Introducing Japanese Candlestick

8Jap010913You will discover that there are many books on the subject of Japanese candlestick formations. You are now presented in this article with a readily available source of information for your perusal.

Although the powerful philosophy and theory of Japanese Candlesticks have been in existence for hundreds of years, are they still valid and useful in today’s trading markets, such as spread betting. Consequently, is it possible for you to readily and effectively incorporate their main principles into a profitable and successful trading strategy?

This article is intended to answer this question by providing you with an in-depth, but easily to understand analysis of Japanese Candlesticks. In addition, well-illustrated diagrams and charts will be utilized to provide you with optimum clarification about their specific relevance to the spread betting market.


Construction of a Japanese Candlestick

Before proceeding any further, you need to acquire a good appreciation about how a single Japanese candlestick is produced. Each candlestick presents a visual figure that advises you about how price traded during a predefined time-period. Consequently, if you can learn to interpret these symbols well then you will be able to identify many key aspects pertaining to prevailing spread betting market conditions.

Each candlestick consists of 4 key components. They are its closing, high, opening and low prices. The distance between the opening and closing prices is called the ‘Real Body’ of a candlestick. Whenever price closes above its opening value then this result is deemed to be a bullish. The next figure displays a bullish candlestick.


The distance between the high and closing prices is known as the ‘wick’, while the distance between the low and opening prices is called the ‘tail’. Whenever price closes beneath its opening value then the candlestick is representing a bearish movement. The next figure demonstrates a bearish candlestick.


The shape of a candlestick can take many different forms with each one possessing a unique interpretation. Here are some of the most famous candlestick patterns:


You may have already been introduced to money management concepts that you can use to safeguard your equity while optimizing your profits. However, after you have spotted a new spread betting opportunity then it is a highly recommended practice to locate additional verification about the quality of this opportunity.

Many experts advise that a good practice to implement in order to achieve this objective is to examine the candlestick structures on the daily charts of the underlying asset supporting your spread bet. Ideally, you should identify verification that supports your new opportunity by confirming that your new spread bet really does have a high chance of success.

If your trading strategies are not displaying any evidence of new quality entry conditions, then you are advised to study trading charts displaying candlestick patterns with the intent of locating ones revealing quality opportunities to implement new spread bets. If you do detect any, then you must then research into why they have been created i.e. fundamental or technical. You should analyze your trading strategies with the specific intent of identifying proof validating that these candlestick patterns are, indeed, advance warnings of potential new spread betting opportunities.

Specifically, candlestick patterns can be deployed to recognize major price formations, such as breakouts, retracements, fakeouts and reversals, etc. For example, you can use candlesticks to help you distinguish between retracements and reversals.

You will find that there are many well-known candlestick formations. You have already been introduced to some but here are the details of some more famous ones.


Morning Star

This formation is formed by a three-day candlestick pattern that represents a forceful bullish reversal.  The initial candle is usually a lengthy bearish one, the second records a minor decline and the last one is bullish that distinctly closes well above the central point of the first candlestick, as displayed on the next chart.


Dark Cloud Cover

The Dark Cloud Cover is a renowned pattern that signifies a bearish reversal and consists of a large bearish candlestick which completely overshadows a preceding bullish one.  The second candlestick must close below the central location of the first bullish candlestick, as shown on the next chart.


Hanging Man

This one candlestick formation possesses a small body and is produced when a bull trend begins to peter out. Investors are not interested in the color of the candlestick as they assess it to be of little importance. Instead, they focus on confirming whether the very long tail is at least double the body size and that there a minimum or no wick, as displayed by the following diagram.




This structure is created when it opening and closing values also match and are located towards the middle of its structure. The Doji possesses both a tail and wick that are nearly equal in length and can be quite lengthy, as displayed in the following chart. By itself, the Doji is not indicative of a new bullish or bearish trend and consequently it is normally evaluated as a component of a larger three candlestick formation.


Candlestick formations exhibiting minimum body length but either with a long tail or wick are considered to be the most effective, i.e. morning star and hanging man. In addition, you should attempt to identify these formations on trading charts exhibiting the hourly time-frame or higher.

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