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Using Japanese Candlestick Pattern Recognition

Economist Shayne Heffernan of www.livetradingnews.com 10 Best Candlestick Patterns to Trade

There is a wealth of information available online and in Bookstores that will teach you the details of using Candlesticks as indicators. The following are 10 candlestick patterns that have in my own experience produced consistent results. These will work better when you understand what is happening in each pattern.

Candlesticks are not stand-alone indicators they must be combined with other forms of technical analysis to really be useful. For example, when you see one of these patterns on the daily chart, move down to the hourly chart. Does the hourly chart agree with your expectations on the daily chart? If so, then the odds of a reversal increase.

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The following patterns are divided into two parts: Bullish patterns and bearish patterns. These are reversal patterns that show up after a pullback (bullish patterns) or a rally (bearish patterns).

Bullish Candlestick Patterns

Engulfing: This pattern consists of two candles. The first day is a narrow range candle that closes down for the day. The sellers are still in control of the stock but because it is a narrow range candle and volatility is low, the sellers are not very aggressive. The second day is a wide range candle that “engulfs” the body of the first candle and closes near the top of the range. The buyers have overwhelmed the sellers (demand is greater than supply). Buyers are ready to take control of this stock!

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Hammer: As discussed above, the stock opened, then at some point the sellers took control of the stock and pushed it lower. By the end of the day, the buyers won and had enough strength to close the stock at the top of the range. Hammers can develop after a cluster of stop loss orders are hit. That’s when professional traders come in to grab shares at a lower price.

Harami: When you see this pattern the first thing that comes to mind is that the momentum preceding it has stopped. On the first day you see a wide range candle that closes near the bottom of the range. The sellers are still in control of this stock. Then on the second day, there is only a narrow range candle that closes up for the day. Note: Do not confuse this pattern with the engulfing pattern. The candles are opposite!

Piercing: This is also a two-candle reversal pattern where on the first day you see a wide range candle that closes near the bottom of the range. The sellers are in control. On the second day you see a wide range candle that has to close at least halfway into the prior candle. Those that shorted the stock on first day are now sitting at a loss on the rally that happens on the second day. This can set up a powerful reversal.

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Doji: The doji is probably the most popular candlestick pattern. The stock opens up and goes nowhere throughout the day and closes right at or near the opening price. Quite simply, it represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction.

Bearish Candlestick Patterns

Notice that all of these bearish patterns are the opposite of the bullish patterns. These patterns come after a rally and signify a possible reversal just like the bullish patterns.

Kickers

There is one more pattern worthy of mention. A “kicker” is sometimes referred to as the most powerful candlestick pattern of all.

You can see in the above graphic why this pattern is so explosive. Like most candle patterns there is a bullish and bearish version. In the bullish version, the stock is moving down and the last red candle closes at the bottom of the range.

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Then, on the next day, the stock gaps open above the previous days high and close. This “shock event” forces short sellers to cover and brings in new traders on the long side.

This is reversed in the bearish version.

Look for confirmation in at least 2 other indicators, RSI, Moneyflow etc BEFORE hitting the buy/sell button.

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Take Japanese candle pattern analysis to a new level with this MetaStock add-on from the author of “Candlestick Charting Explained.”

Many traders have already discovered that Japanese candlesticks allow them to see data more comprehensively at just a glance, but they often ignore critical variables. Though many candlestick products exist, they don’t offer detailed pattern recognition and filtering, and they don’t use correct methodology (original Japanese).

Greg Morris, Western candlestick pioneer and author of “Candlestick Charting Explained,” has partnered with MetaStock to develop the Japanese Candle Pattern Recognition Add-on. This revolutionary addition to the MetaStock line offers accurate identification of REAL Japanese patterns by employing advanced filtering capabilities and Greg’s extensive knowledge on the topic.

Japanese Candle Pattern Recognition includes the following:

3 Indicators

• JCPR Candle Trend
• JCPR Support & Resistance
• JCPR Filtering Binary

4 Explorations and System Tests

• JCPR Reversal Patterns
• JCPR Reversal Patterns Confirmed
• JPCR Filtered Reversal Patterns
• JCPR Filtered Reversal Patterns Confirmed

1 Expert Advisor

• JCPR:Japanese Candle Pattern Recognition

2 Templates

• JCPR Clean Chart
• JCPR Filtering Indicators

How Japanese Candle Pattern Recognition stands apart from the rest:

• True Japanese Candle PatternsAll the patterns in the add-on (except 2) are true Japanese patterns based on the extensive research conducted by Greg Morris with original Japanese literature.
• JCPR Candle TrendThis new method of identifying trends takes into consideration the true range of prices and expands or contracts based on those ranges. This allows it to follow the trend adaptively and with greater accuracy.
• JCPR Support and ResistanceBy automatically calculating the support and resistance lines, this feature allows you to increase the look back periods and expand the concept.
• JCPR ScoringBased on a wealth of experimental data (7275 common US stocks, which included large data histories that totaled over 14.6 million days of data), this critical function scores the probability that a reversal trend pattern will be successful.

Patterns included in Japanese Candle Pattern Recognition