Japenese candlesticks

Japanese Candlesticks;

Ancient Art or Modern Science?

Just what are candlesticks? Well, if you have not seen them, they are an alternative to bar chart. They are much easier to read, and once you are used to them, at a glance can be much easier to discern more information about the price movement when compared to a bar chart. Here is a quick comparison;

Notice above, the color makes it easy to tell which direction the price is moving at a glance, this candle shows an up day as green and a down day as red. Some candlesticks show an up day as clear, or matching the background of the page it is on and black as the down day.

Japanese candlesticks are somewhat ancient, as they have been used for a few hundred years, originally for charting the trading of rice in Japan. They seemed to have also stood the test of time in that they have proven themselves pretty reliable, and they have a strong following, of which I am a member.

We will discuss just two of many Candlestick formations today, the Engulfing Bullish and Engulfing Bearish formation. Both of these formations are easy to spot. The Engulfing Bullish formation occurs when during a downtrend or down swing the current candle stick “engulfs” or exceeds the previous candlesticks top and bottom. It must also be an up day, that is, a day where the close is higher than the open. Note the chart below;

Please disregard the yellow area in these illustrations, as it is another indicator I use that will not be discussed here. Now, the Engulfing Bearish formation is basically the opposite of the formation just discussed. It occurs while an uptrend or swing is occurring and the current candlestick “engulfs” or exceeds the previous candle’s top and bottom. It must also be a down day, that is, a day where the close is lower than the open. Note the chart below;

This formation all buy itself should not be used as an entry signal, but should be confirmed with another indicator, such as volume (my favorite), RSI, moving average, etc. Whatever your personal preference is to trading, if you remember this pattern, after a short while, it will jump out at you and can become another important analysis tool you can pull from your trading toolbox to help you make a profit.

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