Over three centuries ago, a Japanese man named Sokyu Honma began developing candlestick charts by observing patterns in commodity and stock prices. While not the inventor, Honma helped mature candlestick analysis. Used first in Japanese rice and commodity markets, candlestick charts spread to Japanese stocks after World War II. The technique analyzes bullish and bearish multi-day candle formations like "Three Mountains" and "Three Rivers" to identify trend reversals, continuing trends, and periods where it is best not to trade. Candlestick patterns provide intuitive insights into market psychology and are still used worldwide today.

1. Overthreecenturiesago,oneJapanesemanbegandevelopingatechnicalanalysistoolthatwasdirectly
relatedtotheactualpricemovementofanycommodityorstockissue. Hewasnotamathematicianora
statisticalgenius,hewassimplyobservingthetypesofpatternsthatarecreatedduringeachtradingsession
toidentifyandestablishtraitsortendenciesthatoccurredafterindividualpatternshadformed. Hisnameis
SokyuHonma.
Althoughitisstillunclearastowhoisresponsibleforinventingthecandlestickchart,muchofthedevelop-
mentandmaturingprocesswascompletedbyHonma. Itisrumoredthatthechartwasfirstintroducednear
thebeginningoftheMeijiera(around1870)byanEnglishmanandwasusedprimarilyforthesilvermarket
inYokohama. ThemostwidelyacceptedtheoryastohowcandlestickswereintroducedintoJapanese
cultureisthatthechartoriginatedatthebeginningofthericemarket(around1750). AfterbothWestern
Europe(1561)andJapan(1654)establishedexchanges,theincreaseinthecomplexityanddiversityofthe
economicconditions,andthecontinuingtechnologicaladvancesprovidedanidealenvironmentforthe
developmentofthecandlestickchart.
TheJapanesefirstusedthecandlestickchartinthecommoditymarket(primarilythericemarket),then
integratedthesetechniquesintotheirstockmarket. AfterWorldWarII,thechartbecameverypopularin
Japanduetoanincreaseinthenumberofactivespeculativeinvestors. Priortothislast50orsoyears,the
candlesticktechniquewasknowntoonlyafewJapaneseinvestors.
Japan’smostelusivetechnicaltradingmethodologyhasnowenteredthetwentiethcenturyandtradersworld
wideareinterestedissharingthewealthofknowledgethatisonlyavailablewiththistechnique. Japanese
candlesticksblendperfectlywithnearlyallofthecommonWesterntechnicalanalysismethodsandwill
increaseyourunderstandingofanycommodityorstockissueaswellasprovideanincredibleinsightinto
anymarketsfuturepricemoves. Thetechnologicallyadvancederathatwehaveevolvedtoprovidesthe
necessarytools(computersandsoftware)tosimplifythecandlesticktechniqueandmakesitavailableto
anyoneinterestedinusingthisenhancedtechnicalanalysismethod.
The Power And Finesse of Japanese
Candlestick Charting
Presentedby:
Brad L. Matheny

2. Open
Open
Open
Close
Close
Close
High High High
Low Low Low
Open
Open
Open
Close
Close
Close
High High High
Low Low Low
FilledCandleStick
(Black)
Empty CandleStick
(White)
"Doji"CandleStick
(WhiteOrBlack)
ConstructingCandlesticks
TheconstructionofJapaneseCandlesticksisreallyquitesimple. Becausetheemhpasisisplacedonthe
Open~Closerange,Candlesticksaredrawnwitha"rectangle"aroundtheOpen~Closerange. Iftheclose
ishigherthantheopen,thentherectangleisleft"Empty"-whichappearsasa"White"candle. Ifthecloseis
belowtheopen,thentherectangleisdrawnin,or"Filled"-whichappearsasa"Black"candle. Lastly,if
theOpenandCloseare"VeryClose"or"Equal",asmallrectangle(orhorizontalline)isdrawn-creatinga
"Doji"shapedcandle.

3. The “Sakata’s Constitution” and “Sakata’s Five Methods”
SokyuHonmawasactuallybornKosakuKato(1716-1803)inthecityofSakata,YamagataPerfecture,
JapanduringtheTokugawaperiod(EighthShogunate). Laterinlife,hewasadoptedbytheHonmafamily.
Atthattime,theportofSakatawasadistributioncenterfor“shonai”(rice). Honmaconcentratedhis
attentiononthericecashmarketandlateronthepopularfixedricemarket. Hisdetailedattentiontothe
marketsandhisunderstandingofcandlestickspropelledhimtobecomeaverywealthyman. Hewas
consideredanelusiveandfearedindividualtraderbecauseofhisdiligentandeffectiveunderstandingof
candlesticksandthepsychologyofthericemarkets. Throughhisverycharismaticpersonalityandhighly
effectivetradingmethodsgainedhimthenick-name“Dewa’slongnosedgoblin”.
The“Sakata’sFiveMethods”originatedfromtherulesandmethodsthatHonmafirstdevelopedtotrade
withcalled“Sakata’sConstitution”. Atthistimethecandlestickcharthadnotevolvedyetandwasnot
incorporatedintoHonma’stechnique. Later,afterHonmabeganusingthecandlestickchart,the“Sakata’s
FiveMethods”wasdevelopedbyfusingthe“Sakata’sConstitution”withtheadvancedtechniquesofthe
candlestickchart. Honma’ssecretmethodsweredividedintotwogroupsandhavebeenpasseddown
throughmanygenerationsofJapanese. Thetwomethodsarethe“MarketsSanminoden”and“Sakata’s
Strategies”.
The “Market’s Sanmi no den” or “Sakata’s Constitution”:
1. Withoutbeinggreedy,thinkaboutthetimeandpriceratiobylookingatpastpricemovements.
2. Attempt to sell at the top and buy at the bottom.
3. Oneshouldincreaseone’spositionsafterariseof100bagsfromthebottomorafallof100bagsfrom
thetop.
4. Ifoneforecaststhemarketincorrectly,oneshouldattempttoidentifytheerrorassoonaspossible. As
soonastheerrorisdiscovered,oneshouldliquidateone’spositionsandrestonthesidefor40-50days.
5. Oneshouldliquidate70to80percentofone’sprofitablepositions,liquidatingtheremainderachanging
directionsoncethepricehasreachedit’sceilingorbottom.
Uponexecution,allofthesemethodscanbeconsidered“Sakata’sStrategies”. Methods4.and5.are
primarilytradingprinciplesusedtolimitlossandincreaseprofits. Methods1.,2.and3.requiretheuseofa
chartandaretechniquesdesignedtorealisticallyenhanceone’stradingabilityovertime.

4. The Japanese Method of Three:
ThereisaJapanesesaying“consultthemarketaboutthemarket.”whichmeanswhenobservingthemarket,
weshouldpaycloseattentiontothemarketmovementitselfratherthanobservingtheinternationalaffairs
andeconomicpoliciesthatmayormaynoeffectthemarket. Thechartisarecordingofmarketprice
movementsinapictureform. Bystudyingthechart,oneisabletoidentifythepaththemarkethastakenin
thepastandisabletoattempttopredictthefuturecourseofthemarketprice.
AsdivulgedbySeikiShimizuinhisbook“TheJapaneseChartofCharts”,thenaturallawofmarketpriceis
the“ThreeLevelFluctuation”. Thismethodteachesusthatmarketpricesmoveinthreelevels,movingup
threelevels,then,alwaysmovingdownthreelevelstoformazigzagpattern. This“ThreeLevelFluctua-
tion”greatlycorrespondstothe“ElliotWaveTheory”(seefigure1). Therearemanyunforeseencircum-
stancesthatcanalterorcauseabreakdowninthispattern,suchasrecentnewsitemswhichmaycause
erraticpricemovements. Weneedtobeabletoadjusttotherealitiesofthefuturebysortingthroughthe
variousshapesandpatternsthathaveformedandusingonlythosewiththehighestprobabilities. Thisis
whatthecandlestickchartisallabout. Thechart’staskisnottopredictexacttopsorbottoms,butto
instantlyassistinconfirmingmarkettopsorbottomswhentheyform.
3 A
2 B
1 C
Figure1

5. VeryearlyinJapan’sculturalhistory,thenumber“three”hasbeenconsideredamysteriousnumberanditis
thoughtthatadivinepowerliveswithinit. Thisismorethanlikelywherethe“Sakata’sConstitution”andthe
“Sakata’sFiveMethods”attaineditsmysticism. The“Sakata’sFiveMethods”consistsof“Sanzan”(Three
Mountains),“Sansen”(ThreeRivers),“Sanku”(ThreeGaps),“Sanpei”(ThreeParallelLines)and“Sanpo”
(ThreeMethods). Toprefaceallfivetermsofthe“Sakata’sFiveMethods”,theJapaneseterm“San”
translatestothenumber“three”.
“Sanzan” (Three Mountains)
The“ThreeMountains”consistoftwogroups,eachwiththreeindividualshapesofmarkettoppingand
bottomingformations(seefigure2). Thesetwogroupsdirectlycorrelatetothe“threelevelfluctuations”
theorywehavealreadydiscussed. The“ThreeMountains”patternisverysimilartotheWestern“Headand
ShouldersTop”. Theybothconsistoftheverysamepricemovementcharacteristics. TheJapanesealso
considerthe“DoubleTop”and“RoundedTop”asvariationstothe“ThreeMountains”group.
Thereverseofthethreeindividualmarkettopformationsdetailedabovecreatethesecondgroupofpat-
ternsthatcompletethe“ThreeMountains”. Thisgroupidentifiesamarketbottom. Theyarethe“Headand
ShouldersBottom”,the“DoubleBottom”andthe“RoundedBottom”.
TheJapaneseviewthesepatternsfromabroaderperspective. Thesepatternsareattunedtoidentifying
majorreversalsoftrendoveralongertimeframe. Oftentimes,weseethesepatternsassmallerpiecestoa
muchlargerpuzzle. Whenwebegintopiecetogetherthepuzzle,wecanonlythenbegintopredictits
outcome.
“Sansen” (Three Rivers)
The“ThreeRivers”patternsreflectacompletereversalofpricedirection. Theyformineither“Morning”or
“Evening”positionswithmanyvariations. The“ThreeRiverMorningStar”patternreflectsabullishreversal
oftrendorapossiblemarketbottom. Whereasthe“ThreeRiverEveningStar”patternreflectsabearish
reversaloftrendorapossiblemarkettop.
Thecommonformations,asshowninfigure3,oftenconsistofverystrongsinglecandletypes(suchas
Doji’s,BozuorMarubozulines). Theseindividualcandletypesrepresentsomeofthestrongestsingle
candletypestoidentifypricedirectionorlackofit. Forexample,the“DojiLine”thatseparatestheother
twocandleswithinthispatternidentifiesthatthemarketisunabletocontinueitscurrenttrend. Thethird
candlethatcompletesthispatternconfirmsthefactthatthemarkettrendhasreversed.
Thevariationsofthe“ThreeRivers”includethe“UpsideGap’sTwoCrows”,the“EveningSouthern
Cross”,the“TwoCrows”andthe“UniqueThreeRiverBottom”. Althoughthesevariationsmayappear
visuallycompletelydifferent,theyreflectthesameintentionofthemarket-toreverse.

6. DoubletopHead and shoulders top
Headandshouldersbottom Doublebottom
Roundedtop
Roundedbottom
2 31
A B C
UpsideGap'sTwoCrows EveningSouthernCross
UniqueThreeRiverBottomThreeRiverMorningStarTwoCrows
ThreeRiverEveningStar

7. ThreeDownGapsThreeUpsideGaps
WhiteThreeLineAdvanceBlock
WhiteThreeLineStarin
Deliberation
BozuThreeWings SimultaneousThreeWings
ThreeCrowsThreeWhiteSoldiers

8. “Sanku” (Three Gaps)
The“ThreeGaps”patternconsistsofthreeindividualgapsinpricethatoccurduringadefinedtrend. The
gapsdonotneedtobeconsecutive,theymayformthroughoutmanydaysoftrading. Thispatternsignifies
thatthemarkethascontinuedinitsdefinedtrendandcurrenttrendmaysoonend. The“ThreeGaps”
patterncanformduringeitherabullishorbearishtrendtoidentifyspecifictrendreversals. Rememberthat
thispatternhasaspecificcorrelationtothe“ThreeLevelFluctuation”theory. Thegapsmayformduringthe
threeindividualpriceadvancesordeclinesthatsupportthe“ThreeLevelFluctuation”theory.
Whena“BullishThreeGaps”isformed,theJapanesecallthis“SankuFumiage”. Itrepresentsaprice
ceilingandoneshouldstartselling. Whena“BearishThreeGaps”isformed,theJapanesecallthisthe
“SankuNageOwari”orthe“SankuTatakikomi”andoneshouldstartorderinglongpositions. Ineither
condition,oncethemarketpricebeginstoreverseandthethirdgapisfilled,oneshouldincreaseone’s
currentlongorshortpositions.
“Sanpei” (Three Parallel Lines)
Theclassicformationofthe“ThreeParallelLines”occurswhenthreeofthesamecolorcandlesappearwith
nopricegapsbetweenthem. Iftheyareallbullishcandles(white),theycreatethe“ThreeWhiteSoldiers”
pattern. Iftheyareallbearishcandles(black),theycreatethe“ThreeCrows”pattern. Thesecommon
typesof“ParallelLines”areviewedasacontinuationofthecurrentmarkettrend.
Thevariationsofthebullish(white)“ThreeParallelLines”aredifferentinshapeandmeaningfromthe
classicformations. The“WhiteThreeLineAdvanceBlock”(Sakizumari)differsslightlyfromthe“Three
WhiteSoldiers”,yetitrepresentsthepossibleendacurrentbullishpricemove. Itdepictsacontinuing
bullishpricemovethatisdiminishinginstrengthandlikelytoreverse. Anothervariationisthebullish(white)
“ThreeLineStar inDeliberation”(AkasansenShianboshi). Itrepresentsthatthecurrentpricemoveis
indecisiveandislikelytoreverse. Often,thispatternmayformintoan“EngulfingBearish”ora“Three
RiverEveningStar”indicatingstrongsellinginthemarketnow.
Thebearishvariationsofthe“ThreeParallelLines”arealittlemorecomplicated. Thefirstisthe“Bozu
ThreeWings”. Itvariesfromthe“ThreeCrows”becauseofagapbetweenthefirstandsecondcandles
andtherequirementthatallthreecandlesbeofthe“Bozu”or“Marubozu”type. Thispatternrepresents
strongbearishpriceaction. Thesecondvariationoccurswhenthesecondcandlesopeningpriceisequalto
thefirstcandlesclosingpriceandthethirdcandlesopeningpriceisequaltothesecondcandlesclosing
price. Sotosay,eachnewcandleopensonthepreviouscandlesclose. Thisiscalledthe“Simultaneous
ThreeWings”,andisanindicationofcontinuedbearishpriceaction.

9. “Sanpo” (Three Methods)
The“ThreeMethods”patternsarerelatedtoone’spositioninthemarket(buy,sell,orwait). Sotosay,one
shouldn’tbuyandsellallyear,itisoftenwisetowaitandnotenteranypositioninthemarket. Thesepattern
groupsindicateacongestionperiodwithinthemarketandoneshouldwaitforconfirmationofnewtrend.
Thesetwopatternsarethe“RisingThreeMethods”andthe“FallingThreeMethods”. Ifthe“RisingThree
Methods”appearsinarisingmarket, oneshouldexpectashortrestbeforeafurtherclimbinprice. Theoppo-
siteistrueforthe“FallingThreeMethods”. Ifitappearsisadecliningmarket,oneshouldexpectashortbreak
beforeafurtherfall.
FallingThreeMethodsRisingThreeMethods

10. Candlesticks are a true leading indicator. They regularly identify potential market price
moves before they begin to happen.
Candlesticks are attuned to the short term trend (3 to 15 trading sessions) when
charted on a Daily basis. To apply candlestick to longer term trending markets, one
must use a Weekly or Monthly chart.
Candlesticks can be applied to any other Western technical oscillators to produce a
synergistic trading approach.
Candlesticks are the only technical analysis tool that generates intuitive text massages
(results) about the inner psychology of any market.
Candlesticks have been relatively unknown, except in Japan, for the last three centu-
ries.
Candlesticks use the same price data as bar charts, yet the candlestick technique better
promotes the ability to recognize complex patterns and to identify what these patterns
mean.
The Japanese candlestick technique consists of hundreds of different patterns that
accurately identify specific market traits or tendencies.
Facts about Japanese Candlesticks

11. 1.Confirmation
“Confirmation”patternsarecreatedafteraninitialcandlestickpatternhasformed. The“confirmation”
patternisconsideredaconservativetradersentrypoint. Theyidentifythattheinitialcandlestickpatternnow
hasahigherlikelihoodofpromptingamarketpricemoveinthedirectingpredicted. “Confirmation”patterns
areanessentialpartoftradingwithcandlesticksandhavebeentaughttogeneratingaftergenerationof
Japanese.
2.Continuation
“Continuation”patternsarecreatedafteraninitialcandlestickpatternhasformed,andnormallyappears
aftera“confirmation”pattern. The“continuation”patternsareusedtoidentifyatrendingmarketandto
maintainanawarenessofthetrendstrength. Manytimes,the“continuation”patternswillformduringthe
individual“ThreeLevelFluctuations”asdescribedearlier. These“continuation”patternsaregenerally
helpfultokeepyoulongorshortduringadefinedmarkettrendaftertheinitialcandlestickbuyorsell
pattern.
3. Combination
“Combination”patternsarefairlysimpletounderstand. Theyarecreatedwhentwoormoreindividual
candlesticks,ortwoormoreindividualmulticandlestickpatterns,oranycombinationthereof,appearside
bysideandissuesimilarsignals. Anexamplewouldbea“HangingmanandDojiLine”foundatorneara
ceiling. Thisisastrongindicationofapotentialbearishpricemove. “Combinations”patternsarenotrare,
theyappearingenerallyallstocksandcommodities. Thekeytotheseuniquepatternsistobeableto
identifythemasastrongerinfluencetoapossiblefuturepricemoveandtohelpidentifythedirectionofthe
futuremove.
4. Confluence
“Confluence”patternsarecomposedofanumberofothertechnicaloscillatorsorpatternsthatassistin
confirmingordenyingthepotentialforanycandlestickpatternprobabilityofsuccess. Forexample,one
mightchoosetouseMovingAverages,Stochastics,MomentumandElliotWaveTheoryas“confluence”
indicatorstoassistindeterminingthecurrentconditionsofanymarketandtoassistinconfirmingthepossi-
bilitiesofthecurrentcandlestickpattern(s). GenerallyallWesterntechnicaloscillatorscanbeusedas
“Confluence”patterns. Thekeyistounderstandtherelationshipsbetweenthepricemovementofthe
chart,therelativechangeintheWesterntechnicaloscillators,andthecandlestickpattern(s)thathave
formed. Thiscouldbeconsideredpartofthe“Sakata’sConstitution”,asitisanunderlyingconcept.
Although,thisismoreafundamentalrealityofprofitabletradingthanaconcept.
Extended pattern groups used with candlesticks

12. Candlestick Pattern Table
¨ Bullish Patterns
¨ Bearish Patterns
Engulfing Bullish - is a common bullish, or buy,
pattern. An engulfing bullish pattern after a defined
down trend normally signals a bullish reversal. It is
normallywisetowaitforconfirmation.
PiercingLine-mayindicatetheendofabearishtrend.
Withconfirmation,thispatternisindicatingabullish,or
buy,signal.
BullishHaramiLine-isindicatingapotentialmarket
reversal. Theharamilineisasignofmarketconsolida-
tion. With confirmation, this pattern is indicating a
bullish,orbuy,signal.
Inverted Hammer with Confirmation - is indicating
thepotentialforabottomreversaliffoundafteradown
trend. Thisisaverycommonbottomreversalindicator
-buywithconfirmation.
Hammer with Confirmation - is the inverse of the
InvertedHammer. RefertotheInvertedHammer.
Confirmation(conservative)-usedtoconfirmcandle-
stickpatterns. Waitingforconfirmationwillhelpreduce
anypremature,orincorrectcandlesticksignals.
Engulfing Bearish - is a common bearish, or sell,
pattern. Anengulfingbearishpatternafteradefinedup
trendnormallysignalsabearishreversal. Itisnormally
wisetowaitforconfirmation.

13. ¨ Doji’s
Thinkofanydojiasatighteningofpriceactivity. Aspriceactivity
tightens, the potential for a reversal or breakout becomes more
probable. Whendojisformingroups,morepressureiscreatedthus
wehaveahighprobabilityofamajorreversalorbreakout. Whenthe
pricetrendestablishesdirection,thepressureisreleased.
Single,highvolumedojisthatgapaboveorbelowpreviouspricelevels
arestrongindicationsofapotentialmajortoporbottom.
DarkCloudCover-mayindicatetheend,or correc-
tion,ofabullishtrend. Withconfirmation,thispattern
isindicatingabearish,orsell,signal. It’snormallywise
towaitforconfirmation.
BearishHaramiLine-isindicatingapotentialmarket
reversal. Theharamilineisasignofmarketconsolida-
tion. With confirmation, this pattern is indicating a
bearish,orsell,signal.
ShootingStarorInvertedHammer-isindicatingthe
potentialofatopreversaliffoundafteranuptrend. This
isaverycommontopreversal,orconsolidationindica-
tor-sellwithconfirmation.
Hangman with Confirmation - is the inverse of the
InvertedHammer. RefertotheInvertedHammer.

14. ¨ Tweezers Patterns:
Adojiisanindicationofextrememarketconsolidation
andshowssignsofapotentialreversal.. Onewithhigh
volumeisshowingtheintensepressureofthetrading
session. Largevolumedojisafteralargepricemoveare
strong indicators of major tops and bottoms. In a
defined,longertermtrend,itisnotuncommontoseefour
or5dojisinagroupthatformnearcorrectionpoints.
DoubleDoji-isindicatingtighteningpressurewiththe
inabilityofpricemovement.
Tweezers patterns show levels of support and resis-
tance.
Tweezersbottomsindicatesasupportlevelat,orbelow
thelowsofthepattern. Ifthesupportlevelisbrokenwith
a large black candle or includes a price gap, proper
actionistosell.
Tweezerstopsindicatesaresistancelevelat,orabove
thehighsofthepattern.
Tweezers tops and bottoms indicates a very tight
supportandresistancelevelnearthehighsandlowsof
the pattern with a strong potential for an accelerated
pricemove.

15. Candlestick Analysis Rules & Suggestions
As one learns to interpret the different candlestick patterns, one should
allways keep in mind the following rules to assist in the proper identification
and possible actions taken from the patterns. There are three simple rules to
interpreting candlestick patterns:
1. Size
Larger candles play an important role when identifying
patterns. They represent accumulation or distribution
within the market or stock. When you begin to see an
increase in size of the candles, the trend is accelerating
and accumulation is occuring. When you begin to see a
decrease in the size of the candles, the trend is
decelerating and distribution is occuring.
2. Shape
The shape of the candlestick, or pattern, determines the
type of pattern generated, the possible trading signal
and the potential direction of trend. Shape and size
work hand-in-hand. A very small Engulfing Bullish
pattern would indicate the potential for a market rally,
yet the small size indicates that the trend has not yet
begun to accelerate.
3. Location
The location of a candlestick pattern will assist in
determining the possible trading signal. For example, a
Shooting Star found after a defined up trend strongly
indicates a potential bearish correction or top. A
Piercing Line found after a defined down trend indicates
a potential for a bullish reversal. Either of these two
patterns found within a consolidated, sideways trend, do
not indicate as strong a potential for a trend reversal,
and one should wait for confirmation of the candlestick
pattern before taking action.