1. Section VI
Classical Method

2. Chapter -26 - Part I
Japanese Candle Stick
Pattern

3. CANDLE STICK PATTERNS
Introduction
 Invented by the Japanese. Used first in the 1870s with the opening of the
Japanese stock market.
 Can be used with the weekly, daily and 5 minute charts.
 Candlesticks do not give price targets and need a close to confirm candle
signal
 Before placing a trade based on a candle signal:
- Other technical signals should be considered
- Consider the risk / reward of the trade.
 Candle charts are best used as a tool not a system.
 Munehisa Homma is considered as the father of candle sticks

4. CANDLE STICK PATTERNS
Introduction
 Candle Sticks predict the strong psychology of the markets, its emotions and
future expectations.
 “What is important in market fluctuations are not the events themselves, but
the HUMAN REACTIONS to these events”.

5. CANDLE STICK PATTERNS
Construction
Real body
Lower Shadow
Upper Shadow
White:
Open low and
close higher
Black / red:
Open high and
close lower

6. CANDLE STICK PATTERNS
White:
Open low and
close higher
Black / red:
Open high and
close lower
Open = 30
low = 29
High = 37
Close = 35
Close = 30
low = 29
High = 37
Open = 35
Lower Shadow
Real body
Upper Shadow

7. CANDLE STICK PATTERNS
 The rectangular portion of the candlestick is called the real body.
 The thin line extending above the real body is called the upper shadow.
 The upper shadow of a black candle represents the range between the high and
the session’s price.
 The lower shadow of a white real body candlestick represents the range
between the session’s open and low.
 The black real body means that the close was lower than the opening.
 The white real body means that the close was higher than the opening.
Construction Review

8. Basic Market Strategies
 Candles play a powerful role in early reversal signals.
 Candle lines and patters confirm support and resistance.
 A long lower shadow on a daily charts shows the market bouncing
off from the lows of the day.
 The spinning top is another name for a small real body.
 The real body of a spinning top can be black or white.
 A wave candle must have long upper and lower shadows
 A spinning top indicate indecision
CANDLE STICK PATTERNS

9. Strengths of Japanese Candlestick Charting
 It allows for dearer visualization of price action.
 Candlestick patterns are extremely popular and are heavily traded by market
participants, thus making them more reliable via the effect of the self-
fulfilling prophecy.
 Candlestick patterns are easy to learn and understand.
 Candlestick patterns provide clear and objective entry and exit price levels.
 Candlestick charting may be combined with other technical studies for more
effective forecasting of potential reversals and breakouts in the market.
 Candlestick charting is a form of constant-time charting and as such allows
for the accurate plotting of trend lines, channels, and chart patterns
CANDLE STICK PATTERNS

10. Weakness of Japanese Candlestick Charting
 Higher time frame candlesticks do not provide information regarding the
lower time frame price activity which may be relevant for effective
forecasting of more reliable breakouts on the higher time frame
candlesticks.
 It is impossible to tell whether the high or low was created first.
 There are hundreds of Japanese candlestick patterns making learning a
challenge.
 The majority of Japanese candlestick patterns are reversal patterns and as
such require the trader to establish a position against the direction of the
existing trend.
CANDLE STICK PATTERNS

11. Price Action Guide for Analyzing Candlestick Action
 Here are some elements that influence pure price action and candlestick
behavior:
CANDLE STICK PATTERNS
Sentiment
Bias
Trend
Sentiment
Size
Colour Location
Trend
Interruption
Preceding
Activity
Relative
Proportions
Internal
Proportions

12. Thank You