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Japanese Candlestick Trading Signals

An excellent technical analysis tool for trading stocks, options, futures, or Forex is the collection of Japanese Candlestick trading signals. Since the days of the Samurai, these signals have guided traders to reliable profits. Candlesticks are not only a reliable trading signal but also easy to read and use. There are a dozen major signals and many secondary signals that rice traders in Japan used centuries ago and these patterns work just as well today in the fast-moving stock market.

The Secret Code of Japanese Candlesticks

The fact is that Japanese Candlesticks are a mystery only to those who have not bothered to learn them. The way the system works is like this. A “candlestick” is a rectangle with lines extending from the top and/or from the bottom. These symbols represent the range of trading of a stock or other equity over a defined period such an hour, a day, a week, or a month. The candlestick is superimposed on a price chart to help interpretation of evolving price patterns. The candle represents the opening and closing prices for the equity. So, when these were close together, the candle is very short and when they were far apart, the candle is very long. The lines (like wicks of a candle and called shadows) represent the total range of trading. When the equity closes higher than its opening the candle is white and when it closes lower the candle is black.

japanese candlestick trading signals
Japanese Candlestick Trading Signals

How to Read Japanese Candlestick Charts

Once you know how to read a single candlestick, the next step to understanding Japanese Candlestick signals is to understand the implications of a single size and color of candlestick and what it means when two, three, or more are found in sequence.  Experts at trading with candlesticks rely of clear signals and never “reach” to try to make a signal meet their expectations or wishes. When you trade this way, you will only make trades that have a high likelihood of success. A basic and extremely important signal is the Doji candlestick.

Doji Candlestick

When markets are undecided as to whether a trend is about to end and reverse, the opening and closing prices for a day will be very close together. This gives you a candlestick that looks like a burned out candle with very little height or even just a line. This may be accompanied by very long upper or lower shadows which indicates that the market tried to move up or down but came back to its beginning level at the end of the trading period. This signal, by itself, does not tell you where the market is going next. But it does tell you to expect a jump either up or down when the market makes up its mind.

Japanese Candlestick Reversal Patterns

What many traders find profitable are Japanese Candlestick reversal patterns. A good example is the bullish engulfing pattern which commonly occurs at the bottom of downward market trend. It signals that the bad news has been all squeezed out of the tube of toothpaste and the market is likely to start an upward rally. The signal includes three downward days, a day when an upward rally started and then fizzed out, and then a day that starts by gapping lower and then rallying to “engulf” the previous downward day.

One of the best Japanese Candlestick Trading Signals is the bullish engulfing pattern
Bullish Engulfing Pattern

Japanese Rice Traders Candlesticks

These signals worked for trading in the Japanese rice markets centuries ago and still work today. However, they are applicable to virtually any traded market. These are purely technical trading tools and do not rely on any fundamental analysis input to interpret them. However, most traders use candlesticks as part of their trading arsenal along with tools like the important moving averages. Even folks who are experts at candlestick trading will typically wait for a confirming day or two before jumping in completely on what may be an impressive bull market rally.

Trading Applications of Japanese Candlestick Charting

Candlesticks are technical analysis tools. They have been around for centuries and provide an accurate indication of market direction when there are clear signals. However, the majority of traders who use candlesticks do so because the signals are easy to read. They are used in conjunction with things like moving averages and a basic understanding of intrinsic stock value. Many times value investors will have their eye on a stock that has excellent long term potential but which has been somewhat unfairly driven down by a negative market. The use of Japanese Candlesticks is meant to signal when to pull the trigger at the most profitable time to start buying that equity.

History of Japanese Candlesticks

Back in the Samurai era in Japan there was a legendary rice trader, Munehisa Homma. He realized that emotions of other traders had a big effect on prices, often as much as the forces of supply and demand. He simply kept track of how certain price patterns were followed by predictable market movement. And, he used a simple design, which is the same rectangle and line configuration used today. His system came into general use and, when the Japanese stock market opened in the mid-1800s, it came into use there as well. It took more than a hundred years for the rest of the world to realize the value of this excellent trading tool and put it to use outside of Japan.

Japanese Candlestick Tutorial

You can learn this system on your own by reading and practicing or you can get help from an expert. The best Japanese Candlestick Tutorial material we have found comes from Stephen Bigalow at www.CandlestickForum.com. There are several membership options that allow you to take advantage of both Japanese Candlestick trading and Mr. Bigalow’s expertise. Mr. Bigalow published a book entitled Profitable Candlestick Trading which is an excellent base from which you can start your journey to profits with Candlestick signals. Check their store for more information.





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