Japanese Candlestick Charting

London November 2006

Taso Anastasiou
Director: Technical Strategy
UBS Investment Bank
Phone : +41-44-239 91 04
E-Mail : taso.anastasiou@ubs.com

Brief History
SECTION 1

Aims and Objectives of The Session

Interpretation
Timing trades with candlestick patterns
Money management identifying risk levels

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Candlestick History
By the early 15th century the Shogun Tokugawa had created a
unified country by pacifying the 60 Daimyo feudal lords. This
facilitated more freedom to trade between the provinces as well
as towns such as Edo and Osaka. (Osaka became the centre of this
trading activity). Even today, the traditional greeting in Osaka is
Mokarimakka, which translated means, are you making a
profit?

Early records show charts were first used in Japan in the early 16th
Century to record price fluctuations on feudal Japans rice
exchanges

Rice was essential to the Japanese economy; a unit of exchange

and the primary dietary staple of the Japanese people

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Candlestick History (continued)

There were as many as 1,300 rice traders working in Osaka at the
Dojima Rice exchange. As trade developed, receipts from rice
warehouses were accepted as payment and hence the first futures
contracts were effectively traded

Sokyu Honma (17161803) was a brilliant rice merchant who

is widely acknowledged as being the grandfather of Candlestick

charting

Honma was such a successful trader that he eventually attained

the status of bushi or samurai an amazing accolade for the time

as merchants were regarded as being very low on the social ladder

Honma developed a series of rules which were called the Soba

samni no den or the Sakata Constitution

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The Different Types Of Chart

Line chart

Anchor line

Bar chart
Close

Open

Close

Open

Open

Close

Point and fig chart

Open

Close

o
o
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What is a Candlestick Chart?

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Candlestick Components
Close

A Candlestick shows the same

four price plots used to construct
a typical bar chart i.e. open, high,
low and close

Candles are colour coded for; up

closes i.e. close > open and down

closes i.e. close < open

Open

Open

Close
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Candlestick Composition
Uwakage

Upper shadow

Real body

Jittai

Shitakage
L

C Lower shadow

The Candlestick Is Divided Into 3 Distinct Areas

Upper Shadow
Real Body
Lower Shadow
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Candle / Bar Chart Comparison

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JittaiThe Real Body

The Real Body represents the area between the opening and
closing prices

The closing price is the most important piece of information since

it concludes the sessions trading and provides an insight into
market sentiment

Most technical indicators use the closing prices as the basis for
their calculations

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The Real Body

The size of the real body can provide useful clues regarding
prospective corrective / reversal points

The colour of the real body can be used to identify directional

changes in any given market, over any given time frame

Close
Open

Close
Open
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Impact of opening vs previous closing

Dangerreversal

Normalcontinuation

Neutralcorrection

Short term consolidation

Dangerreversal
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UwakageShitakage Shadows

The longer the

shadow the more
significant the level

Critical support

TAKURI
Testing the Water

Short
covering
and buying
pressure
off this level

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The 50% levelMarket Profile

To understand the importance of the 50% level it is necessary to
understand the concept of Fair Price and Market Profile. For any
given distribution there will be a level which is accepted by the
market i.e. an equilibrium point. A close above the Fair Value area
serves as a very useful guide what that consensus is
Extremes

Fair
value
area

Sellers

Close
Fair price
Point of control

Buyers

Extremes
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The dynamics of a candle line

RBbecoming smaller

Long shadows either side

Closes below previous
equilibrium price

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The dynamics explained

A normal candle is called a strong line, this simply means it
represents a positive continuation of either a bullish or bearish
move

The smaller the real body, the weaker the line. Typically this
reflects consolidation when uncertainty exists and traders square
positions looking for a potential reversal or correction

Lengthening shadows herald the existence of weakness in a trend

Significant penetration into the previous line is a potential
reversal once confirmation has occurred

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The Classification And Single Candle Lines

SECTION 2

The classification
The original eight

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A new perspective
Any market can only make one of eight moves
Interpretations may vary in different markets but the basis
remains the same

There are no other possibilities

Once you understand the eight moves you then apply them to
the markets you are trading

This is the key to the technique

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1. The standard line

(+)

()

The standard line is generally considered to be a continuation

move. They have strong real bodies and small lower / upper
shadows. They will not provide you with any specific clues in terms
of a potential change in market direction, they merely reinforce
the existing directional bias
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Standard lines

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2a. The Komaspinning top

(+/)

(+/)

The Spinning Top is a neutral pattern and is distinguishable by its

small real body and long shadows either side of the real-body

Generally the market is considered to be consolidating when this

pattern is formed. The market has little directional conviction

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Koma

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2b. The starHoshi

A Koma that gaps away from the
market becomes a Hoshi or star
The Gap is a window or Ku

The market has become

very weak and is showing
signs of imminent
reversal

A potential top reversal pattern

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Hoshi

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3. The Dojireversal

Juji

Tohba

Tonba

The Doji is very important, it is considered to be a reversal line or

warn of indecision

The Doji represents the area where Bulls and the Bears meet.
Opening / closing prices are equal. Doji means same as, in
Japanese

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3a. The Rickshaw manJuji

Juji

The Long Legged Doji(Rickshaw man), shows a potential turning

point where the upper and lower shadows are long and of
approximately equal length

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The Rickshaw manJuji

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3b. The Gravestone DojiTohba

It is called the gravestone because of its shape. This candle is

considered to represent the onset of an impending reversal if

observed in an up-trend

Market rejects this level

strong selling pressure

Tohba

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DojiNIKKEI

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3c. The dragonfly DojiTonbo

This is the opposite of a Gravestone and is found at market
bottoms

Takuri -

Strong buying pressure

at this levelcritical
support point

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3d. The Doji Star

One of the strongest reversal patterns, found at tops and
bottoms. Is known as a pattern of three, though at this stage the
Doji that gaps away from the previous close is warning enough

Ku
Hoshi
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Doji Star

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4. The UmbrellaKarakasa
Hanging Man

Takuri

Hammer

Takuri

At the top of the market this pattern is called a hanging man,

but at the bottom of the market it is known as a hammer

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4. KarakasaUmbrella reversal
There are two distinctive variations of the umbrella pattern
The Hanging Man which appears at a market top and the
Hammer which appears at a market bottom

An umbrella should have a small real body with little or no upper

shadow. The lower shadow should be two to three times the
length of the real body

The umbrella is widely regarded as a reversal line but

confirmation of reversal is required

The colour of the real-body is usually not considered to be

important but would recommend that you do pay attention to
the direction of the closing as this gives additional weight to
the pattern

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4a. The Hanging Man

The market has to be in a
clearly defined up-trend

The market shows signs of

weakness and aggressively

tests the downside

Support

The session however closes

much higher than the
recorded low

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The Hanging Man (continued)

LIFFE Lg-Gilt

Hanging Man

Dark Cloud Cover

Shooting Star

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4b. The Hammer

The Hammer is a very
important bottoming reversal
pattern

The colour of the real body is

less important than for the
Hanging Man as the market
has bounced off a low in
a downtrend

Strong buying has occurred,

and indicates a good level
of support

The long shadow is indicative

Support

of the strong buying pressure

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Hammer

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Karakasa

Inverted Head and

Shoulders Reversal

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Hammer

Bearish Engulfing Pattern

The Hammer in Zone 1, fails to confirm the positive tone
the weight of the signals following the hammer are -ve.
Hammer

The Hammer in Zone 2, fails to confirm at first. Notice

the resistance that has been established following the
formation of the hammer.

Hammer
Piercing Line

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5. Inverted Hammerreversal
Shooting Star

Inverted Hammer

This pattern is the direct opposite of the umbrella lines

or Karakasa

The shooting star can be a powerful reversal signal in an up-trend

(but only on a new high)

An inverted hammer is indicative of a strong area of resistance,

confirmation is sought prior to entering any new long positions
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Shooting Star

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Shooting Star
Shooting Star

Shooting Star

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Shooting Star

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6/7. The Bozu Line

Closing
Marubozu

Opening
Marubozu

Opening
Marubozu

Closing
Marubozu

Also known as a Belt Hold lines or Shaven Top and Bottom.

These are regarded as continuation lines

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8. The Marubozu

50% level
critical

The Marabozu is a candle line with no upper and lower shadow

The period opens and closes on the low and high
The Marabozu is very common in short term charts, especially
after the release of economic data. Corrections are likely in the
period following after the pattern
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The Long Standard line

The Long Standard line is easily identifiable as a single candle line
which is two to three times the length of a normal standard line
(it stands out)

Like the Marabozu this line generally corrects and it is quite

common to draw corrective retracements along the length of the
move in order to be able to ascertain the ability of the trend to
continue in its actual direction and to sustain the momentum of
the trend

Because of the abnormal size of the move a correction or

consolidation phase is likely to occur after this particular line

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The Long Standard line

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The classification

Positive or negativedepends on the colour of the real body

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The classification (continued)

NeutralKoma market has little directional conviction

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The classification (continued)

ReversalJujiTohbo at bottomTonbo at topHoshi

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The classification (continued)

ReversalAt bottom Tonkachi very strong.

At top Kubitsuri quite weak
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The classification (continued)

ReversalTohba at top very strong.

Nagare Boshi at bottom very weak
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The classification (continued)

ContinuationOpening Bozuhits resistance in an uptrend.

Very strong close in a downtrend
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The classification (continued)

ContinuationClosing Bozuhits support in an downtrend.

Very strong close in an uptrend
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The classification (continued)

CorrectiveMarabozuno shadows usually very aggressive

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Sandome no shojiki

The Japanese candlestick chart

Part 2 reversal patterns

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Reversal patterns two-day lines

In section 1 we looked at the individual classification of the
various candle lines and have assigned a nominal value to the
moves in terms of positive, negative and neutral

In this section we look at the two-day (session) reversal patterns

In this section it is essential to understand the impact of the
opening vs the previous session closing value as this often
provides directional clues

We also look at a technique which is derived by combining the

open of the first day and close of the second day to look at the
candle formation as a single line. This is done to achieve a greater
understanding of changes in market sentiment

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Gyakushushen
Counter attack lines

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1. The Tsutsumi line

Bearish Tsutsumi line

Bullish Tsutsumi line

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1a. The Bearish Engulfing lineTsutsumi line

Tsutsumi line

Close

The Engulfing Line is one

of the strongest reversal
patterns and is an effective
method for identifying
changes in market
sentiment

Trend

The market has to be

trending for this pattern to
be validated

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1a. The Bearish Engulfing lineTsutsumi line

Tsutsumi line

Open
Gap

The next period opens

higher than the previous
close, creating a gap or Ku,
(in section 1 we saw this
phenomena is usually a sign
of market weakness)

The real-bodies are

obviously of opposite
colours

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1a. The Bearish Engulfing lineTsutsumi line

Tsutsumi line

Open

The close of the current

candle line is lower than the
previous session open
engulfing the whole of the
last real-body

The shadows are not taken

Close

into consideration at
this stage

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1a. The Bearish Engulfing lineTsutsumi line

Tsutsumi line

The open of the first day

and close of the second
day would result in the
entire session resembling
a, Tohba or Shooting Star

This technique gives

additional understanding
to the analyst and
suggests that this pattern
does not require
confirmation

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1a. The Bullish Engulfing lineTsutsumi line

Tsutsumi line

Is the reverse of the bearish

engulfing pattern and is very

strong with the 2DC forming
a hammer

There must be a reasonable

trend in place for this pattern

to to be effective

Trading strategy is to square

(2 day lineclassification = Tonkachi = Positive)

trades that are positioned

with the prevailing trend
and get ready to reverse if
second day follows
through(confirmation is
not necessarily required if
all the rules have been
adhered to)
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The Tsutsumi line

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The Tsutsumi line

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2. The Kabuse line

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Bearish Deaisen
Major support

The Bearish meeting line is

found at the top of a
trending market

Gap

Price action initially gaps

away from the previous

close but closes into the real
body of the previous session

The most common pattern

in the bearish meeting line
family is Dark Cloud Cover

2/D,C
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Examples
USDJPY

Bearish Engulfing
Pattern

Bearish Deaisen
Two Crows

Hammer

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2. Dark cloud coverKabuse line

Kabuse line

Very similar to the Engulfing

pattern but does not engulf the

whole of the previous Jittai

A sustained up-trend is required,

with price action of the active
session opening higher than the
close of the last session and in
turn closing well into the
previous real-body

The greater the penetration into

the previous period the stronger
the signal

Trading strategyclose long

positions, go short when trend

reversal confirmed
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2. Dark cloud coverKabuse line (continued)

2/D,C

Kabuse line

b
a

(2 day lineclassification = Shooting Star = Negative)

This line is a reversal but is weaker than the

engulfing pattern therefore a close below point
(a) would act as a confirmation.

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Kabuse

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Counter attack linesDeaisen

Deaisen is a meeting line

Major support

in effect two periods of price

action converge, to form a
reversal pattern known as the
Piercing line

Sashikomi occurs when a big gap

occurs between the close and the

opening of two sessions with
price action returning to close on
the high meeting the old price
action

Gap

The 2/D,C Shows the long Takuri

2/D,C

and suggests that price action

has touched a key support but
confirmation is required prior to
reversing a position i.e. a new
high in the next trading session
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3. The Piercing patternKirikomi line

Similar to the Engulfing

Kirikomi line

pattern but does not engulf

the whole of the previous
Jittai

An important feature of this

2/D,C

50%

pattern is that you must get

significant penetration into
the previous real body to
call a reversal

The greater the penetration

into the previous period the

stronger the signal

Trading strategyclose long

(2 day line
classification = Red Closing Tonkachi = Positive)

positions, go short when

trend reversal confirmed

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Kirikomi

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3. The Piercing PatternKirikomi line

Kirikomi Line

2/D,C

Tonkachi

2/D,C

2/D,C

Bozu

Standard
line

50%

Positive

Neutral

Continuation

The importance of closing well into the previous real body is

highlighted by the 2D/C
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5. The Harami line

Harami

Harami Cross

Support

Support

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5a. The Bearish Harami line

2/D,C

The Harami similar to an

inside day with the body of
a session contained within
the previous sessions real
body

A market must be trending

before this pattern can be
considered a reversal

Support
Shooting
Star

The market opens lower

than previous close and

immediately becomes
corrective as opposed to a
reversal signal

Colours of the two bodies

are different

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5b. The Bullish Harami line

2/D,C

Confirmation is required ( a

break in the direction of the

reversal on the third day
would suffice).

Trading strategy

Resistance

Tonkachi

exercise extreme caution

when you see one of
these patterns, adjust
your stop-loss level
accordingly. If expecting
a full trend reversal it is
imperative to seek
confirmation prior to
acting.

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5c. The Harami CrossHarami Yose Sen

Also known as
the Doji cross

Because the last line is a Doji this pattern is much more significant
than the standard Harami line

Shadows are excluded (except in the case of Tweezers which will

be covered later)

Trading strategyclose current positions and look for

opportunity to stop and reverse where possible

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6. The Doji StarDoji bike

2/D,C

2/D,C

This pattern was already outlined in section 1 but if a trend is

actually underway then the gap at the open of the Doji indicates
a strong possibility of reversal. This pattern would not be so clear
on a bar chart

This pattern needs to be confirmed as the 2/D,C equates to a

standard line (3-line reversal pattern, see later)

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Doji Star

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8a. Tasuki

Support

Resistance

Shadows are not taken into consideration as we are primarily

concerned by the open of the real body which opens into the
previous days session suggesting Haramibut closes lower than the
previous session open

This pattern is closely related to the Tasuki Gap which is a three line
reversal pattern

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Tasuki

Bearish Engulfing Pattern

Upside Tasuki Gap

Bullish Tasuki
Bullish Tasuki

Bullish Tasuki
Piercing Line

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7b. Tasuki Gap

Upside Tasuki Gap

Downside Tasuki Gap

Support

Upside Tasuki Gap

Resistance

Downside Tasuki Gap

The Tasuki Gap is a form of star, but rather than a spinning top or
Doji the gap is part of a Standard line. The Ambush line is the
third Confirmation line which closes the window and forces the
change in the trend and sentiment

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Tasuki and Tasuki Gaps

Tasuki

Upside Tasuki Gap

Aggressive Sellers
below 0.8389

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Reversal patterns
Top reversal

Bottom reversal

Doji***

Doji***

Shooting Star**

Hammer***

Hanging Man*

Inverted Hammer*

Star**

Star **

Bearish Engulfing Pattern***

Bullish Engulfing Pattern***

Tasuki Gap**

Tasuki Gap**

Dark Cloud Cover**

Piercing line**

Harami line*

Harami line*
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Three line reversals

Sandome no Shojiki

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8. The Morning and Evening Star

Evening Star

Morning Star

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8a. The Evening Star

Evening Star

The market has to be trending

The second session is a small
star that has gapped away
from the price action

The third session is always the

opposite colour of session 1

The related pattern (2d/c)

1
3

would result in a bearish

engulfing line/dark cloud
cover so is extremely negative

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The Morning Star

Morning Star

The market has to be trending

The second session is a small star
that has gapped away from the
price action

The third session is always the

opposite colour of session 1

The related pattern (2d/c) would

result in a bullish engulfing line /
piercing pattern so is extremely
positive

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8b. The Doji Star

Evening Doji Cross
or Northern Star

Morning Doji Cross

or Southern Star

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The Doji Star

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8b. Sute Go Abandoned baby

Sometimes known as the

abandoned baby and is
distinguished by a trading
session that gaps away
from lines 1 and 3. This
pattern does not require
confirmation and
is very powerful. Essential
that the entire session gaps
away.

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Upside Gap 2 Crows

Shita banare niwa garasu
Upside Gap Two Crows

Another 3 line bearish reversal

pattern market is in an
uptrend and gaps higher in
second session

Third session again opens

2
3
1

higher and engulfs the body

of session 2.

Session 2 and 3 gap away from

session 1.

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Unique 3 River Bottom

Sankawa Soko Zukae

This pattern is extremely rare

Session 1 is in a downtrend with a
lower closing

Session 2 is a Harami line of sorts

but has the lower close so the

colours of the real bodies are the
same in sessions 1 and 2

Session 2 has a long lower shadow

1
3

and in itself is a hammer or Takuri

Session 3 is a positive session

Sankawa Soko Zukae

below the middle day (can be a

meeting line).
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10. Three White Soldiers

Aka Sanpei

This pattern shows a bullish

reversal

Session 1, 2 and 3 are all

bullish standard lines
3

The sessions all open roughly

in the middle of the previous

real body and close higher as
bearish sentiment falters

No confirmation is required
Aka Sanpei

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Advance Block
Saki zumari

This pattern is potentially a bearish

reversal and certainly defines
weakness in the current trend

The three positive sessions in a

sustained up trend all open within
the previous sessions real body
3
2

The advance block is highlighted by

the long upper shadows leaning
towards a shooting star

Confirmation is required

Saki zumari

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11. Three Black Crows

Saki zumari

This illustrates a bearish reversal

pattern

Three consecutive down

sessions are formed

Each line opens within the

previous days real body and

closes on or near its lows, but
lower than previous session

1
2

No confirmation is required
3
Aka Sanpei

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12. The Harami age and Harami sage

Confirmation of a Harami pattern

Support

Resistance

3
1

Harami sage

Harami age

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13. The Tsutsumi age and Tsutsumi sage

1

Confirmation of an Engulfing pattern

3
2
Support

Resistance

3
1

Tsutsumi sage

Tsutsumi age

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14. The Tweezers Top & BottomKenuki

Tweezers can be found at a market top or a bottom. The highs of

two sessions (top) or the lows of two sessions (bottom) are the
same. Includes the body (for example one day can be a
Marubozu). Indicates support or resistance.

Tweezer tops or bottoms are more effective when they form part
of a reversal pattern.
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15. High Wave WarningTakane nochiai

3
2

Trend

Support
8

This usually occurs after a strong rally, the high wave is made up
of a series of spinning tops, dojis and umbrellas

There are lots of clues to the direction of the breakout, but seek
a confirmation line

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15. Tower Tops and BottomsOhtenjyou

Trend

Support

This pattern would equate to a double top and the break below
the support following the second tower and bearish engulfing
pattern gives ample warning of the trend reversal
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Identify The Patterns

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Identify The Patterns

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Identify The Patterns

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Identify The Patterns

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Identify The Patterns

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Bibliography and References

Candlestick Charting ExplainedGregory L. Morris
Japanese Candlestick Charting TechniquesSteve Nison
Beyond CandlesticksSteve Nison
The Japanese Chart of ChartsSeiki Shimozu Stocks & Commodities
Pattern Recognition & CandlesticksGary S. Wagner & B.L. Matheney
Compressing Candlestick PatternsJean-Olivier Fraisse & K.D. Armstrong
Candlesticks & Preserving CapitalGary S. Wagner & B.L. Matheney
Candlesticks as a leading indicatorGary S. Wagner & B.L. Matheney

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Technical Trading Approach

For FX Markets
Taso Anastasiou
Director: Foreign Exchange Technical Strategy
UBS Investment Bank
Phone : +44 (0)20 7567 6870
E-Mail : taso.anastasiou@ubs.com

What Are We Looking At?

Underlying Principles
Momentum plays an important role in defining the
strength of an existing trend

Japanese Candlestick techniques are effective in

pinpointing the early stages of a directional play or
the resumption of an existing trend effective
timing signal

Momentum assists in verifying the candlestick

signal

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Pinpointing The Turn.

Dark cloud cover

Dark Cloud Cover

reversal pattern identifies

the potential turning point

The combination of a

negative momentum
crossover reinforces the
significance of such a
reversal

If momentum is

overbought or oversold,
the signal is deemed to be
more significant

Momentum is overbought

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How Does Momentum Fit In?

Momentum defines the
Dark cloud cover signals
a reversal in trend with
momentum already
displaying a bearish
climate

climate, either bullish or

bearish the market is in at
that point in time

Momentum - RSI and a

moving average of the RSI

1 Pattern is identified

Bullish pattern ignored

given the fact that
momentum was still
declining

as a Piercing Pattern.
Momentum though is
declining and suggests a
higher probability the
bullish pattern will fail.

2 Price action

completely reverses
pattern 1 and suggests a
resumption of the trend.

Positive and negative

momentum is defined by
the crossover of the black
line (RSI) above or below
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116
the red line (MA)

Example 1 - GBPCHF
Bearish Engulfing
Bearish Engulfing

pattern develops following

strong uptrend suggesting
a mature trend

Momentum confirms a

bearish reversal and

reinforces the potential
significance of the candle
stick pattern.

Entry - opening price

next day

Subsequent price action

confirms the bearish
outlook.

Subsequent breach of

trendline support also

reinforces the change in
sentiment
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Summary
Bearish pattern deemed
valid given the fact that
momentum was declining

A signal is deemed valid

only when momentum
considerations are in line
with price signals

A bearish price pattern

Bullish pattern
ignored given the fact
that momentum was
still declining

within a positive
momentum environment
suggests the market is not
in vogue

Momentum helps to

identify any false reversal

signals

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Risk And Objective

Underlying Principles
Early trend reversal would apply a maximum 2% stop loss
(subjective decision).

Such a trend reversal has typically resulted in a 3%

directional move. Therefore the trade is expected to

generate 3%, however this is actively managed.

A signal that marks a resumption of trend uses the high /

low of the signal day or most recent corrective high / low

as the risk parameter. Maximum allowable risk remains
2%

Risk and objectives are actively managed

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Identifying The Turning Points In CHFJPY

1
3

Trade 3 resulted in a loss although the

original 2% stop loss would have been
tightened and not incurring the
maximum stop loss

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Identifying The Turning Point In EURNOK

Stop loss was

appropriately
tight

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121

Identifying The Continuation In EURCAD

Achieves objective of 1.6230

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Identifying The Turning Point In USDZAR

Target 6.2013

Entry 6.0207

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Identifying The Continuation In USDCHF

Target 1.3200

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Information

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Information

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Information

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Information

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