shorter the body, the weaker the buying or selling pressure.

• 1. Remember from Introduction to Japanese Candlesticks that if you see a white body it means the closing price is above the opening price. So if we see a long white body it tells us that there is strong buying pressure. The longer it is; the further is the closing price above the opening price. It also tells us prices have increased significantly from the open to the close and that the buyers were aggressive.
  2. Also remember that if you see a filled-in (usually black) body it means that the closing price is below the opening price. So if we see a long black body it tells us that there is strong selling pressure. The longer it is; the further is the closing price below the opening price. It also tells us prices have decreased significantly from the open to the close and that the sellers were aggressive.

There is more information in the “Shadows”

• Upper shadows indicate the session high.
• Lower shadows indicate the session low.
• Long shadows tell us that the trading activity occurred well past the open and the close.
• Short shadows tell us that most of the trading activity occurred near the open and the close.

• A candlestick with a long upper shadow and a short lower shadow tells us that while buyers bid prices higher, sellers drove prices back down to near the open price.
• Conversely, a candlestick with a long lower shadow and a short upper shadow tells us that while sellers drove the price lower, buyers pushed prices back up to near the open price.

The next lesson is Candlestick Patterns.

Basic Candlestick Patterns

Forex traders can get a lot of information from candlestick patterns. Here are the basic patterns and what they mean.

Spinning Tops

A “spinning top” has a long upper shadow, a long lower shadow, and a small real body (or just “body”). The color of the body can be disregarded.

This pattern tells us that the activity between buyers and sellers is indecisive.

• The small body indicates that there is little movement between open and close
• The shadows tell us that there was activity by both buyers and sellers but neither of them overpowered the other.
• While prices had significant up and down movements, there was little change between the open and close of the session. Buying and selling activity, essentially, cancelled each other out.

Spinning tops during uptrends

• This usually means buyers are scarce.
• There is a chance that a reversal in direction could occur.

Spinning tops during downtrends

• This usually means sellers are scarce.
• There is a chance that a reversal in direction could occur.

Marubozu

Even though this name may seem rather exotic to English-speaking people, its candlestick pattern explanation is straightforward.

• A Marubozu pattern has no shadows coming from the bodies.
• It’s high and low are the same as it’s open or close. Notice that I said “… open or close.” Whether the high and low are the same as the open or the close depends on whether the candlestick’s body is filled or hollow. Further explanation follows.

There are two types of Marubozu

1. White Marubozu

   • It has a long white body and no shadows.
   • The open price equals the low price.
   • The close price equals the high price.
   • It is a bullish candle and it tells us that the buyers were in control during the entire session.
   • It is often an indicator that a bullish continuation or a bullish reversal pattern has begun.

2. Black Marubozu

   • It has a long black body and no shadows.
   • The open price equals the high price.
   • The close price equals the low price.
   • It is a bearish candle and it tells us that the sellers were in control during the entire session.
   • It is often an indicator that a bearish continuation or a bearish reversal pattern has begun.

Doji

• A Doji candlestick can be identified by its very small body, which shows as a thin line.
• A Doji has the same open and close price or very close to the same price as indicated by its extremely short body.
• A Doji also tells us that there is indecision about session positioning between buyers and sellers.
• Once again, even though prices move above and below the session opening price, the close ends up at or near the open price and the fight between buyers and sellers is, basically, a draw.

If you see a Doji form after there has been a series of candlesticks with long hollow (white) bodies – such as white Marubozus – the Doji is telling us that the buyers are getting very tired and their activity is weakening. At this point, more buyers are needed to keep the price moving up. The problem is; there are no more buyers. So sellers smell an opportunity to get in and drive the price back down. (See below.)

This does not meant that you should automatically sell (go short). You should look for confirmation. Wait to see if a bearish candlestick closes below the long white candlestick’s open.

If you see a Doji form after there has been a series of candlesticks with long filled (black) bodies – such as black Marubozus – the Doji is telling us that the sellers are getting very tired and their activity is weakening. At this point, more sellers are needed if the price is to continue to fall. But the sellers appear to be pretty much done. So this time, the buyers smell an opportunity to get in cheap. (See below.)

In the above instance where the decline is weakening due to the lack of new sellers, new buyers are needed to confirm a reversal. For that, look for a white candlestick that closes above a long black candlestick’s open.

The next lesson is Candlestick Reversal Patterns

Reversal patterns are just what they sound like. When a currency price is trending upward and then a downward trend develops, there has been a reversal. This reversal, once established, is called a reversal pattern.

1. First, we must identify a prior trend in order to have a trend to reverse. We identify a trend with trend lines, moving averages, and other technical-analysis tools. You can learn more about these things later.
2. After we have identified a trend, we need to identify and establish the fact that a reversal is about to or has occurred.

Here’s where our very useful Japanese candlesticks come in.

Hammer and Hanging Man

Even though they look alike, depending on prior price action, they have completely different meanings. As you will see, they both have small bodies (hollow or filled) with long lower shadows and short (or absent) upper shadows.

So what do they tell us?

The Hammer

• The hammer signifies that a bullish reversal pattern is forming during a downtrend. It is called a “hammer” to express the idea that the market is hammering out a bottom.
• When we watch a downtrend and see a hammer it tells us that the downtrend is approaching its bottom and that the price will reverse and begin an uptrend.
• The long lower shadow tells us that sellers were able to drive prices lower, however, the buyers managed to outdo the sellers and the price closed near its open.

Again, here’s what to look for to identify a hammer:

• The long lower shadow is about two or three times the length of the real body.
• There is little to no upper shadow.
• The real body is located at the upper end of the trading range.
• The real body can be any color – empty or filled.

The Hanging Man

• While the hammer is a bullish reversal pattern, the hanging man is a bearish reversal pattern. The difference is because of the prior trend, which in this case is upward instead of downward for a hammer reversal pattern.
• It can signify a top or a strong resistance level.
• It tells us that when the price is trending upward (as opposed to downward for a hammer reversal pattern) and a hanging man appears, the sellers are beginning to outdo the buyers.
• As with the hammer, the long lower shadow tells us that the sellers have driven prices lower during the session and that the buyers managed to drive the price back up to near the open price.
• This is very important information because it indicates that the buyers have disappeared and there is no one left to maintain the uptrend.

Again, here’s what to look for to identify a hanging man:

• The long lower shadow is about two or three times the length of the real body.
• There is little to no upper shadow.
• The real body is located at the upper end of the trading range.
• The real body can be any color – empty or filled. However, a black body is more bearish than a white body.

The Inverted Hammer and Shooting Star

• They look the same.
• Again, the information they give us is different only because of the prior trend – whether it is an uptrend or a downtrend.

The Inverted Hammer

• If an inverted hammer appears while prices are falling, it can suggest that a reversal is possible.
• The long upper shadow tells us that buyers have attempted to bid the price up. But it also tells us that the sellers caught on to what the buyers were doing and tried to drive the price back down.
• However, the buyers won out and were able to overcome the sellers to close the session near the open.
• This tells us that since the price was not driven lower, most, if not all, of the sellers must have dropped out and that the only traders left are buyers.

The Shooting Star

• It looks the same as the inverted hammer but it appears when prices are rising (as opposed to the inverted hammer that appears when prices are falling).
• It is a bearish reversal pattern.
• By its shape, we can see that the price opened at its low, then rallied and finally went back to the bottom.
• In this case, it tells us that the buyers tried to drive the price up but were outdone by the sellers.
• So, since there are few or no buyers left, it is a bearish indicator.

The next lesson is Review of Japanese Candlesticks

Candlesticks were invented a long time ago by the Japanese to improve the business of rice trading.

Forex software creates candlesticks using the session open, high, low, and close prices.

• A hollow (usually white) candlestick is formed if the close is above the open.
• A filled (usually, but not always, black) candlestick is formed if the close is below the open.
• The hollow or filled part of a candlestick is called the real body or just body.
• The thin vertical lines above and below the body are called shadows and they indicate the high/low range of a trading session.
• Upper shadows are about the session high.
• Lower shadows are about the session low.
• The topmost point of the upper shadow indicates the highest price of a session.
• The lowermost point of the lower shadow indicates the lowest price of a session.

The length of a candlestick body tells us how strong or weak a trading session is. The longer the body the more active (stronger) is the buying or selling.

• Long bodies imply strong buying or selling.
• Short bodies imply weak buying or selling.

Spinning Tops

• They have a long upper shadow, a long lower shadow, and small bodies.
• They tells us that the activity between buyers and sellers is indecisive.

Marubozu

• They have no shadows.
• Whether the candlestick’s body is hollow or filled, determines if the session high and low are the same as it’s open or close.

Doji

• They either have the same open and close price or their bodies are very short.

The Hammer

• It is a bullish reversal pattern, which is formed during a downtrend.
• It gets its name because it “hammers out a bottom.”

The Hanging Man

• It is a bearish reversal pattern.
• It can identify a top or strong resistance level.

The Inverted Hammer

• It appears in a downward price trend.
• It can indicate the possibility of a reversal.

The Shooting Star

• It is a bearish reversal pattern.
• It looks just like an inverted hammer but it appears in an upward price trend.