The first thing to understand about Japanese candlesticks is that they are champions at detecting trend changes. The second thing is to always use them in conjunction with your favorite variety of reliable indicators. The third is to know that when used in conjunction with Indicators they reflect the underlying psychology of traders, as a group (or herd, if you prefer). The fourth thing is to memorize the 15 or so candlestick reversal patterns. That’s easy, and you have to put your mind to it.

My all-time favorite of all the Japanese candlestick reversal patterns is the shooting star. After a long uptrend, it appears high up in the sky, above previous prices, all by itself. It looks a lot like a real shooting star, or maybe more like a comet, but we won’t argue with that: it has a small head, a long tail, we have to look up to see it, and it points towards Earth. It is a roaring bearish warning. Many traders will enter a bearish position on sight or at the latest the next day if prices open below the shooting star. It is a very reliable pattern.

The Evening Star is another favorite. It appears only at the high end of a long uptrend. This is a three bar pattern, of which the first bar is a tall white candlestick, indicating a strong bullish day. The middle bar will show a much smaller price range between the open and close (ie the “real body”) at or above the previous day’s high. It is as if someone has hit the brakes and now has stopped the car and is looking around, surveying the landscape, before continuing. The third bar will be a tall black candlestick, which is evidence of a strong down day, and also the fact that the trend has reversed from top to bottom. The Evening Star is a generally reliable reversal pattern. Many traders will open a short position immediately after it appears. Monthly bars for Goldman Sachs, Bear Stearns and Merrill Lynch all showed Evening Star patterns in their stocks at the start of the last big slide.

Every trader should learn the top 15 or so candlestick reversal patterns and learn how to use them every day to spot reversals after they have just emerged or, better yet, while they are in the process of forming.