Learn to interpret double and triple Japanese candlestick formations
Japanese candlesticks are the most popular and trustworthy trading charts because they provide 4 key price points, i.e. open, close, top and bottom, in a visually appealing way. In fact, the shape of a single candlestick can hint towards an upcoming price reversal . These swing points are great opportunities to trade so learning to read charts and look for patterns is very important.
Popular patterns to look out for in single candlesticks are:
- Marupozu: Long body, short or no shadows. The market is moving confidently in one direction.
- Spinning tops: Short body, long shadows. Buyers and sellers are cancelling each other out. In a bullish trend, it may suggest the market is running out of buyers and, in a bearish trend, if may suggest scarcity of sellers. Possible reversal.
- Doji: Very short body, long shadows. Identical opening and closing price, indicating a reversal may be imminent.
- Hammer or hanging man: Short body, no top shadow, long tail shadow. We call these hammers in a downward trend and hanging men in an upward trend. Another strong sign of reversal.
Double and triple formations
Single candlesticks may suggest an imminent reversal of the price trend, but we’d strongly encourage you to observe surrounding candlesticks to see whether your forecasting is accurate. Here are the most popular formations to watch out for:
- Engulfing candlesticks: A candlestick whose body engulfs the body of the previous candlestick, e.g. a bullish (green) candlestick is followed by a bearish (red candlestick) whose body engulfs the previous one. This double formation indicates a strong reversal.
- Evening star: Long green candlestick, followed by a green or red doji with a short body and then a long red candlestick. Clear reversal downwards.
- Morning star: Long red candlestick, followed by a green or red doji with a short body and then a long green candlestick. Clear reversal upwards.
- Three inside up: At the bottom of a downward trend. Long red candlestick, followed by a green candlestick with the closing price about mid-way up the previous one and then a long green candlestick with closes above the opening price of the first candlestick. The market is confidently moving upwards.
- Three inside down: At the top of an upward trend. Long green candlestick, followed by a red candlestick with the closing price about mid-way down the previous one and then a long red candlestick with closes below the opening price of the first candlestick. The market is decidedly moving downwards.
Seeing the wider picture in a chart, rather than individual candlesticks, confirms your predictions and helps you make decision on when to best enter and exit the market . This is the greatest skill for any trader.
- Individual candlestick shapes can give you an indication of where the market may be going but it’s always better to zoom out and look at surrounding candlesticks.
- Double and triple formations will confirm your predictions around trend reversals and help you decide when to trade.
- Look out for engulfing candlesticks, morning and evening stars, as well as three inside up and three inside down formations.
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