In this article I would like to introduce you some of the most effective japanese cadlestick patterns which I trade successfully on live account. Purpose of such article is to present you very powerful and easy techniques for earning green pips without caring much about difficult strategies with many indicators, as often presented among traders. As I often say: "Less is more". I will show, that it isn't only plain, vague phrase behind such words. Also, my article wouldn't be complete without brief introduction to japanese candlestick basics. Let's start!
Japanese candlestick charting technique was originally developed in "medieval" Japan by traders with rice, who used this tool to predict the future price of this commodity on rice market. That days rice was traded on specialized places for it, such as the Dojima Rice Exchange in Osaka. In such places in fact became history of modern future contracts trading, but that is another part of a story.
Construction of candlesticks:
- Candlestick line consists of a thick part which is called "real body" and thin lines above and below real body which are called "shadows". They can be "upper shadow" and "lower shadow".
- The real body is a range between session's opening and closing. When the body is red, session's closed lower than opened. If the body is let's say blue or green, depending what colour you prefer for bullish candles, it means, that session closed higher than opened.
- Upper and lower shadow represent high and low of the session.
- Candles without shadows exist too, they can be called "shaven heads or bottoms".
- Candle without real body is called "doji".
It is important to mention that according to Japanese, only real bodies are of higher importance and shadows are understood as price fluctuations. However, I don't agree with that explanation, as shadows often tell us significant things about volatility, S/R levels and different price levels which were rejected.
Japanese candlestick lines often form different patterns and those can be divided into 2 basic groups:
- Reversal patterns
- Continuation patterns
In my trading and in this example I will use only some of the reversal patterns, as they give us much larger potential for profit, especially these days. Also, some of my favourite reversal patterns are very easy to recognize and occur frequently.
"Shooting star" - probably my most favoured pattern which is often successful. It consists of long shadow and very small body. In official literature it is said, that colour of the body is not important, but I prefer it to be red, it is stronger signal. Also, I accept slight variations in lower area of candle, such as little shadow.
"Hammer" - in fact it is shooting star occuring in downtrend, simply inverted, strong signal to buy. Contrary to official literature, I only prefer hammers to be blue or green colour, simply - bullish.
"Engulfing patterns" - multiple patterns, either bullish or bearish, consisting of one candle with small real body followed by candle with large body, engulfing the previous candle in opposite direction. It is major reversal signal. They don't occur so often as stars and hammers, however, they are of high importance.
How to trade these patterns:
- Wait until pattern is completed, let it finish on the timeframe you are trading.
- Enter the trade manually at market price.
- SL set above the concrete pattern, but not too close. Usually such patterns are parts of some swing, so set it above pattern and swing too. It can be for example last day's candle.
- PT set manually to the nearest visible S/R level, but not less than 2:1 RRR. Usually such shooting star pattern on 4h TF is something like 20 - 60 pips, so set PT at least to double it - 40 - 120 pips. These targets can be met during hours or one day.
- Do not be afraid to get out of position earlier, if it is not moving in direction which you expected. Better take half profit than watching the markets hitting your SL. In these conditions we often see markets ranging more instead of strongly trending, so use the frequency in your favour to make more trades instead of waiting days for completing one setup.
- If you want to be more sure of the setup, add exponential moving average (EMA) with 34 (for example) period, it can show you interesting details on the charts, like where off the price will bounce when consolidating on the top, so it serves us as a good filtering tool.
That was some brief introduction to candlesticks and how I trade them. You can see, it's that easy. Try similar approach and you will be nicely surprised by reward - pips and also time spared.