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Overview
Candle charts originated in Japan several centuries ago, but have recently gained a following in other countries. Candle charts can
be plotted only for markets in the opening, closing, high, and low intra-day prices are known. Candles can be used to identify price
patterns as well as to construct trendline (Pring 2002).
Structure of a candle
A typical candle consists of two parts: the real body, that is, the rectangular part, and the shadow or wick, that is, the two vertical
extensions. The tops and bottoms of the rectangle are determined by the opening and closing prices for the day. If the closing price
ends up above the opening price, it is plotted in white. When it closes below the opening price, it is plotted in black (see Figure 1).
The thin, vertical shadow lines that protrude from the real body reflect the high and low for the day.
Since the closing and opening prices can be identical, or identical with the intra-day high or low, there are a number of possible
combinations that need to be represented. Some of them are shown in Figure 2.
Morning Star
The morning star heralds a new day (upmove) and is bullish. It consists of two long real bodies separated by
a spinning top; altogether develop overthree periods. In the first period, prices close lower than they opened,
resulting in a black main body. The star is represented by a spinning top, which is made on a downside gap
in the second period. The third period's body should be white and should has a closing price above the
midpoint of the first period's black body (Meyers 1994, Pring 2002).
Evening Star
The evening star is a precursor of night. It has the opposite characteristics and implications of a morning star
(Pring 2002). Evening star has a white body in the first period. In the second period, price opens higher,
creating an upside gap and close lower after trading in a relatively narrow range (i.e. a spinning top). Finally,
in the third period, price continues to move lower and close below the midpoint of the first period's white main
body (Meyers 1994).
Doji Star
A doji star is a bearish sign and occurs after a lengthy rally (Pring 2002). It occurs when price gap to the
upside on the open, and then close at the same price as the opening price (Meyers 1994).
Shooting Star
A shooting star is like a short-term top where the daily price action experiences a small gap and the black
real body appears at the end of a long wick or upper shadows (Pring 2002).
The three black crows pattern consists of three declining black candlesticks that form after an advance. They indicate lower prices.
Each black candles should open within the real body of its black predecessor and close at or close to its session low (Pring 2002).
A tweezer top consists of two candles with an identical high. Actually, it is possible for a tweezer to consist of more than 2 days with
an identical high. This pattern is short-term bearish because the first day's high acts as resistance; when the second day is unable
to break through the first day's high, it indicates a loss of upside momentum.
A tweezer bottom occurs when, after a decline, two or more candles make an identical low. This is a short-term bullish, indicating a
loss of downside momentum since the price finds support in the area of the low.
One factor that will increase the significance of a tweezer is the nature of the pattern being formed, e.g. engulfing pattern, hammer,
hanging man, etc (Pring 2002).
The first day is colored in the direction of the prevailing trend and the second day forms in the
opposite color
Both real bodies extend the prevailing trend and are long
The closing prices are identical
Windows (Ku)
Japanese chartists refer to gaps (areas on a chart where no actual trading takes place) as windows.
Windows therefore have the same technical implications as gaps (Pring 2002). Gaps frequently act as
support or resistance. An upside window is considered to be bullish, while a downside window is viewed as
bearish.
These formations are very similar in concept to a flag formation, except that they take only a few days, not weeks, to develop.
The rising three method is a bullish pattern and consists of a powerful white body followed by a series of three or four declining
small black bodies. These bodies should be accompanied by a noticeable contraction in volume that a very fine balance is
developing between buyers and sellers. The final part of the pattern is a very strong white body that takes the price to a new
closing high. This final day should record a significant increase in activity (Pring 2002).
The bearish falling three method is exactly the opposite except that volume characteristics are of no significance on the last day
(Pring 2002).
Example
After a retracement, SembMar exhibited a Bullish Harami Cross pattern. This signaled a possible short-term reversal. However, on
the third day after the shooting star was formed, the prices then started to decline. During the downward price movement, an
inverted hammer was observed which signaled a possible trend reversal.