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Arnaud Deblander
Apr 15, 2022 11:27 AM

Ever wanted to know how technical analysts anticipate and capitalize on market movements? It’s a whole set of techniques that, when put together, allow us to detect the moves with the highest probability of success.

Today we will start from the beginning with the Japanese candlesticks and more particularly their bullish configuration.

What is a Japanese candlestick?

Before we go into detail about the different patterns, let’s start at the beginning! Japanese candlesticks first appeared in Japan in the 18th century. Before any other form of a candlestick, Japanese investors were already using this technique to trade rice on the markets. This technique was only discovered by American investors in the 1980s.

A Japanese candlestick has 4 elements, an opening price, a closing price, a high price, and a low price. Graphically it looks like this:

schema

The importance of timeframe

Each candle represents a quotation period. It’s a bit confusing? Let me explain! On charting software such as Tradingview or Prorealtime, you can change what is called the timeframe. This can be anything from less than a minute to a month or more. Specifically, if you choose a timeframe of 15 minutes, each candlestick at its close will represent the history of the last 15 minutes of trading.

The choice of timeframe is a very important element in the analysis of candlesticks and more globally in all technical analysis. The longer the time frame, the more relevant your analysis will be. Indeed, a shorter timeframe tends to provide more false signals. The patterns we will analyze below are still valid on all timeframes.

Continuation or reversal?

Today we will separate candlestick patterns into two main categories, reversal patterns, and continuation patterns. This distinction is important because it will help you avoid many mistakes.

Indeed, a reversal pattern will have a much better chance of being valid if it occurs on support, rather than if the same structure appears under resistance. It will not have the same value and will certainly be a source of false signals, hence the importance of knowing which pattern to look for at which point.

Continuation

Gap

A bullish gap is defined as a Japanese candlestick whose opening price is higher than the closing price of the previous candlestick. It usually occurs in an uptrend and is often formed after a significant rise characterized by several large green Japanese candlesticks.

It can happen that the gap is filled, that is to say, that the prices come down, not necessarily at the close, at least to the closing price of the previous candlestick. The best way to analyze candlesticks is to couple them with a volume analysis.

In the case of a continuation gap, we prefer to observe a strong buying volume to confirm the continuation of the bullish trend.

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The 3 bottom-up methods

This candlestick pattern is a typical case of continuation, it is equivalent to a consolidation composed of 3 candles of indecision between two directional green candles to allow prices to catch their breath before resuming the rise.

For this to be confirmed, the close of the last candle must be higher than the close of the first bullish candle. Of course, neither the consolidation candles nor the confirming bullish candle must have a low below the first green candle.

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Reversal

Now let’s look at reversal candles. As for the continuation candles, it will generally be preferable to see a rise in volume at the same time for these patterns to be valid.

Bullish engulfing

This pattern is one of the most relevant to remember. The opening price of the second candle must be at least lower than the closing price of the previous bearish candle, if it is lower than the low of the bearish candle, even better.

The closing price of the bullish candle should also be at least higher than the opening price of the bearish candle, even better if it is higher than the high point of the latter.

If the green candle is a marabozu, i.e. its low and high points are also opening and closing points while encompassing the entire previous candle, this is the most powerful form of bullish engulfment. This is the most powerful form of bullish engulfing. We tend to see this kind of pattern on a support.

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Bullish Hammer

The hammer is also one of the most important turning configurations. It also appears very often towards support and is just as, if not more, powerful than engulfing. Indeed, the hammer consists of a small body and a long wick, indicating a low point.

The psychology inherent in this pattern is a strong buy on the support level, which completely negates the previous bearish move and sometimes even closes higher.

It is very common to see a huge increase in volume on this type of pattern.

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Conclusion

In conclusion, we have seen that there are different types of Japanese candlestick patterns, reversal, and continuation.

As always in technical analysis, a single method should not be applied blindly but rather used in conjunction with other tools. One of the tools that lend itself best to this is volume.