A Handbook of Technical Analysis: The Practitioner's Comprehensive Guide to Technical Analysis

CHAPTER 14

Japanese Candlestick Analysis

LEARNING OBJECTIVES

After studying this chapter, you should be able to:

• Understand the significance of various Japanese candlestick patterns and how to use them to pinpoint reversals and breakouts in the market
• Describe the difference between reversal and continuation candlesticks
• Identify and differentiate between reliable and unreliable patterns by referencing the 10 important price action guidelines
• Integrate technical studies to Japanese candlestick charts effectively
• Identify the three important trigger levels in Japanese candlestick patterns

Just as with bar charts, Japanese Candlestick charting represents the study of pure price action. It takes into account the price range, relative positions of its open, high, low, and close (OHLC) prices, the location of the price activity, and trend characteristics in order to effectively forecast potential breakouts and reversals in the market. In this chapter, we shall be covering various Japanese candlestick formations, their classifications, price action behavior, and their integration with other technical tools.

14.1 ELEMENTS OF CANDLESTICK ANALYSIS

Construction and Classification of Japanese Candlesticks Formations

Japanese candlesticks are constructed using OHLC data. They are identical to standard price bars except for the boxing up of the price range between the opening and closing prices. See Figure 14.1. We refer to the boxed up area as the real body. Unlike standard price bars, ...