In Japanese Candlesticks, Windows are the same thing as Gaps (sometimes). I will use both of these terms in the course from time to time.

At times I will use the phrase that the market Gapped on the open meaning that the price gapped up or gapped down. It does NOT mean that a Window formed since it can only do that at the close of the day.

A Window must be completely void of ANY price action. As the graphic below shows what is not a Window and what is a Window. Many traders incorrectly think that a Window should be drawn between the bodies and not drawn between the shadows. That is NOT correct.

Windows CAN be powerful continuation signals AND they can be powerful reversal signals too. It depends on the direction of the Gap.

A Rising Window in an uptrend is a strong continuation signal and a Falling Window in a Downtrend is a strong continuation signal.

The size of the Window is not of major importance but if it’s just a tick or two and I would not count that as a Window but some people do. However, a huge Window can pose a problem that I will discuss below.

A Rising Window is a Gap up and a Falling Window is a Gap down. In Western analysis, we will say that the Gap filled whereas in Candlesticks they will say that the Window closed. They mean exactly the same thing.

A Window should not have a shadow at all anywhere in the Window itself and if it does it’s not a true Window. As mentioned, a Window MUST be void of any price action.

Below is a graphic of both a rising and falling window. Remember it’s the same thing as a Gap and is traded the same way. You can see where I indicated the Windows opened and closed.

A Rising Window should act as support and a Falling Window should act as resistance. Japanese say that “corrections stop at the Window. This simply means that Windows can act as support or resistance areas.

Quite often all of us will miss the Window when it appears and feel that we missed out on the trade. That’s true sometimes but other times the price will come back and “fill” the Gap and then head back in the same direction. When this happens it’s often a great opportunity to enter the trade on the pullback or retracement.

Some people say that Gaps always fill. While that is true most of the time it may take weeks or months for that to happen. I feel that if the Window does not close in a reasonable period of time, then I just disregard it. The question remains what a “reasonable” period of time is. I would say that if it doesn’t fill in a few weeks then I don’t see it as a valid signal to get back in. Sometimes I’m right and sometimes I’m wrong but it’s always a good idea to keep an eye out when they happen.

In the above graphic you can see that each time the Window filled it was the lower or upper shadow that filled it. It does not have to be filled with the body of the Candle to be valid.

There is a saying that markets don’t like “voids” and an open Window is a void.

The market needs to CLOSE above or below the window for the Window not to continue to be a valid support or resistance area. In a Rising Window, the window is still a support area until the body of a Candle closes below it. It doesn’t matter if the lower shadow drops below it or not. It has to be the body of the candle that closes below it for that support area to be broken. It’s just the opposite for a Falling Window.

I feel that Windows can provide a great opportunity for all of us. Keep in mind that since Windows will often act as support or resistance levels so they can be excellent places to place your protective stops or to lock in profits.

If you are long the market and see a Rising Window it’s not only great news, and also a place to lock in profits. Just the opposite holds true for a Falling Window.

Never trade markets with low volume. Look at the extremely low volume on the chart below when the Windows appeared. The chart looks horrible and the Windows are not to be trusted in such a thin market.

Click the chart to enlarge the chart.

I’ve explained that Windows can act as support and resistance levels. The problem with really wide Windows is that the support or resistance area is so wide that it might be the best place to put your protective stop because it would incur too much risk. There are other ways to look at a good place to put your protective stops. I will cover this in more detail at the proper time.

Look at the chart below. There was a large Window, but I would not have traded this even if I had been lucky enough to catch the gap up on the open that ended up forming a Rising Window. Why would I have not traded it? Simple, the Risk would have been $920.00 with a Reward of only $870.00, (B). Also, look at all the past resistance that the price tried to get past for many days at (A)

Enlarge The Chart

See the chart below. Just for an example, I put a buy stop order just over the prior resistance area at 85.225. I think you should wait another day before you place the order because you want to make sure the price CLOSES above the resistance area. But this is just an example.

I would have kept a very tight stop just under the prior resistance because as you know, resistance can become support. By doing this, I would have a small risk and a potential to make money if the market rallied, even if it stopped at the next resistance area and not the top resistance area.

As you can see, the market dropped very hard. The Doji was my “guiding light’ on this trade. Hats off to the Doji.