OPTION TRADING

Japanese candlestick



Candlesticks are the oldest form of technical analysis in the world.
Japanese Candlesticks were invented by a Japanese rice trader, Munehisa Homma, in 17th century.
He spent about ten years of his life in researching and analyzing of the effect of weather, psychology of buyers and sellers, and many different conditions on the rice price.
Then he made 100 successful trades and retired a rich man and wrote two books about technical analysis.
Candlesticks are the indicators of the markets’ psychology.
This is the first and most important thing you have to know about the candlesticks.
Price volatility is the result of nothing but behavior of buyers (Bulls) and sellers (Bears).
When there is more tendency to buy, the price goes up and visa versa.
Candlesticks are the indicators that reflect the emotions (fear and greed) of buyers sellers.
Candlesticks have their own language which is very easy to learn.
If you learn their language, you will see that they really talk to you and tell you about the next price movements.

Candlesticks Anatomy
Each candlestick represents 4 parameters:
1. Open price
2. Close price
3. High price
4. Low price
For example, in one hour time-frame, the open price is the price of the currency pair at the time that each candlestick opens.
In this time-frame, it takes one hour for each candlestick to mature.
So let’s say when a candlestick is just opened on an one hour chart, the price is 1.9825.
This is the open price.
The price goes up and down during one hour, and finally, when one hour is over, the price is 2.0080. This is the close price.
When the close price is higher than the open price, the candlestick is Bullish.
It means the price has gone up during the formation of the candlestick.
If the close price is lower than the open price, the formed candlestick is Bearish.
It means the price has moved down while the candlestick was forming.
High price is the maximum price and low price is the minimum price,

during the formation of the candlesticks in that special time-frame.






The shape and color of a candlestick may change several times during its formation.
Therefore, you have to wait for the candlestick to be formed completely.
Then you read the candlestick signal and do your analysis and make a decision.
Candlesticks have two main parts:
1. Body
2. Shadows









Psychology of the Markets
Candlestick trading means knowing the psychology of the markets through the candlesticks shapes and colors.
Candlesticks are the indicators of the markets psychology.
They show us if there is more buying than selling or there is more fear than greed on the market and visa versa.
Using this information, you will be able to predict the next price direction.
It is the shape of the candlesticks that reflect the psychology of the markets.
Because of the price changes, candlesticks can have several different shapes.
For example the open and close prices can be the same.
Or the high price can be the same as the close price.
Let’s see how many different shapes candlesticks can have:




1. Typical Candlesticks:
In this case, all of the four prices are different from each other.
A typical candlestick can be Bullish or Bearish.
A typical bullish candlestick (left), and a typical bearish candlestick (right):

Marubozu:
Marubozu means shaven.
Candlesticks that have no shadows are called Marubozu.
What Does Marubozu Mean?
In Bullish Marubozu candlestick, the open price is the same as the low price, and the close price is the same as the high price.
Bullish Marubozu means that Bulls are so strong and didn’t allow Bears to take the price down while the candlestick was forming.
It means there is a lot of buying activities on the market and bulls have the full control.
The size of the candlestick, reflects the strength of the bulls or buyers.
The longer the Marubozu candlestick, the stronger the bulls or buyers.
In Bearish Marubozu candlestick, the open price is the same as the high price and the close price is the same as the low price.
A Bearish Marubozu means that Bears are strong and there is a lot of selling activities on the market, specially when the Bearish Marubozu is longer than the previous candlesticks

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What Does It Mean in General?

1. When you see a Bullish Marubozu, you should not take a short position because Bulls are strong and price can go higher.

2. When you see a Bearish Marubozu, you should not take a long position.

3. When you see a Bullish Marubozu at the bottom of a downtrend, it is a reversal signal and it is possible that the market turns around and goes up.

Or, it can be an exhaustion signal which means bears are exhausted and can’t take the price lower, and so, it is possible that the market moves sideways for a while before it continues the downtrend or turns around.

4. When you see a Bearish Marubozu at the top of an uptrend, it is a reversal signal and it is possible that the uptrend turns around and goes down.

Or, it can be an exhaustion signal which means bulls are exhausted and can’t take the price higher, and so, it is possible that the market moves sideways for a while before it continues the uptrend or turns around.

5. If you already have a long position and you see a Bearish Marubozu at the top of the uptrend, you should close your position and take your profit.

6. If you already have a short position and you see a Bullish Marubozu at the bottom of the downtrend, you should close your position and take your profit.

We will talk about the candlesticks patterns and you will learn more about taking the right decision when you see different kinds of candlesticks.

However, for now just keep in mind that Bullish/Bearish Marubozu means Bulls/Bears are strong and have taken the control.

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