Sunday, April 13, 2008

Candlestick Continuation & Reversal Signals

The Japanese candlestick charting is one form of forex chart to display the currency market movement. As shown on the diagram below.

candlestick chart

The importance of Japanese candlestick understanding is to study the emotions of traders as reflected on the chart. These emotions are shown on the chart patterns formation such as doji, harami, morning star, evening star, etc to represent the different emotional patterns in the market. An in-depth study of these chart patterns can be found in Steve Nison book called the "Japanese Candlestick Charting Techniques". In this book he explains about the emotional definition/psychology about each patterns of the chart formation and how to use them.

In order to simplify the explanation I shall touch only on two significant usage of the candlestick which is the continuation and reversal patterns.

Diagrams below shows the common continuation patterns. The psychological explanation for this pattern is when some traders are taking profit from the overbought/oversold situation it will create relatively weak movement called corrections. Corrections occurs to normalize the movement after the market deviate to far out of the way from the overall average movement.

Apart from taking profits some traders also might watch out for for any complete reversal that might be taking precedent. However after studying the candlestick getting thinner in body size indicating that the correction is getting weaker and reversal is very unlikely to happen. Therefore continuation of the market is becoming very certain.

Bullish Continuation Patterns

bullish continuation pattern

Bearish Continuation Patterns

bearish continuation pattern

Reversal signals is shown the morning star or evening star formation or sometimes called hammer or hanging man. The psychological explanation behind this formation is the after high volumes of movement (strong body) the second candle suddenly form a thin body (morning/evening star) which indicates weakness of continuation. At this point traders should be wary of quick reversal might take place. Strong and quick reversal usually taken place in the area of overbought/oversold where the traders desperately trying to get out of their position to avoid profits cut-back.

Bearish Reversal

bullish reversal

Bullish Reversal

bearish reversal

To study more candlestick pattern go to Chart Schools or FX.WORDS

The candlestick charting works better on the 4 hourly and daily time frames because of the majority of traders who trade within these time frames are using it as a must indicator signals.

No comments:

Popular Posts