INTRODUCTION

Over the last few decades, traders have begun to use candlestick charts far more frequently than any other technical analysis tool. Candlestick charts have a simple, easy to analyze appearance. Unlike bar or line charts, candlestick charts provide more detailed information about the market at a glance. after reading this topic you can be able to confidently interpret candle charts.

THE BENEFITS OF CANDLESTICK CHARTS

Today, candlestick charts are one of the most common tools traders use for technical analysis. Most traders prefer to use the candlestick chart because it can help them to:

• Determine the current state of the market at a glance. Just by looking at the color and length of a candlestick, traders can determine instantly if the market is strengthening (becoming bullish) or weakening (becoming bearish).

• See the direction of the market more easily.  On a candlestick chart, the color and shape of the candlestick can help traders determine if an uptrend is part of bullish momentum or simply a bearish spike.

• Identify market patterns quickly. Candlestick charts display specific bullish and bearish reversal patterns that cannot be seen on other charts.

 CANDLESTICKS FEATURES

When you open a candlestick chart, you may notice that it looks similar to a bar chart.
At this point, you may be wondering, “So, how can candlestick charts tell me more about the state of the market?” We’ll discuss this in a moment. First, let’s take a closer look at candlesticks.

ANATOMY OF A CANDLESTICK

The candlestick body is a rectangle that represents the level of trading activity for a specified period. For example, on a chart with a ten minute time scale, a candlestick would represent all of the trading activity in a ten minute period on the market.

Candlestick shadows (also called tails or wicks) are the thin lines above and below the body. An upper shadow displays how high trading went while a lower shadow shows how low it went.

READING CANDLESTICKS

 

The appearance of the candlestick body and its shadows provide a lot of information about the state of the market and where it’s going. The length of the candlestick body shows where the majority of the trading took place. A long body suggests that the market is trading heavily in one direction,
while a small body indicates lighter trading. In our examples, you’ll notice that green candlesticks appear in an “up” candle; in other words, the currency closed higher than the previous candle’s close. Red candlesticks show a “down” candle or that the currency closed below the previous candle’s open.

Traditionally, up trends were represented by white candlesticks, while down trends were depicted by black candlesticks. Today, traders using DealBook® 360 can select any color combination they want. For our purposes, we’ll continue to use the green and red colors to show ups and downs.

IDENTIFYING CANDLESTICK PATTERNS

Being able to read the candlesticks in a candlestick chart can help you see the current state and direction of the market. This can help you make decisions about
the market now, but how about what the market will do in the future?
Candlestick charts can also display specific bullish (strengthening) and bearish (weakening) patterns that cannot be seen on other charts. These can help you find potential market opportunities and make decisions about what to do in the future. Let’s look at a few patterns that may help you.

ONE-DAY REVERSAL PATTERNS

One pattern that traders frequently look for is a candlestick reversal pattern. You may already know that a reversal indicates a sudden change in the market direction. For example, a bullish reversal means that the market may move up from a down trend while a bearish reversal indicates that the market is shifting
down from an up trend.
A one-day reversal is usually a signal that the general direction of the market for that day is changing. While one-day reversals are significant to traders for short term trading, they know this pattern can also be the starting point of a more long term market reversal.

When a doji appears on a chart, it usually means the opening and closing prices of the candlestick were identical. This means that the market reached the end of the trend and temporarily balanced. Usually, the markets tend to reverse after a doji appears, although significant market pressure on one side may postpone the reversal briefly. There are many variations of the doji. For example, the long-legged doji has long upper and lower shadows that show the level of trader indecision in the market. When a doji appears midway through an up or down trend, the pattern is called a rickshaw man. Often, the appearance of this doji means that the trend is about to reverse suddenly.

A doji may also appear with other patterns that indicate reversal trends in the market. Whenever a doji appears, traders should watch the market and prepare for a reversal.

TWO-DAY CANDLESTICK REVERSAL PATTERNS

Another type of candlestick reversal pattern is the two-day reversal pattern. Again, this kind of reversal signals that the general direction of the market is changing, but the change occurs over two days. These patterns appear at an extreme up or down trend in the market, so many traders watch for these patterns so that they can manage their own position in the market. Like one-day reversal patterns, a two-day reversal pattern can be either bullish or bearish. In this section, we’ll look first at bullish and then bearish reversal patterns. The most common bullish reversal patterns are the bullish engulfing pattern and the piercing line pattern.

In contrast, the two most common bearish reversal patterns are the bearish engulfing pattern and the dark cloud cover pattern.

Again, recognizing these reversal patterns in a trend helps traders make decisions about their position and prepare for movement in the market.

THE “WAIT AND SEE” PATTERNS

While most patterns on the candlestick chart can show you possible up or down trends, certain patterns can also indicate when traders should slow or stop trading and wait for clearer market signals. These are called wait and see patterns; two of the best known are the inside range and tweezers.

When an inside range occurs, the market movement is slight and provides little indication of its direction. For traders, this pattern usually means securing their positions and waiting until a new pattern in the market emerges.

The tweezers refers to two consecutive candlesticks that have matching highs or lows. When the consecutive candlesticks have matching highs, the pattern is called a tweezers top. When candlesticks have matching lows, the pattern is a tweezers low.

The tweezers pattern indicates that a currency is rising to a specific price, falling to a lower price, and then repeating the rise and fall. As with the inside range pattern, traders who can see a tweezers pattern in the charts should slow and even possibly stop their trading until a clearer trend in the market emerges.

SUMMARY AND CONCLUSION

While candlestick charting may seem like a lot to learn, don’t worry. As you read candlestick charts, these common patterns will become more familiar to you. Over time, you’ll learn about other patterns and combinations of patterns that you can use to determine the state of the market, anticipate its possible direction, and identify market patterns.

One of the best ways to analyze candlestick charts and test your knowledge of patterns is by opening a GFT practice trading account. If you already have a live account with GFT, you can also view candlestick charting on historical data. DealBook® 360 enables you to view candlestick charts in a range of time scales and even compare other charting types. In no time at all, you’ll see why candlestick charts are one of the most popular and truly useful technical analysis tools.