Trading Options: Using Technical Analysis to Design Winning Trades, + Website

CHAPTER 4

Japanese Candlestick Patterns

There are several methods of illustrating the price action of a stock. The most popular are bar charts, line charts, area charts, and Japanese candlestick charts. Bar charts were discussed in Chapter 1. Line charts use just the closing value to create a smooth line that rises and falls over time, and area charts fill in the space under that line to distinguish it from the territory above the line where price did not travel. Japanese candlestick charts are the charts used in the previous illustrations on patterns. Like bar charts, they convey a lot of information: the open, high, low, and close. I prefer them because they are also color coded to show at a quick glance whether the price action was an up or down day (see the sidebar in Chapter 1). A green (or white) candle is a positive day and a red (or black) candle is a down day. These have a long and robust history, and I urge you to learn it. Steve Nison is the father of candlestick charting, and his books are a great resource that I refer to often; his classic text is listed in the Additional Resources section at the end of the book. Japanese candlestick charting is a fascinating subject, but that is not for this book. What is important for our analysis is using the result of that history and Nison’s work to identify potential trade setups.

In this chapter you will learn how to identify specific candlestick formations and understand their significance. With that knowledge, you will then ...