Recommended for Newbies

Japanese Candlestick Signals: How Do You Trade Them?

I’ll be honest, the history of Japanese Candlesticks and the names of the signals got me into using them as much as their usefulness. The thought of ancient traders using these charts to price rice futures in feudal Japan mixed with the martial arts sounding names brings a thrill of mystique akin to watching a really good samurai or kung-fu movie. Harami, Bearish Attack, Doji, and Three Black Crows all carry a bit of the exotic but the thing is, they also carry a fair bit of weight when it comes to technical analysis and making an argument for a trade. If you are new to the candles this article is a starting point, if you are already using candles this article can help unlock their secrets.



How to Read Japanese CandleSticks?

The thing about the candles, and just about any form of technical analysis, is that the individual candle sticks, the patterns, the signals and their meanings are all relative. They are relative to each individual asset and to market conditions; each market has its own characteristics, average daily range, volatility etc.  A long white candle on one chart may be a spinning top on another, a doji one day may be a sign of balance, on another it may be a sign of indifference. What this means is that first rule to reading the candles is to understand what kind of move is an average move and one without true meaning, and which ones are real signals and you have to do this for each asset you trade.

The strength of the signal is also relative to its position on the chart. A reversal signal that appears in the middle of a range is less likely to bear fruit than one that appears just below resistance. So, questions to answer include what kind of market is it and where is the candles appearing. Is it a bull market, a bear market, a ranging market? Is the signal appearing in the middle of a range, near support or near resistance? If the market is trending, reaches a peak and produces a bearish signal it may mean reversal and it may not, at this point the best thing to do may be to exit current positions or wait for the next bullish entry.



Some Rules To Weed Out Good Candle Signals From Bad Ones

1. The size of the candle relative to recent candles and historic candles. If an asset has a typical range of 0.5% and today’s candle is 1% there is a good chance it is more meaningful than the average. It is possible for two candles to form an engulfing pattern, or a piercing pattern, or for a small doji to look like a shooting start, but if they are only average size or smaller they are more likely the result of random market action. This true for white, black and doji candles.


2. A lot of traders fail to realize the impact of volume and do so at their own peril. The higher the volume of trades behind a move the stronger it is, the weaker the volume the weaker the move is. This is also true of white, black and doji candles. A high volume combined with a large move is the strongest signal while a small volume with a small candle is the weakest signal. Big candles with low volume, or small candles with high volume, are also signals worth taking note of as they can precede reversals and break outs.


3. Trend And Fundamentals. Having a good grasp on trend and fundamentals is important. If you know that fundamentals are positive and the trend is up then you can target only the candle signals that are in agreement with that outlook, ie trend following pullbacks and continuations, and ignore those that don’t.


4. Support And Resistance. Support and resistance are two of the most important things for any trader to be familiar with. These are areas where buyers and sellers can expect to enter the market and thereby keep prices from falling or rising further. Candles signals that appear near these lines are more likely to profit than ones that don’t. In a rising market resistance lines may prevent otherwise good signals from profiting while support lines are great places for entry. The same is true in reverse for bear markets, resistance during upswings are great places for entry. I like to use Fibonacci Retracements to find my support and resistance levels.


If you are new, I also suggest reading these two articles for a deeper understanding of the candles, the signals and how to use them: Japanese Candlesticks, Trading Naked

and Japanese Candles, The Sequel.



Reading On Japanese Candlestick Signals

  1. The Doji Signals
  2. Bullish Reversal Signals
  3. Bullish Continuation Signals
  4. Bearish Continuation Signals
  5. Bearish Candlestick Reversal Signals


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