Classic Japanese candlestick trading strategies

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6 Types Of Tailed Bar Candlestick Trading Strategies

Tailed bars are the most important bars on a price chart. Plain and simple. The reason they are so important is because they often give us a very strong clue as to what price might do next, more so than any other type of price bar.

Today’s lesson is a summary of my favorite tailed-bar candlestick patterns. These are the same patterns that I look for when I analyze the charts and that I trade regularly. You will learn what these patterns look like and how to identify them as well as what they mean. This will be a great introduction into different tailed bar candlestick strategies for beginners, but also, it’s an excellent refresher for those that already have a basic idea of how I trade and what I look for on the charts daily.

This lesson does rely on you knowing the basics of candlestick charts and candlesticks however, so if you aren’t too familiar with this topic then please checkout my candlestick chart tutorial for more information. I am not going to go into detail on specific entry and exits using the patterns discussed today because that is a whole topic unto itself, but I do expand on this in great detail in other articles and in my price action trading courses.

Now, let’s get started in learning about some of the best tailed bar candlestick trading patterns…

What are tailed bars?

A tailed bar is somewhat subjective in nature, but what I mean when I refer to “tailed bars” is a bar with a tail that is noticeably longer than the body or real body (area between the open and closing price).

The tails of price bars, sometimes called shadows or wicks, are important to decipher because of what they show and what they imply. They show rejection of a level or price area and either a small, medium or large reversal that happened quite quickly. This shows us that there was exhaustion at that area the tail formed, which has big implications. When we see an area price is becoming exhausted at, it means there is something happening that we need to take note of. That tail is showing us that either buyers really wanted to buy there, or sellers really wanted to sell, why doesn’t really matter, we only care about the what and the how.

A tail on a bar implies that price MIGHT move in the opposite direction, and soon. This is obviously a huge piece of data for a price action trader, and you can honestly base your entire trading approach around tailed bars if you want. Daily chart bars are, in my opinion, the most important bars and as a result, daily chart tailed bars are the most important bars of all. If you are unfamiliar with why daily charts are so important, please read my daily chart trading tutorial before moving on.

Even if we don’t have an extremely clear tailed price action signal like (my favorite) a pin bar pattern or perhaps a fakey pin bar combo signal, we can still gather a tremendous amount of information from simple tailed bars, which we will go over shortly.

In short, tailed price bars are your friend, perhaps your BEST FRIEND in the market, and I suggest you get as close to them as possible, you need to ‘fall in love’ with them and I suggest you make them the one thing you master to succeed at trading.

Examples of tailed bar candlestick patterns:

The Classic Pin Bar Candlestick Pattern

The pin bar candlestick pattern is a tailed bar that shows a sharp reversal in price across the time period of the chart. So, a daily chart pin bar is showing a sharp price reversal during that day period, whereas a 1-hour pin bar shows a reversal in price across a 1-hour period. The higher the time frame, the more ‘weight’ a signal carries, or the more important it is.

The pin bar typically has a much longer tail than the body, the body is the distance between the open and close. The tail on a pin bar should be at least 2/3 the length of the total bar, ideally 3/4. Sometimes, there is little or no body, as in the second pin bars depicted below. Here are examples of a couple of different looking pin bars that both have the same meaning; a reversal in price has occurred, represented by the long tail. The implication is that price may move the other direction, opposite the tail…

  • Here’s a real-world example of the classic pin bar candlestick pattern:

The Long-tailed Pin Bar Candlestick Pattern

A long-tailed pin bar pattern is exactly what its name implies; a pin with an unusually long tail on it. These are perhaps the most important bars in all of trading, and they are rare as well. When you see a long-tailed pin bar, stop and take notice because it’s a huge clue that price is going to swing in the other direction. Long-tailed pins often mark major directional changes in the market and even major trend changes.

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Long-tailed pin bars typically have a smaller real body than a classic pin bar. Their tails are always significantly longer than any nearby bars and as such, they are impossible to miss. They are sometimes good candidates for entering on a 50% retrace per my trade entry trick strategy. Here are a couple of examples of ideal looking long-tailed pin bars. For those of you who are new: Bullish means it’s a potential buy signal and bearish means a potential sell signal…

  • Here’s a real-world example of a long-tailed pin bar candlestick pattern:
  • Another example of a classic long-tailed pin bar candlestick pattern:

Double Pin Bar Candlestick Pattern

It’s not uncommon to see consecutive pin bars form in a market, often at key chart support and resistance levels as the market is ‘testing’ these areas to see which party is going to win between the bulls and bears (buyers and sellers). You will more commonly see double pin bars or two pin bars back-to-back, but I have even seen three in a row before, but that is rare. Double-pins are something to take very strong notice of because formed within the proper market context and with confluence, they can be an obvious warning signal that price is about to surge the other direction. Here is what they look like…

  • Here’s a real-world example of a double pin bar candlestick pattern:

Note: You may notice price just barely violated the lows of the double-pin bar pattern pictured. This happens sometimes and it’s why you need to thoroughly understand proper stop loss placement on your trades before you start trading live. The proper stop loss, a wide-enough one, would have kept you from getting stopped out before the trade went on to be a huge winner…

Small tailed bars and Long tailed bars (not pin bars)

The following diagram shows what I simply refer to as “tailed bars”. These are bars with significant tails but that are not perfect enough to be considered a “pin bar signal”. As I said in the opening; tails are often significant, so we need to look at any tailed bar as potentially having an impact on near-term market direction, even if they aren’t perfect pin bar signals. I have dedicated an entire new chapter in my course to this tailed bar “phenomenon”.

  • The chart below shows a fairly ‘classic’ tailed bar. This was a bullish tailed bar that formed at a support level within an overall up-trending market; we can see it lead to a strong push higher. Note, it was not a bullish pin bar because the lower tail wasn’t quite long enough in relation to the body and its upper tail was a bit too long. But, still, the lower tail was long enough to classify it has a “bullish tailed bar” …
  • In the next image, you can see the differences between a long and small tailed bar as well as classic pin bar patterns…

Other tailed bar candlestick patterns

There are other tailed bar patterns that I get into more in-depth in my course, but for now, let’s look at some of the more common ones briefly.

Below, you will see a pin bar inside bar combo pattern, this is where an inside bar pattern forms after a pin bar and within the pin’s structure. Next, you will see an inside-pin bar pattern, now don’t get confused, this is not the same as the previous combo pattern, this is where you have a pin bar that is ALSO an inside bar, so it’s an inside bar pattern where the inside bar is a pin, essentially it’s treated just like an inside bar pattern with a little added ‘weight’ since you have that pin bar as an extra piece of confluence. Lastly, we have a fakey pin bar combo setup where the fakey or false-break part of the fakey pattern is also a pin bar.

  • Below, we can see a real-world example of a bearish pin bar inside bar combo pattern. This led to a large decline as the pattern implied. Also, notice the bearish tailed bar that followed, another nice sell signal in that downtrend…
  • Here’s a real-world example of an inside-pin bar combo candlestick pattern:
  • Here’s a real-world example of a fakey-pin bar combo candlestick pattern:

Conclusion

I hope you have enjoyed this tutorial on tailed bar candlestick patterns and what they mean. It was a brief introduction to these patterns, but you should have learned enough to start identifying them on the charts and practicing them on your demo account.

I get into these patterns and a lot more in much greater detail in my comprehensive price action trading mastery course. We go in-depth on how to enter trades using these patterns, identifying the proper chart context in which to enter them and ‘confirm’ our entry, as well as understanding how to filter the signals in different market conditions. Effectively, I teach you to read the charts from left to right, much like you read a book, which is a key element in profitable trading.

What did you think of this lesson? Please share it with us in the comments below!

Basic Japanese Candlestick Patterns

Spinning Tops

Japanese candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.

The pattern indicates the indecision between the buyers and sellers.

The small real body (whether hollow or filled) shows little movement from open to close, and the shadows indicate that both buyers and sellers were fighting but nobody could gain the upper hand.

Neither buyers nor sellers could gain the upper hand, and the result was a standoff.

  • If a spinning top forms during an uptrend, this usually means there aren’t many buyers left and a possible reversal in direction could occur.
  • If a spinning top forms during a downtrend, this usually means there aren’t many sellers left and a possible reversal in direction could occur.

Marubozu

Sounds like some kind of voodoo magic, huh? “I will cast the evil spell of the Marubozu on you!”

Fortunately, that’s not what it means. Marubozu means there are no shadows from the bodies.

Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as its open or close.

Check out the two types of Marubozus in the picture below.

A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price.

A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low.

This is a very bearish candle as it shows that sellers controlled the price action the entire session. It usually implies bearish continuation or bearish reversal.

Doji candlesticks have the same open and close price or at least their bodies are extremely short. A doji should have a very small body that appears as a thin line.

Prices move above and below the open price during the session, but close at or very near the open price.

Neither buyers nor sellers were able to gain control and the result was essentially a draw.

There are FOUR special types of Doji candlesticks.

The length of the upper and lower shadows can vary and the resulting forex candlestick looks like a cross, inverted cross or plus sign.

The word “Doji” refers to both the singular and plural form.

When a Doji forms on your chart, pay special attention to the preceding candlesticks.

If a Doji forms after a series of candlesticks with long hollow bodies (like White Marubozus), the Doji signals that the buyers are becoming exhausted and weakening.

In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down.

If a Doji forms after a series of candlesticks with long filled bodies (like Black Marubozus), the Doji signals that sellers are becoming exhausted and weak.

In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.

While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal.

In the next following sections, we will take a look at specific Japanese candlestick pattern and what they are telling us.

Hopefully, by the end of this lesson on candlesticks, you will know how to recognize different types of forex candlestick patterns and make sound trading decisions based on them.

Japanese Candlestick

What is a Japanese Candlestick?

Japanese Candlesticks are a technical analysis tool that traders use to chart and analyze the price movement of securities. The concept of candlestick charting was developed by Munehisa Homma, a Japanese rice trader. During routine trading, Homma discovered that the rice market was influenced by the emotions of traders, while still acknowledging the effect of demand and supply on the price of rice.

Homma developed candlesticks that graphically displayed the nature of price movements by using different colors to denote the differences. Traders can use the candlesticks to identify patterns of price action and make decisions based on the short-term direction of the prices.

As a legendary rice trader of financial instruments, Homma dominated the rice markets and became popular for discovering the candlestick charting method. When the Japanese stock market Japan Exchange Group Japan Exchange Group is a Tokyo-based financial services corporation that operates different financial instruments exchange markets. It facilitates the trading of Japan’s financial securities under the country’s Financial Instruments and Exchange Act. It was established in 2020 began in the 1870s, local technical analysts incorporated Homma’s candlestick methodology into the trading process. American technical analyst Steve Nison introduced the technique to the West through his book “Japanese Candlestick Charting Technique.” Japanese Candlestick charting is now a popular technical indicator that traders use to analyze financial markets.

How Japanese Candlesticks Works

Japanese Candlesticks provide more detailed and accurate information about price movements, as compared to bar charts. They provide a graphical representation of the supply and demand behind each time period’s price action.

Each candlestick includes a central portion that shows the distance between the open and the close of the security being traded, the area referred to as the body. The upper shadow is the price distance between the top of the body and the high for the trading period. The lower shadow is the price distance between the bottom of the body and the low for the trading period

The closing price of the security being traded determines whether the candlestick is bullish or bearish. The real body is usually white if the candlestick closes at a higher price than it opened. In such a case, the closing price is located at the top of the real body and the opening price is located at the bottom.

If the security being traded closed at a lower price than it opened for the time period, the body is usually filled up or black in color. The closing price is located at the bottom of the body and the opening price is located at the top. Modern candlesticks now replace the white and black colors of the body with more colors, such as red, green, and blue. Traders can choose among the colors when using electronic trading platforms.

Japanese Candlesticks vs. Bar Charts

Both Japanese candlesticks and bar charts provide the same information to traders but in different graphical formats. Candlesticks are more visual, presenting traders a more graphically clear picture of price action. They also display graphically the forces (supply and demand) that contribute to each time period’s price movement.

On a candlestick chart, the area above and below the body is known as shadows. The length of the candlestick body and the shadows are both important indicators of price action.

Candlestick Patterns

Japanese Candlesticks form patterns that traders use to analyze price movement. Some examples of candlestick patterns include:

Doji: This is a candlestick formed when the opening and closing prices are the same, or very close to each other. The shadows may have different lengths.

Gravestone Doji: This pattern resembles a gravestone, hence the name. It is formed when the open and the close occur at the low of the period.

Dragonfly Doji: This pattern is formed when the opening and the closing prices of a security are at the high of the period. It includes a long lower shadow and signals a reversal of an uptrend.

Bearish Engulfing Pattern: This pattern indicates bears in control of the market. It consists of a large body that completely engulfs the body of the previous candlestick. It is a “down” candlestick, one where the closing price is below the opening price. When it appears, it signals a bearish reversal.

Bullish Engulfing Pattern: The pattern is often formed at the end of a downtrend. It is comprised of a smaller down candlestick whose body is engulfed by a larger up candlestick.

Hammer: The Hammer pattern includes a long tail on its lower end and a near-negligible upper shadow. It is typically a signal of a market reversal, either bullish or bearish.

Additional Resources

Thank you for reading CFI’s explanation of Japanese Candlesticks. CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™ FMVA® Certification Join 350,600+ students who work for companies like Amazon, J.P. Morgan, and Ferrari certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional resources below:

  • Forex Trading – How to Trade the Forex Market Forex Trading – How to Trade the Forex Market Forex trading allows users to capitalize on appreciation and depreciation of different currencies. Forex trading involves buying and selling currency pairs based on each currency’s relative value to the other currency that makes up the pair.
  • Guide to Commodity Trading Guide to Commodity Trading Secrets Successful commodity traders know the commodity trading secrets and distinguish between trading different types of financial markets. Trading commodities is different from trading stocks.
  • How to Read Stock Charts How to Read Stock Charts If you’re going to actively trade stocks as a stock market investor, then you need to know how to read stock charts. Even traders who primarily use fundamental analysis to select stocks to invest in still often use technical analysis of stock price movement to determine specific buy and sell, stock charting
  • Technical Analysis – A Beginner’s Guide Technical Analysis – A Beginner’s Guide Technical analysis is a form of investment valuation that analyses past prices to predict future price action. Technical analysts believe that the collective actions of all the participants in the market accurately reflect all relevant information, and therefore, continually assign a fair market value to securities.
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