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Japanese Candles – The Sequel

Binary Options Technical Analsys Trading Tool  – Japanese Candlesticks

Ok, guys, this is where it gets a bit more complicated because we are going to talk about  formations composed of two candles. In the first article, we covered the basics, explaining how a candle is formed and presenting you three of the most important types of candles, the Pin, Doji and Marubozu. When analyzing two candle formations, more attention must be paid to both candles. Let’s get down to business and start talking about the first formation.

 

Engulfing pattern

The name gives us a hint about the formation, but I want to make sure everything is crystal clear. In a valid engulfing formation, the second candle totally engulfs the body of the first one. The bullish engulfing is formed of a bearish candle followed by a larger bullish candle and the bearish engulfing is formed of a bullish candle followed by a larger bearish candle. In the picture below we have the bullish engulfing to the left and the bearish engulfing pattern to the right.

 

A bullish engulfing pattern can appear after a down move or a period of consolidation and it shows us that the bulls, after a good rest and an energy drink are strong enough to start taking control of the market. Their strength appears in the form of a big, engulfing candle. Sometimes the second candle can engulf more than one previous candle, just like in my picture above. Pay attention when that happens, because it’s an even stronger signal. The same principles apply to the bearish engulfing pattern. Often we can see the retracement ending with an engulfing formation and that’s a good time for us to join the resuming trend.

 

Tweezers

This type of pattern can usually be spotted after an extended move in either direction.

 

Tweezer tops appear after an uptrend or an extended move up. The first candle must match the main trend or the latest move (so it will be a bull candle) and the second will be a counter trend candle (so it will be a bear candle), but both must test the same highs. Check out the picture below:

Notice the first candle is bullish and it’s followed by a bearish candle and they both test the same high point. After the candle formation is complete, price reverses and a down move starts.

 

Tweezer bottoms appear after a downtrend or an extended down move. The first candle must match the main trend or the latest move (so it will be a bear candle) and the second will be counter trend (bull candle), but they will both test the same low. Here is the picture to go with the explanation:

 

Again, notice the valid sequence: first candle is the same as the recent move (down), the second is counter trend (up) and both must test the same low point.

Tweezer bottoms and tops suggest strong support or resistance at that level and give us a hint that the level will hold and price will reverse. They can mark the end of a trend, the beginning of a reversal or retracement or even the end of the retracement as they are reversal patterns. One more important point is that Tweezer bottoms or tops can look different than the ones I show on my pictures, but the sequence must be the same: trend candle – counter trend candle – testing the same high/low.

 

Inside bar

The last dual candlestick formation that we are going to talk about today is the Inside Bar. This is formed when the second candle has the Open and Close inside the range of the first. You could almost say that it is the opposite of the Engulfing pattern. Check out the picture:

 

On the picture I have circled four inside bars and each one marks a reversal. Notice that the second candle (inside bar) in the formation has the Open and Close inside the range of the first candle, named Mother Bar. Inside bars can appear either in an uptrend or a downtrend and there are no special requirements like in the case of the Tweezers. Sometimes the Mother bar is followed by more than one Inside bar; this gives more strength to the signal, although it’s not a common situation.

 

Why do double Japanese candlesticks suck?

Well, you thought one candle shape and name is hard to memorize? Now you have two – double trouble. The patterns presented here are some of the most easy to understand and remember but even these can give a newbie a bad headache. Just like almost any tool, Japanese candlestick formations must be used alongside other indications of price direction and with a strong fundamental awareness.

 

Why double Japanese candlesticks don’t suck?

Once you train your eyes to identify them on the charts, the double formations can be even more accurate than the single ones and used in conjunction with the main trend, they can bring a lot of profit and a better market understanding. We know trends are comprised of retracements and then higher highs (uptrend) or lower lows (downtrend). Our best entry is the end of the retracement and Japanese candlestick formations can identify that point with a high degree of probability. Remember them and keep an eye out for them on the charts; it can’t hurt. Sayonara!

 

 

Learn more about the Japanese Candles on our Trading Forum Here

 

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