Japanese Candlestick Analysis
Although the color of the first candlestick in a Harami formation is of lesser
importance, it is not completely insignificant as we will see in a subsequent section
on internal proportions.- Location The location of the candlestick pattern is also critical to the success
of its application. The best location to employ candlestick analysis will be at a
price barrier. In short:
■ (^) Bearish reversal candlestick patterns work best at or near resistance.
■ (^) Bullish reversal candlestick patterns work best at or near support.
■ (^) Bearish continuation candlestick patterns work best after a top reversal.
■ (^) Bullish continuation candlestick patterns work best after a bottom reversal.
Candlestick patterns do not work well within tight or narrow price consoli-
dations. For example, a Doji works well interrupting trends, but it is of little use
within a narrow consolidation.
- trend interruptions Trend interruptions are always regarded as a sign of po-
tential trend change. Some examples of candlestick patterns that represent trend
interruptions include:
■ (^) The appearance of a Doji or small real‐bodied candlestick
■ (^) The appearance of candlestick patterns that include a small real‐bodied candle-
stick or Doji within its price range (not applicable to most candlestick patterns)
■ (^) The appearance of a large candlestick reversal formation
It is for this reason that the Harami’s color is irrelevant. The inclusion of a
Doji or small real‐bodied candlestick within a pattern renders it a reversal pattern,
which may be augmented or diminished by contextual sentiment.
- preceding activity Preceding price activity influences the extrinsic and contex-
tual sentiment of subsequent candlestick patterns. Some examples of preceding ac-
tivity that diminishes the bullishness and bearishness of candlestick patterns include:
■ (^) The slowing down of a trend (trend‐rate deceasing)
■ (^) ATR values decreasing as the trend proceeds (meaning that the candlestick rang-
es are decreasing; smaller ranges indicate less bullish and bearish candlesticks)
■ (^) Prices are converging, tapering, or narrowing (e.g., rising and falling wedges).
■ (^) Rising candlesticks have successively lower closes.
- relative proportions The relative size of preceding candlesticks to that of
later ones will affect the extrinsic and contextual sentiment of subsequent candle-
stick patterns. As already mentioned under preceding activity, a gradual reduction
in the average candlestick range indicates:
■ (^) Increasing bearishness in an uptrend
■ (^) Increasing bullishness in a downtrend