Mastering the Art of Japanese Candlestick Reading

Throughout my decade of trading, one of the most important skills needed to be successful in trading the Stock Market is mastering the art of Candlestick reading. Candlestick reading, at times, can give you an indication of highly accurate future price movement. 

There are easy patterns, complex patterns, fake patterns, and so forth when it comes to Candlestick reading. That is why a careful study and countless reviews of thousands of candlestick patterns over decades of stock charts will be required to give you the experience needed to develop an edge in the Stock Market. In this article, I will provide an overview of Japanese Candlesticks as well as my thoughts on them. Hopefully, that will inspire you to master your own art form of interpreting them when chart reading.

The Basics

Candlestick roots originate from Japan where it was a part of technical analysis of the merchants trading rice in the 17th century. It is believed that a well-known rice trader named Munehisa Homma, belonging to Sakata, was the first to develop candlesticks. Though its present form has been conceived by Charles Dow of the US in 1900, most of its guiding principles remain the same.

Candlestick may be defined as a form of a price chart that is used for technical analysis of a particular security. It shows the opening and closing prices as well as the highest and the lowest prices of a stock for a given period. The fat and wide part of the candlestick is known as the real body. It compares its closing price with the opening price thereby indicating whether the stock closed higher or lower than the actual opening price. Take a look at the picture below taken from Wikipedia.

Why Learn Candle Sticks?

Broadly, candlestick charts show the opening/closing and highest/lowest price of a given stock for a specific period. By reading the stock behavior at a specific time via candlesticks, certain patterns can form that hint at future price movement. This is the most important aspect of candlestick reading, the ability to predict future price movement! There are several types of very powerful candlestick patterns that can predict future prices. I love to combine Japanese Candlesticks with my other favorite technical indicators, for a powerful and very accurate trading system.

Types of Candlesticks

Some of the most famous candlestick patterns include (the goal is to know these by heart):

• Dragonfly
• Hammer
• Morning/Evening Dojis
• Bearish/Bullish Harami
• Engulfing Bullish/Bearish
• Gravestone
• Big Candles
• Dojis
• Dragonfly and Gravestone

Take a look at the cheat below for a representation of many of these patterns listed above.

Exploiting These Patterns of Money

Below shows an example of very powerful candlestick patterns that, if it can be identified in real-time, can be exploited to make money. However, I must emphasize that studying these patterns in the past and during the present requires a lot of backtesting and practice. This is where the "art form" comes into play.


The Bottoming Hammer (chart taken from Investopedia).

The Gravestone Doji hints at a bearish reversal. (chart taken from Chart Formations)

There are an endless amount of simple and complex patterns to learn and explore. I go into depth about incorporating Japanese Candlesticks into a trading system as well as covering the top 5 best patterns to trade in this article The Secret To Reading Japanese Candlesticks.

For a more advanced starting point head over to Amazon and check out many of the books such as Japanese Candlestick Charting Techniques.

Conclusion

Chart and candlestick reading is an art. Make sure you understand it and as the time comes you will gain experience in reading these patterns to maximize your money in the market. It's important to remember that none of these chart patterns guarantee that you will end up a winner in the stock market. However, following candlestick patterns can increase the chances of you ending up in a winning zone--which very few have been able to achieve. That is why it is imperative that you master reading them and not simply memorizing them. Remember, mastering involves going over countless charts over the last few decades, as well as trying to predict in real-time as the candlesticks are formed.

For those ready to absorb more information about Japanese Candlesticks make sure to read part 2, of my analysis on how to master them.