Top Technical Tool: Japanese Candlesticks

How to spot trade setups using this tool

By Elliott Wave International

You may be familiar with an Open-High-Low-Close (OHLC) chart: comprised of vertical lines with small horizontal lines on each side. The top of each vertical line is the high and the bottom is the low. The small horizontal lines on either side represent the open and close for that period.

A Japanese Candlestick chart is similar. It allows you to zoom in and analyze a single period’s worth of price action.

Here’s an example of a Japanese Candlestick chart:

Japanese Candlestick charts employ the same data that OHLC price charts do except that the data is expressed differently. The real body is the range between the open and close, and appears as a small block. Shadows are the lines that extend upward and downward from this block, and represent the highs and lows.

Candlestick analysis can help alert you to reversals. Two bearish candlestick reversal patterns that Elliott Wave International’s (EWI) analysts find highly reliable are Bearish Engulfing patterns and Evening Star patterns. A Bearish Engulfing pattern means that the close is below the open, and the real body encompasses the real body of the prior candle. On a daily chart, it portends further decline for the next three to five days. An Evening Star pattern consists of three candles – a large bullish candlestick, a small-bodied candle and a red candle. It signals that the uptrend is nearing its end.

,p>You can combine Japanese Candlesticks with other tools in order to get a high-confidence view. This weekly continuation chart for the Canadian dollar combines a 20-period moving average to show that the trend is down — allowing you to focus on bearish reversal candlestick patterns to spot trading opportunities.

EWI’s senior instructor Jeffrey Kennedy notes that “combining these reversal patterns with moving averages makes them even more dynamic because they focus your attention in the direction of the larger trend.”

One of the best ways to get an edge in trading is to hand-pick a few select tools for your arsenal. Japanese Candlesticks are one such tool. In skilled hands, they can really show you the trend and alert you to trend reversals.

Free for a limited time, you can get full access to EWI’s premium course on candlesticks to help you add another arrow in your quiver. This course, “Japanese Candlesticks Made Simple and Effective” normally sells for $99.

You need to simply enter the Partner Referral Code CANDLES once you click on the link below and join free Club EWI to gain access to this free course.

Learn how to use candlesticks as a simple, effective trading and risk-management tool now (Partner Referral Code: CANDLES).