Japanese Candlestick Analysis
Candlestick to Bar Chart Correspondence It should be noted that there is a fair
amount of correspondence between bar chart patterns and candlestick patterns. But
in some cases they do differ. For example, all outside days are essentially equivalent
to candlestick engulfing patterns, but not all inside days are equivalent to Harami
patterns. This is because there is no requirement that the first bar of an inside day pat-
tern be less than one‐quarter to one‐third of the range of the second bar. In Harami
patterns, the second small real‐bodied candlestick must be at most one‐quarter to
one‐third of the range of the first candlestick.price action guide for analyzing Candlestick action
Before we delve into the analysis of individual Japanese candlestick patterns and
their underlying psychology, we need to first understand the behavioral character-
istics of price and candlestick action from a broader perspective.
Here are some elements that influence pure price action and candlestick behavior:- sentiment bias Most individual candlesticks and candlestick patterns have in-
trinsic sentiment bias. Intrinsic sentiment bias is a condition or state of having an
inherent bullish or bearish bias or sentiment, with all other external or extrinsic fac-
tors excluded. Many individual candlesticks and candlestick patterns are, in and of
themselves, bullish or bearish. As a general rule, individual candlesticks or candlestick
patterns that have no intrinsic sentiment bias, that is, they are neither bearish nor
bullish, will fully adopt any sentiment derived from external factors such as location,
overextension, relative proportionality, trend interruptions, including prior activity.
Nevertheless, the intrinsic sentiment is often overwhelmed by extrinsic senti-
ment, causing the formation’s sentiment to be influenced by the extrinsic factors.
This means that a bullish candlestick or formation may be regarded as less or more
bullish and a bearish formation as less bearish or more bearish, depending on ex-
ternal factors such as location, overextension, relative proportionality, and prior
activity. Extrinsic or external factors do not alter the intrinsic sentiment, but rather
the degree of bullishness and bearishness inherent within the formation. This means
that not all similar candlestick formations will be equally bullish or bearish.
An example will help crystallize this concept of sentiment adoption. Refer to
Figure 14.6. The rising three method is a bullish pattern, that is, it is intrinsically
bullish. It is obvious that the pattern is more bullish at the start of the uptrend
where the bullish candlesticks have a much larger range. As the trend proceeds
upward, the bullish candlesticks start to shrink in height, that is, their ranges start
to decrease gradually as the prices rise. The bullish candlesticks associated with
the last rising three pattern have by far the smallest candlestick ranges, which in
itself is already an indication of decreasing bullishness. Although the last rising
three pattern is still inherently bullish, the external sentiment is turning poten-
tially bearish. We notice that not only are the candlestick ranges decreasing, but
the entire trend is being constricted to move in a narrow and converging manner,
forming what is referred to as a rising wedge, which is bearish. This potentially
bearish scenario is further corroborated by bearish volume and absolute true range
(ATR) divergence. Prices at the last rising three formation are also testing a prior
resistance level in the market. Hence, it is easy to see why traders would be less