The Candlestick Patterns Trading Guide
If you are just getting into the world of forex trading, then one of the things that you need to know all about are candlestick patterns. Candlestick patterns originated in the country of Japan well over 100 years ago before the western style bar and point-and-figure charts were invented.
In fact, these candlestick patterns were first invented in the 1700s by a Japanese man who saw that there was a link between price and the supply and demand of rice. One of the things that candlestick patterns aim to extrapolate is what the emotions of traders are like. anyway, we will get more into explaining these Candlestick patterns further below.
The point here is that Candlestick patterns are great analysis tools that you can use to place either buy or sell trades, as they show you whether or not there is bullish or bearish momentum in the market. What we are going to do today is to take a closer look at Candlestick patterns and see exactly what they are, how they work, and what the most important ones are that you need to know.
What are Candlestick Patterns?
In terms of what candlestick patterns actually are, they are at special type of chart that are used by many different traders to determine the possible price movements based on those past patterns. Candlestick patterns are extremely useful for trading because they provide you with a lot of information.
Technically speaking they provide you with four different pieces of information, including the open, that close, the high, and the low of a specific asset throughout a certain period of time like a trader has specified.
The fact of the matter is that trading is more often than not dictated by emotion, even though it shouldn’t be, and this emotion can actually be read in those candlestick patterns. Due to the fact that these Candlestick patterns provide us with such a plethora of information, they are often seen as some of the most useful tools in all of trading.
Now, what can get a bit confusing is being able to identify a variety of Candlestick patterns as well as what they need. as you are about to find out further below, there are many different Candlestick patterns, both bearish and bullish comment and they all tell you something different. The trick is of course to be able to read these patterns and to therefore place trades based on what those patterns tell you.
The Components of Candlesticks
Something else that is definitely important for you to know here is what the different components of candlesticks are. So, once again, candlestick patterns show you the markets open, the high, low, and the closing price for the day. Now, a candlestick has a wide part, which is called the real body.
The real body represents the range of price between the open and the close for the day of trading. If this real body is filled in or totally black, it indicates that the close was lower than the open. However, if the real body is empty that means that the close was higher than the open. Moreover, the wicks of the candles indicate the low price of the day and the high price of the day.
What you need to know here is that when it comes to forex, stock market, commodities trading, and more, the fact of the matter is that these candlestick charts do provide you with more or less the same information as bar charts, but most people find that candlestick patterns are much easier to read than bar charts. In terms of identifying the candles, do keep in mind that most people will shade a down candle red instead of black, and up candles are often shaded green as opposed to white.
Pros & Cons of Candlestick Charts
Just like everything in trading, Candlestick charts do have both their pros and cons, so let’s take a look.
- One big advantage is that most indicators work really well with this type of chart.
- Candlestick patterns are very aesthetically pleasing and they’re easy to read. this is a very beginner friendly way of trading.
- What also stands out is that candlestick charts are infinitely customizable, and a single candlestick can represent anytime period of any asset.
- Candlestick patterns are also extremely accurate because they provide you with so many different types of information, including the highs, lows, opens, and closes inside a given time frame.
- This is one of the best possible tools for identifying market sentiment and who is in control of the market.
- One small disadvantage here is that candlestick charts do sometimes have gaps in them where one candle closes at a certain level but the following candle opens at a different level.
- These patterns do also have a tendency to cause what is called apophenia, which is a cognitive bias where we see patterns and things that are actually random. Some people may actually see patterns where none exist.
- Many people make the mistake of thinking that candlestick patterns are all that they need in order to trade accurately. The fact of the matter is that price data alone usually isn’t enough to provide you with enough reliable information to place trades. In other words, do so you have to use indicators.
Some Basic Candlestick Patterns
What we want to do now is to go over some of the most basic Candlestick patterns out there, and exactly what they needed. Remember folks, the trick to candlestick trading is that you actually need to be able to identify the various patterns that you may see within your charts.
Bearish Engulfing Pattern
One of the most basic Candlesticks that you may see is called the bearish engulfing pattern. The type of pattern that develops in an uptrend when there are more sellers than buyers. In this pattern, you will see a long red real body that engulfs a smaller green real body. This is a pattern that indicates that the sellers are back in control and the price could continue its decline.
Bullish Engulfing Pattern
On the other hand, we have the bullish engulfing pattern, which is when the buyers outnumber the sellers. In terms of the candlestick pattern, you will see a long green real body that engulfs a small red real body. This shows that the bulls have established a certain amount of control, and the price could continue to go up.
Candlestick Patterns – The Bottom Line
Today, we have provided you with a basic tutorial on candlesticks, but the fact of the matter is that there are of course dozens, if not hundreds of different patterns out there. Stay tuned and come back tomorrow, because we will be doing a part 2, where we will be talking about all of the most common candlestick patterns that you may encounter, and exactly what they mean.
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