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<h2>Types of Doji</h2>
In Japanese, the word Doji means the "face of innocence". In candle charts, it is the name of any candle where the opening price is equal to the closing price.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure1.jpg" alt="" />
<figcaption class="figure-caption">Figure 1 - Types of Doji</figcaption>
</figure>
 
The name is, therefore, quite appropriate as this candle body reveals nothing about market pressures except the fact that during the period upon which the candle is based, buying pressure and selling pressure were exactly equal – the daily battle of the markets ended in a draw. The first candle in figure 1 is the true Doji. It reveals absolutely nothing as even the shadows are of equal length. The second candle is a Dragonfly Doji. The long lower shadow would indicate either bearish failure or bearish emergence, depending upon whether it is located in an uptrend or a downtrend. The third candle is a Gravestone Doji. Its long upper shadow would indicate either bullish failure or bullish emergence, depending upon whether it is found in an uptrend or a downtrend.
 
Signals like the Hammer, Inverted Hammer, Shooting Star and Hanging Man frequently have Doji type bodies. When this is the case, it provides added strength to the signal. Doji candles are generally considered by the Japanese as more powerful signals when they are encountered at the top of a trend rather than at the bottom of a trend. The single most important aspect of the Doji is that it signals that the battle between the bulls and the bears in the market has been fought to a standstill. If found at the end of a trend, it could imply that a reversal is imminent. Doji candles are also found during moments of uncertainty.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure2.jpg" alt="" />
<figcaption class="figure-caption">Figure 2 - More Types of Doji</figcaption>
</figure>
 
The first candle in figure 2 is created when open, close, high and low prices for the period are all exactly equal. This situation is usually brought about when there is little activity and, more frequently, when there is very low volume. It is a meaningless signal unless it comes into existence on high volume. The second candle in figure 2 has a small body. It is, however, also regarded as a Doji due to the smallness of the body. Unfortunately there are no hard and fast rules that determine when the size of a small body may or may not be regarded as a Doji. It is left entirely to the user’s discretion. The best guideline that can be offered is that the body must be very small relative to the average size of the other candles on the chart. The third candle in figure 2 is a very significant one. It is called a Rickshawman and it signals uncertainty. It is not in itself a reversal signal. This candle is a clear statement that buying and selling pressures have both tried to gain dominance and both have failed - hence the long shadows. It is often followed by candles that contradict each other as market pressures fluctuate and swing first in one direction and then the other while the period of uncertainty continues.
 
What follows is an extract from the chart of Afrimat (AFT) between June 2020 and March 2021. Afrimat is a secondary share which generally trades around R8m worth of shares every day on average. This type of share will have may doji candles. Consider the chart:
<figure><img class="figure-img img-fluid" src="/onlinecourse/images/afrimat.jpg" />
<figcaption class="figure-caption">Afrimat: June 2020 - March 2021. Chart by ShareFriend Pro.</figcaption>
</figure>
 
<figure><img class="figure-img img-fluid" src="/onlinecourse/images/standard_bank.jpg" />
<figcaption class="figure-caption">Standard Bank: June 2020 - March 2021. Chart by ShareFriend Pro.</figcaption>
</figure>
 
This chart is for a similar same period as the Afrimat chart above – but you will see that it has absolutely no doji candles at all. This is because on average at this time Standard Bank shares were trading over R530m worth of a shares a day – 66 times the volume traded in Afrimat.
 
<h2>Stars</h2>
The term Morning Star and Evening Star do not describe individual candle bodies; they refer to the position of candles at the end of a trend. The morning star is a precursor to dawn and the evening star precedes nightfall. As the Japanese liken daylight to bull trends and night to bear trends, the Morning Star is regarded as signalling an uptrend and the Evening Star as signalling a downtrend. Any candle or candle signal can be found in a star position.
The first candle of figure 3 represents the last candle at the end of the uptrend. The candle in the centre is a Hanging Man in Evening Star position. The candle on the right is the confirmation of the reversal signal. In the example, the gaps have been enlarged in order to emphasise the signal. For the purpose of interpretation, a small gap between the first and second candle is quite acceptable and it would even be acceptable if the lower part of the second candle’s body was equal to the upper part of the first candle’s body. The gap between the bodies of the second and third candle is also not strictly necessary. Gaps are, however, preferable and add strength to the signal. It is a strict rule that no star signal can be regarded as valid until confirmed.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure3.jpg" alt="" />
<figcaption class="figure-caption">Figure 3 - Hanging Man in Evening Star Position</figcaption>
</figure>
 
The example in figure 4 is a Shooting Star in Evening Star position. Please note that it is a perfectly valid signal in spite of the fact that the second candle’s body is within the upper shadow of the first candle and that the confirming red candle overlaps into the body of the second candle.
<figure><img class="figure-img img-fluid" src="/onlinecourse/images/Figure_26_-_Shooting_Star_in_Evening_Star_Position_resised_2.jpg" />
<figcaption class="figure-caption">Figure 4 - Shooting Star in Evening Star Position</figcaption>
</figure>
 
In figure 5, the first candle represents the last candle at the end of a downtrend. The second candle is a Dragonfly Doji in Morning Star position. The third candle is confirmation of the signal.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure5.jpg" alt="" />
<figcaption class="figure-caption">Figure 5 - Dragonfly Doji in Morning Star Position</figcaption>
</figure>
 
The signal in figure 6 is called an Abandoned Baby in Morning Star position. The small second candle is also called a Spinning top. The following points should be noted:
<ul>
<ul>
<li>Any small candle that is too large to be regarded as a Doji, is called a Spinning Top.</li>
<li>In order for a candle to be regarded as an Abandoned Baby, it has to be small and it has to have gaps in both directions as per the example. Most Abandoned Babies are Doji or near-Doji candles. The example used here is not very common and it was used for the dual purpose of also introducing the Spinning Top.</li>
<li>Abandoned babies are more commonly found as top reversal signals, i.e. in Evening Star positions, rather than at the bottom in Morning Star position.</li>
</ul>
</ul>
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure6.jpg" alt="" />
<figcaption class="figure-caption">Figure 6 - Abandoned Baby</figcaption>
</figure>
 
The signal in figure 7 is a rare signal called a Tri-Star in Morning Star position. The first candle represents the last candle at the end of a downtrend. The second, third and fourth candles are all doji candles. The fifth candle that appears is confirmation of the signal. This formation is regarded as a powerful signal and implies that a strong bull trend will follow.
 
<figure><img class="figure-img img-fluid" src="/onlinecourse/images/jse_oVERALL_INDEX.jpg" />
<figcaption class="figure-caption">JSE Overall Index: 26th October 2020 - 19th February 2021. Chart By ShareFriend Pro.</figcaption>
</figure>
 
The chart above shows the JSE Overall index from 28th October 2020 to 27thth February 2021. You can see the downward trend which ends with an abandoned baby, the confirmation candle and then the new upward trend.
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure7.jpg" alt="" />
<figcaption class="figure-caption">Figure 7 - Tri-Star in Morning Star Position</figcaption>
</figure>
 
The Tri-Star in Evening Star position in figure 8 is almost identical to the one in figure 7, except that it appears at the end of an uptrend. The first candle represents the last candle of an uptrend. The following three doji candles signify extreme uncertainty in the market and subsequently lead to a change in the direction of the trend. The Tri-Star candle formations are extremely rare and should always be taken into consideration.
 
The following chart shows Firstrand from 28th August to 29th December 2020. The tri-star formation after a downward trend signals the new upward trend.
<figure><img class="figure-img img-fluid" src="/onlinecourse/images/FIRSTRAND.jpg" />
<figcaption class="figure-caption">Firstrand: 28th August 2020 - 29th December 2020. Chart by ShareFriend Pro.</figcaption>
</figure>
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure8.jpg" alt="" />
<figcaption class="figure-caption">Figure 8 - Tri-Star in Evening Star Position 
 
</figcaption>
</figure>
Caution: Before acting on the above signal/s, it is advisable to first check on new fundamental factors that may have influenced the market. It is not uncommon for a trend to weaken and then strengthen as fresh information becomes available.
 
 
<h2>Continuation Signals</h2>
It is useful to be acquainted with continuation signals, but it is dangerous and risky to act upon them. The reason for this is because they can only be truly recognised with the benefit of hindsight. Theoretically, they are formed on low volume. This has led many analysts to claim that continuation signals can be recognised. Unfortunately, this reasoning is very flawed because:
<ol style="text-align: justify;">
<li>While they are in the process of being formed, continuation patterns and trend reversal patterns can look the same;</li>
<li>When a trend runs out of steam, it frequently happens that volume dries up and the reversal can occur on line volume.</li>
</ol>
On the positive side, it should be noted that continuation signals most commonly occur after very strong moves in the direction of the ruling trend, such as, for example, a very long green candle in an uptrend. Their most common occurrence, however, happens after a gap. And the bigger the gap, the greater the likelihood of a continuation signal coming into existence. The reason for this is that continuation signals come into being because they are periods of profit taking (in an uptrend). It is the strength of the move that provides the motivation to take profit.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure9.jpg" alt="" />
<figcaption class="figure-caption">Figure 9 - Rising Three Methods</figcaption>
</figure>
 
In a downtrend, continuation signals come into existence mostly due to a faulty perception of the price having reached a bargain level, thus creating a small amount of buying pressure.
The Japanese call the pattern in figure 9 a Rising Three Methods. Western analysts call it a Bullish Flag. In the example, the first candle represents the strong move, the three small red candles represent the period during which the price was driven down due to profit taking and the fifth candle shows the continuation of the trend. The Japanese believe that in order for the signal to be valid, the profit candles, i.e. the red candles, should be contained within the body of the first long green candle. In practice it will be found that there are sometimes exceptions to this rule. It should also be noted that the Japanese regard three as a very lucky number. This is misleading as this signal can have anything from one to fifteen or twenty candles and still be valid as a signal. The main criterion is time. Some analysts believe that continuation patterns can take up to three weeks to complete. It is recommended that any continuation pattern lasting longer than a week be viewed with suspicion. Much depends upon the volumes involved and the liquidity of the share in question.
In figure 10 you can see a bearish continuation pattern which is the exact opposite of the one above and it is called Falling Three Methods. Western analysts call it a Bear Flag.
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure10.jpg" alt="" />
<figcaption class="figure-caption">Figure 10 - Falling Three Methods</figcaption>
</figure>
 
Western analysts have invented a variety of names to describe the various configurations that can be found in continuation signals. It should be noted that there is no real difference between them and they all mean the same thing, even though they look different. The following are two more examples:
 
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure11.jpg" alt="" />
<figcaption class="figure-caption">Figure 11 - Triangle</figcaption>
</figure>
 
This (figure 11) is called a Triangle. It is neither bullish nor bearish in this example and the next move will provide direction, depending on which way the price breaks out. Triangles are most commonly continuation patterns and tend to continue in the direction of the prior trend. More often than not they are merely periods of price consolidation.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure12.jpg" alt="" />
<figcaption class="figure-caption">Figure 12 - Bullish Pennant</figcaption>
</figure>
 
This (figure 12) is called a Bullish Pennant and implies continuation of the uptrend. This is very similar to a triangle but occurs over a shorter time period.
<h2>Uncertainty</h2>
When buying and selling pressures both fail to gain dominance, the market trends sideways. Candles frequently (but not always) signal the beginning of such periods of uncertainty with a Rickshawman (see types of Doji above). If the uncertainty continues, candles begin to contradict each other. When this happens there are only two options:
<ol>
<li>Wait it out.</li>
<li>Add the conflicting candles together to form one candle in the hope that a clearer signal will emerge.</li>
</ol>
In the below example (figure 13), the first candle, with very long upper and lower shadows, is the Rickshawman, representing the beginning of the uncertainty period. The second, third and fourth candles represent the period of uncertainty where the candles contradict each other.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure13.jpg" alt="" />
<figcaption class="figure-caption">Figure 13 - Rickshawman</figcaption>
</figure>
 
The last candle is the sum of candles two, three and four. Using the opening price of the first candle after the Rickshawman and the closing price of the last (fourth) candle performs this “trick”. Using the highest high and the lowest low provides the shadows. As can be seen from the example, the last (manufactured) candle is an Engulfing Green, which implies that the market will rise.
Considerable caution should be exercised when using this technique as there is no guarantee that the trend will not continue sideways. In this example only three candles were used for the purpose of demonstration, but sideways trends can sometimes continue for a considerable length of time.
 
<h2>Periods</h2>
Candles can be based upon almost any period: daily, weekly, monthly, quarterly, or, for the purpose of intraday trading, 30 minute, 60 minute etc. Periods of less than 30 minutes for intraday trading is not recommended, unless the chart is extremely active and extremely liquid such as currencies.
No matter what period is used, the rules/guidelines for interpretation of candle signals remain the same. It should, however, be kept in mind that candles based upon longer periods are senior to candles based upon shorter periods e.g. signals obtained from a daily chart over-ride signals obtained from a 60 minute chart etc. In general, our advice is to use daily candlestick charts.
 
<h2>Volume and Liquidity</h2>
Candle signals fail in the face of low liquidity and they become unreliable (which is true for most technical indicators using any method). The reason for this is quite simple: candles reflect the interaction between market pressures and when market pressures are absent there is really nothing to reflect. Conversely, the higher the liquidity of a chart and the more active it is, the more reliable the candle signals become.
 
<h2>Supplementary Tools</h2>
Newcomers to candles sometimes become so enamoured with the subject that they tend to forget, or overlook, the fact that there are other very useful technical indicators that can be used in conjunction with candles. Bollinger Bands, Stochastics and trend lines are particularly useful when employed with candles.
 
<h2>Multiple Candle Reversal Patterns</h2>
The examples provided in this section are major reversal patterns and are usually found at market tops or bottoms.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure14.jpg" alt="" />
<figcaption class="figure-caption">Figure 14 - Three Buddha Top</figcaption>
</figure>
 
The Japanese call this pattern a Three Buddha Top and Western analysts call it a Head and Shoulders formation. Although this is a major top reversal pattern, it can, on rare occasions, be encountered as a continuation pattern in a bear trend and, even more rarely, in an uptrend.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure15.jpg" alt="" />
<figcaption class="figure-caption">Figure 15 - Three Mountains Top/Triple Top</figcaption>
</figure>
 
The Japanese call this a Three Mountain Top and Westerners call it a Triple Top. In essence it is the same pattern as the Head and Shoulders. The only difference is that this pattern has three peaks at about the same level, whereas the Head and Shoulders has two shoulders and a head which is higher than the shoulders. The same fluctuations in market pressures that bring about the Head and Shoulders also bring about the Triple Top.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure16.jpg" alt="" />
<figcaption class="figure-caption">Figure 16 - Inverted Three Buddha/Inverted Head and Shoulders</figcaption>
</figure>
 
This bottom reversal pattern is logically called an Inverted Three Buddha, or an Inverted Head and Shoulders.
When it has three troughs of approximately equal lows, it is called a Three River Bottom by the Japanese and a Triple Bottom by Western analysts.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure17.jpg" alt="" />
<figcaption class="figure-caption">Figure 17 - Broadening Formation</figcaption>
</figure>
 
The Japanese recognise this as being part of the same family and simply call it another Three Mountain Top. Western analysts call it a Broadening Formation, while some call it a Megaphone. The favourite theory is that the size of the drop can be predicted by measuring the width of the mouth of the megaphone at the point where the price breaks below the bottom trend line, then deducting this figure from the value at the point of the breakout.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure18.jpg" alt="" />
<figcaption class="figure-caption">Figure 18 - Frying Pan Bottom/Saucer Bottom</figcaption>
</figure>
 
This is a particularly powerful bottom reversal pattern. The Japanese call it a Frying Pan Bottom. Westerners call it a Saucer Bottom, or a Rounded Bottom. Unlike most reversal patterns, this one shows a degree of calmness during its formation as opposed to the Mountain variety with their nervous upswings, downswings, peaks, troughs and spikes.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure19.jpg" alt="" />
<figcaption class="figure-caption">Figure 19 - Dumpling Top</figcaption>
</figure>
 
To the Japanese this is a Dumpling Top and to the Westerners it is a Rounded or Saucer Top. The basis of this pattern is distribution. It is merely the topside mirror image of the Frying Pan Bottom. It is also a much rarer pattern due to there usually being greater nervousness at the top than at the bottom.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure20.jpg" alt="" />
<figcaption class="figure-caption">Figure 20 - Tower Top</figcaption>
</figure>
 
This is called a Tower Top. Westerners call it a Spike Top. They are formed during a well established bull trend and extreme uncertainty in the market. The first candle is long and white/green followed by three spinning tops, and finally a long black/red candle. This is a reversal signal and implies an end to the uptrend.
<figure class="figure"><img class="figure-img img-fluid" src="/onlinecourse/img/mod29_figure21.jpg" alt="" />
<figcaption class="figure-caption">Figure 21 - Tower Bottom</figcaption>
</figure>
 
A Tower Bottom to the Japanese and a Spike Bottom to the Westerners, it is emphasised that the Tower Tops/Bottoms can be formed over extremely short periods, sometimes in less than an hour for the final spike. They can, however, also be formed over a period of months.
The subject of Japanese Candles is large. There are, in fact, a great many more signals than covered in this module. A certain US company claims to have catalogued about 1400 signals. This module provides all the main signals and should enable the user to gain a fairly thorough understanding of the subject, to the point where candles can be successfully used as a powerful trading tool and/or as an educational aid to a better understanding of fluctuating market pressures.