Ever since its inception, Japanese candlesticks have been used hand-in-hand with other technical strategies in an attempt to clarify blurs in the market and validate trade ideas. It was arguably created and used by a Japanese rice trader named Munehisa Homma, who used candlesticks to profit from the commodity’s price fluctuations. Later, it was refined and introduced to Western civilization by Steven Nison. Over decades, variations of the original set of candlesticks have emerged, consequently creating different strategies that incorporate it.
Bullish Engulfing Candlestick Pattern
It consists of two candlestick pieces and occurs in a downtrend context. The first candlestick will appear as a small bearish candlestick with short bottom and top tails. The next candlestick beside it will be noticeably bigger and will be shaded as bullish, which depending on your chart settings could be green, blue, white, etc. The second candlestick will appear to be engulfing the first one that came before it hence the term for the strategy. The bearish counterpart is referred to as a bearish engulfing pattern and will have reversed characteristics, with the first candlestick printing a bullish candlestick but then engulfed by the next one which is a large bearish candlestick.
Three Line Strike Pattern
The pattern is seen on your broker account, such as AlfaTrade, during a downtrend. Three small bearish candlesticks will close at a lower low and the fourth bar opening evening lower but then reversing upwards to engulf all three of the previous bearish candlesticks. This is similar to a bullish engulfing pattern, with the main difference being that there are three small candlesticks to take note of. According to experts, this pattern forecasts higher highs with up to 84 percent accuracy/win rate.
Evening Star Pattern
A bearish pattern involving three candlesticks, the evening star predicts a nearing reversal in favor of the bears. It begins with a large bullish candlestick that marks a new hourly or daily high for the currency pair. Next, the market gaps higher on the next candlestick, yet the range of price movement is relatively small and appears to have exhausted the bull’s buying power. The third bar shows a gap down, marking the completion of the pattern. A bullish counterpart of the evening star is termed the morning star, both of which offer a 72 percent accuracy/win rate.
Abandoned Baby Pattern
Similar in appearance with the Morning Star, an Abandoned Baby pattern is a bullish three-piece pattern that pops up at the bottom of a downtrend, particularly after a series of bearish candlesticks that created lower lows. The first candlestick will be a bearish candlestick of intermediate size, followed by a gap down. The candlestick appearing after the price gap will appear to be a neutral candlestick, or doji, wherein neither bulls nor bears are winning but rather cancelling out each other’s orders. After the doji candlestick, the third and last bar is a gap up and an intermediate sized bullish candlestick. This predicts a move up with 70 percent accuracy/win rate.
Tips When Trading Japanese Candlesticks
Exercise Discipline and Risk Management Principles. Although the win rate on these given Japanese candlestick strategies are higher than 50 percent and some even being close to a sure bet, one must always exercise risk management principles in the event that the trade goes haywire.
Put the Patterns in Context. It’s not enough to just wait for the pattern when it emerges. Some patterns will indeed form but at the wrong areas of a trend or range. For instance, a bullish engulfing pattern might appear at the top of an already exhausted bullish trend. At this point, the reward is no longer worth the risk being taken.
Be Patient. Most patterns that will appear on your AlfaTrade platform will be clear cut when they form but actually take a long time to materialize. A three line strike, for instance, might appear on the daily chart, but then take several days or weeks to actually lift up price. Be prepared to encounter inactive days where dojis and consolidations are formed.
The art of Japanese candlestick trading uses simple parameters that any trader can understand. Nonetheless, it makes sense to acquire a good deal of experience in candlestick strategies through a demo account before actually diving into a live account with real cash.