Japanese Candlesticks

Three Candle Patterns: OK, so we've looked at single candles, and two bar candle patters, now let's take a look at some of the more common three bar candlestick formations and the first two are the morning star and the evening star. As with all Japanese candlestick analysis it is important to remember that this is an art more than a science. New trades tend to see thee patterns and immediately assume that this is s cast iron trade. This is simply not the case. All trades have to be measured in terms of a risk reward profile, and in addition you must always observe the first rule of trading which is preservation of trading capital. Ignore this simple rule and you will fail - believe me. So with candlestick trading the same rules apply - you may well be right in your reading, but what if you are wrong - so please don't trade without a stop loss!

Japanese Candlesticks - Morning Star

The morning and evening stars are two of my personal favourites, as again, they offer a strong signal that markets may be about to change direction which is useful for closing out existing trades, and also for opening new positions. There are three key elements to the morning star as follows. Firstly is a long down bar with a full body and very short shadows top and bottom. The second candle then follows with a very small body which can be either an up or down bar, but the opening price must be gapped lower than the closing price of the first candle. This normally has short shadows top and bottom. Finally an up candle follows which closes well into the body of the long down candlestick. It can have shadows but these should be short and the body should be long.

The reason it is a powerful indicator is simply that prices have gapped down, and a small doji has formed, which is the morning star, with prices immediately reversing and gapping up to leave the star formation suggesting that the market is not ready for a fall in prices just yet. Now some people differentiate between a morning star ( where the star is not a doji ) and a morning doji star - a very fine distinction - personally I do not, preferring to try to keep things relatively simple!

Japanese Candlesticks - Evening Star

The evening star is the opposite of the morning star pattern and has the same criteria but in reverse, and occurs when markets are reversing from bullish to bearish. In this case we have a strong up candle with small shadows, and this is followed by a second candle with a small body and shadows top and bottom, and with an opening price gapped up from the previous close. The candle can be either red or blue ( up or down). Finally this is followed by a long down bar candle which closes well into the body of the first candle, thus forming the evening star pattern with the 'star' hanging in the sky - hence the name. Again this represents a strong reversal signal and we need to pay attention to the markets as sentiment may have changed from bullish to bearish.

Japanese Candlesticks - Three Black Crows

Whilst the three black crows are a candle pattern all on their own, in order to have some weight, they need to appear after a significant up move, or in an up trend that has been established for some time. The pattern is also called three winged crows by Japanese traders.

As you would guess, the three candles are all down bars ( black was originally the standard colour for down bars, but most packages give you the option to change to those your own choice - I prefer blue and red personally ) . Each one follows the previous candle in an orderly fashion with long real bodies and short shadows, and with the opening price of the each candlestick following the close of the previous bar. Following a long uptrend or established move, then this can represent significant selling in the market, and if we have open positions, it may well be worth closing them out at this point.

Japanese Candlesticks - Three White Soldiers

This candle pattern is the reverse of three black crows, and occurs after a significant down trend in prices, and could be the signal that the market are reversing for the longer term.

As before the Japanese candles must have long bodies, and short shadows, and each candle should ideally close at or near its high for the period. If you are trading a short position, then this could be the signal to close out the trade. Alternatively if you were looking to open a long position, this could the pattern that signals a reversal in the markets.

As with everything it is patience, experience and learning that will make you into a good trader who is able to make money using Japanese candlestick analysis, but you need time and lots of practice. I hope you have found the above examples useful, but these are only the tip of the iceberg - there are many many more patterns and candles to learn. In the resources section I recommend a simple but excellent guide which I feel will benefit all traders looking to learn more about this exciting and rewarding subject. As always, I hope you found this site both useful and enjoyable, and there are many more in the pipeline - Kind regards - Anna

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