Once you understand the anatomy of a Japanese candlestick, it’s time to start learning some candle signals.
Certain candlesticks have names, and by learning certain types of candlesticks, you can start to see patterns when the candlesticks appear in formations. By getting good at spotting these patterns, you’ll become a much more powerful trader!
Doji and Spinning Tops Japanese Candlestick Patterns Signals in Forex Trading
A candlestick, when viewed alone, will tell you whether the bulls or the bears won that trading period. Each candlestick measures price fluctuations within a certain time frame.
Viewed together, candlesticks can alert you to potential trend reversals. There are two candlestick formations in particular that can be very useful tools for spotting coming reversals: the morning star (evening star) and the tweezer top (tweezer bottom).
Doji Candlestick Patterns Signal in Forex Trading
While the morning star (evening star) and tweezer top (tweezer bottom) formations indicate a trend reversal, individual candlesticks can also reveal important information about traders’ sentiment.
For example, a doji candlestick is a candle that has a very small body (or no body at all). This candle reveals that prices during the trading session vacillated between distinct highs and lows but closed at or very near the opening price.
The fact that the session closed at or near the opening price makes the doji candle’s body either extremely thin or nonexistent (in the case that the doji’s body is nonexistent you will see a horizontal line, reflecting the fact that the session opened and closed at the same price).
It makes sense that this candle reveals indecision on the part of traders: the bulls brought prices up during the session, and the bears brought them down, but neither team could really decide what it wanted to do, so in the end, prices closed near the open.
Spinning Top Candlestick Patterns Signal in Forex Trading
A candle known as a spinning top also reveals indecision.
A spinning top is very similar to a doji except that the spinning top candle’s body is somewhat larger than that of a doji (where there is perhaps no body at all).
Still, a spinning top’s body is small compared to its wicks (the length of the wicks make up 60% or more of the total candle’s length). The candle’s name is appropriate: with a small body and long upper and lower wicks, it looks like the spinning toys children play with.
A spinning top represents a near tie in the session’s tug-of-war between the bears and the bulls: each team managed to drag the market to high and low prices, but neither team could keep the market at the high or the low until close.
There are other patterns of Japanese candlesticks in Forex trading charts that you also need to be aware of. I’ll be discussing the most important ones in the next few blog posts!
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