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Master the Candlesticks by Louizos Alexander Louizos

CANDLESTICKS CHARTING
As we mentioned before candlesticks behold some trend signals. In this chapter you will
learn how to correctly evaluate trends using candlestick charts.

Always remember: candlesticks should be used in longer term time periods, preferably
daily, in order to be more valid about the trend signals.

Candlesticks consist of the body and the shadows. Body gives information of the
direction of the market. White body indicates that the price of the currency pair closed
higher than it opened and black body the opposite. Shadows show the high and low of the
price for the given period.

REVERSAL CANDLESTICKS

We will refer to the most common of candlesticks which you should use in order to
identify trends.

DOJI

When the opening and closing price are identical we have a Doji candlestick. These
candlesticks have no body (or almost no body) at all. They may mean the end of a trend.
Market reverses but may not reverse immediately due to pressures to the opposite side
that after a while lose their steam.

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In order for Doji To have reversal significance:

 Doji should be drawn on daily chart

 It must occur on relative low or high of the market
 If it occurs in the midway of a trend the signal is neutral(rickshaw man
candlestick)
 We should have confirmed signals of other indicators such trendline resistance etc

Figure 1 A Doji
candlestick
signaling reversal

HANGMAN

The signal is “sell

at top”. It is called
hangman because
traders that haven’t seen it will be hanged that is caught to the violent reversal of the
market. Signal is sell at top

Figure 2 A hangman candlestick

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 Master the Candlesticks by Louizos Alexander Louizos

HAMMER

Same as hangman, but with black body. Occurs at the bottom of the trend and “hammers”
all the traders that missed the market reversal. Signal is buy at the bottom.

EXTRA CAUTION: The same as dojis apply but you should also remember that the
body of the candlestick is relatively small. (not bigger than one half or one third of the
shadow).

Figure 3 A hammer candlestick

Let’s now look some combinations of candlesticks that give us extra signals.

TWO DAY CANDLESTICKS COMBINATIONS

Two consecutive candlesticks with the same body color show trend continuation.

Two consecutive candlesticks with different body color give us some signals.

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BULLISH SIGNALS
PIERCING CANDLESTICK (kirikomi)

It consists of a white candlestick that opens the second day lower than the previous low
of a long black candlestick and closes at or above the 50 percent of the previous day
range of the candlestick. This formation gives us a strong bullish signal.

Figure.4 A piercing candlestick

UPSIDE GAP CANDLESTICK (TASUKI)

This pattern occurs in strong up trends. It is a second day black candlestick that closes an
overnight gap opened on the previous day by a white candlestick.

Gaps are not often in Forex market but when they occur mean a strong trend in the
direction they happened. Market will always close them but not always the following
days of the gap. When this candlestick appears it means that the gap was closed the day
after it happened and market should continue its uptrend. This pattern is rare at Forex
markets.

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 Master the Candlesticks by Louizos Alexander Louizos

BULLISH ENGULFING CANDLESTICK

It is a strong bullish signal. It consists of a second day long white candlestick whose
body surrounds the previous day’s black body.

Figure.5 A bullish engulfing candlestick

BEARISH SIGNALS

The most bearish candlestick signal is the dark cloud cover (kabuse). It is the opposite of
kirikomi and consists of a second day black candlestick that opens above the previous
day’s high and closes midway through the previous day’s white long body.

One could watch three types of dark cloud cover:

 Long black candlestick which closes under the 50% of the previous white candle
shadow up
 Black candlestick closing exactly at 50% of the previous white candle.
 Long black candlestick which closes under the 50% level of the original white
candlestick shadow down

Figure.6 Schematics of dark cloud cover

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Figure 6 Dark cloud cover candlesticks in real market environment

BEARISH ENGULFING CANDLESTICK

It is a second day long black candlestick whose body engulfs the previous day’s small
white body closing lower than the low of the first day. La8os paradeigma

Figure.7 A bullish engulfing candlestick

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 Master the Candlesticks by Louizos Alexander Louizos

BEARISH TASUKI

It is a long white candlestick that has a low above 50% of the previous day’s long black
body and closes marginally above the previous day’s high. It is assumed that second
day’s rally in only temporally and driven by profit taking. Downward trend is likely to
continue next day.

Figure.8 Bearish tasuki candlestick

WAIT AND SEE CANDLESTICKS

HARAMI

It is the opposite of the engulfing candlestick pattern. Second day’s candlestick occurs
within the previous day’s body. Two consecutive candlesticks may have opposite
directions but it doesn’t matter which is first. Market is ambiguous until further
information become available.

EXTRA CAUTION: when the engulfed candlestick is a Doji then the harami
pattern becomes a reversal signal. Direction should be the opposite of first day’s
direction.

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HOSHI CANDLESTICK (STAR PATTERN)

Identical to the harami candlestick. It consists of a tiny body appearing the following day
outside the previous day’s body. It is not important if the star reaches previous day’s
shadows as soon as it is outside the body. The direction of the consecutive candlestick is
also irrelevant. Signal is wait and see.

Figure 9 Star pattern candlestick

KENUKI (TWEEZERS) CANDLESTICK

Here the two consecutive candlesticks have the same high or the same lows. In an upward
trending market tweezers top occurs when highs are the same. The opposite happened in
a tweezers bottom. EXTRA CAUTION: Wait and see interpretation changes to reversal
when the pattern occurs after an extended move. Figur .10 below shows tweezers
candlestick in real market.

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 Master the Candlesticks by Louizos Alexander Louizos

SAKATA’S 5 METHODS

“Sakata’s 5 methods” strategies are more than 200 year old. The patterns are mostly
reversal formations.

THREE MOUNTAINS (SANZAN)

The same as triple top formation but in candlesticks. When the middle mountain is higher
than the other two the formation becomes a three Buddha formation which is the alike the
head and shoulders formation.

Figure 11

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 Figure 12

Other formations are the “Three Rivers (sansen)” and the “Three Gaps (Sangu)”. These
patterns occur in market with gaps, mostly futures. Not useful in Forex market where
gaps are relatively rare.

THREE PARALLEL CANDLESTICKS (SAMPEI)

It refers to the similarity of direction and velocity of three consecutive candles. It is a

reversal formation signaling reversal after an extended rally. When bullish the formation
is called the three soldiers. When bearish it is called the three crows (inverted three
soldiers).

Figure 13

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 Master the Candlesticks by Louizos Alexander Louizos

THREE METHODS (SAMPO)

Three candlesticks of the same velocity and direction after an opposite direction
candlestick. The last candlestick does not go significantly further from the high or low of
the first candlestick before the formation. This formation advises trader to pause its trade
because market does not go straight up or down. When SAMPEI does not happen after
and extended rally but midway through a trend it provide us an exit signal before the
continuation of the trend takes place. It is basically a continuation pattern signaled after a
short reversal.

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