This candlestick investigation article was written in 2008, while it’s still absolutely legal now, I have enlarged on the subjects discussed here.
To browse my latest articles on candlestick investigation, have a look at my totally free amount actions technique.
People are frequently told how to trade candlesticks by pinpointing routines. The issue with distinguishing routines is that you simply don’t ever know what exactly is supporting this pattern. Exactly why can the candle layout form? What exactly does the candle layout mean? Exactly why can the candle layout mean exactly what this means? Ask most professional traders those questions plus also they won’t have the ability to reply.
In this two part series I shall explainin a easy yet thorough way, exactly what candle patterns really are and how to see properly.
Understanding Candle Patterns – Part One
Running fxarticles.com I often obtain to Talk with newbie traders in their own trading strategies. Some times I must wait laughter whenever I view these overly intricate index dependent systems. Most traders have no idea that the candles within their graphs provide them much more advice than signs will. Here’s just a brief collection of exactly what a few very simple candle scanning may tell a trader concerning market terms:
– Who has control of this marketplace: the sellers or buyers (bulls or bears).
– When the marketplace is prepared to show around i.e. bearish tendency is perishing and dying tendency is now starting.
– What sellers and buyers are believing and at which the amount is going.
– When to make benefits via an open location.
– When to put on a open position.
Overall having the ability to learn Candlenese organizers can allow you to an even more productive trader.
Traders have a tendency to check at candles and watch such little boxes which let them know drops, lows, opens, and sticks. But, candles aren’t as black and white, They are now a window in to the marketplaces mind. They signify to people exactly what sellers and buyers are believing and this advice is valuable to an individual trader. The one issue is you need to find out just how to learn it…
Can You Read Candle Patterns?
I am imagining you have tested that huge collection of candle layouts, together with dozens of names that are strange, and also you have tried to perpetrate all that drivel into memory. Do you know what ? It’s impractical to consider dozens of routines and exactly what they mean. That list only provides you the illusion to be able to learn candle routines, without actually learning how to see them. If you don’t understand just what listing of candle routines I am speaking about GOOD. Don’t even bother looking for it, as all you will be doing is filling your head with useless nonsense.
In this article, I am not just going to show you a pattern and tell you what that pattern means. That is the fools way of reading candles. In this article, I am going to teach you how to truly read a candle pattern. I am going to explain how and why candles form the way they do. This insight, I hope, will give you the knowledge and skills you need to be able to read candle patterns. So forget about all those stupid candle pattern names like dojis, hammers, and morning stars. Its time to learn how to read and interpret all candles by learning how and why they form.
Candle Reading For Dummies
Before we delve into reversal patterns, I am going to have to tell you what bullish and bearish candles are and what they mean. I know, I know, you’re not stupid but just keep reading because you might just learn something here. This is what I am talking about when I say black and white candles, seem like a black and white thing: very simple, no-thinking-needed. However, even these two basic types of candles can have little shades of grey hidden away deep inside. So let’s jump in and discuss bullish and bearish candles:
All Candles are Born Neutral
You might be thinking ‘exactly what the hell is that? . Why does this nutter set an image of a lineup? ‘. Well that’s not just a line, that is a newborn baby candle. Isn’Can it be cute? That lineup there’s really a neutral candle, so it’s a brand-new candle that’s to maneuver one pip in direction. Collars are constantly produced impartial. Once arrival they are able to grow to eventually become bearish, bullish or about infrequent occasions neither (everything you almost certainly know as Doji’s). If a candle has been born we all traders don’t know very well what it’ll end up. We can assume but we don’t truly understand exactly what a candle is before it expires (closes).
After a candle has been born the conflict begins. Even the bulls and the bears fight out it and also the candle exhibits to those that is winning. Whether there are buyers at the marketplace you may realize that the candle progress and shape a candle that is homogenous. Whether you can find more sellers you could observe that the candle go and eventually become a bearish candle. I understand this is very obvious but think of this for a moment. This tiny candle is a sign which tells us that is now winning the conflict, the bulls or the bears. Don’t you find that amazing? I certainly do!
A bullish candle is what I call any candle that has a bullish body. So after our baby candle grows up and dies (closes) if it dies with a bullish body, it is a bullish candle. If it has a strong bullish body it is a strong bullish candle. If it has a small bullish body it is a weak bullish candle. Simple right? But think about it. The candle does not only tell you the amount it tells you the bulls are winning, they have power. There are more buyers than sellers!
This is critical information in this marketplace. If your system tells you to go short but the candle is clearly bullish, it might be a good idea to hold off on the short. Why would anybody go short when there are more buyers in the marketplace?
A bearish candle is what I call any candle that has a bearish body. So what does the bearish candle tell us? It tells us there are more sellers in the marketplace than there are buyers. It tells us that the sellers are currently in control, so a long position would not be a great idea.
So what have we learned so far?
- Bullish Candle:There is currently more purchasing pressure in the marketplace. As long as buyers maintain enough purchasing pressure the candles will be bullish. If purchasing pressure eases and selling pressure increases bullish candles will become smaller, representing decreased bull strength.
- Bearish Candle: There is currently more selling pressure in the marketplace. As long as sellers maintain enough selling pressure the candles will be bearish. If selling pressure eases and purchasing pressure increases, bearish candles will become smaller, representing decreased bear strength.
If you have been trading for a while you’ve probably heard the term ‘modification candle’. That term is a bit of a misnomer because the candles it refers to are not actually reversal candles, they should be called ‘indecision candles’.
Reading candles is easy you just need to put it in terms of a battle, medially the bulls and the bears. I already explained that a candle with a bullish body indicates that the bulls are winning and a candle with the bearish body indicates that the bears are winning. We can say that because we are putting it in terms of a fight medially the two. So what do candles like these ones tell us?
You may recognize these are reversal candles but I call them ‘indecision candles’ and here is why.
The candle tells us that nobody has really won the fight. Sure the candle has a tiny bullish body but overall they were held back from making a significant move. The bears too where obviously held back. They tried to move as the wick shows but they had no luck. So in the struggle the bears pushed down, the bulls pushed up, but they were near equally matched, so we did not see a significant break in either direction.
The point here is to stop looking at candles as shapes, look at them instead as the story of the battle medially the bulls and bears. If the candle has a strong bullish body it means the buyers control the marketplace. If it has a strong bearish body it indicates the sellers control the marketplace. If the candle instead has a small body and a long wick, like the candle above, it tells us that the bulls and the bears have near equal amounts of strength so nobody is winning. Now I am going to throw in a dumb pic to illustrate what an indecision candle is:
This is why an indecision candle is an indecision candle. The sliders have numbers from 0 to 10. When the bulls are at 10 it means they have a lot of power when they are at 0 it means they have no power. The similarly goes for the bears. So what happens when they are closely matched in terms of power? Thats right, an indecision candle forms. So when the bulls and bears have equal amounts of power you will obtain indecision. As soon as one side gains power the candle will show who has gained power.
In the picture down from, we see that the bears have a lot of power and the bulls have very little, so now we have a large bearish candle.
This should really drive home what the candles you know as reversal candles really mean. They do not indicate a reversal, they simply indicate that the bears and bull have equal power and that direction is undecided.
Shades of Grey
So stop thinking of candles as boxes that just show us highs, lows, opens, and closes. Candles tells us the story of the pair. They tell us when there are more buyers, when there are more sellers, and when the buyers and sellers are equally matched. These are the shades of gray I was talking about earlier.
The Three Parts Of a Reversal Trade
Even though an indecision candle is not a reversal candle, in the right context, it can indicate a possible reversal. An indecision pattern indicates a possible reversal when it forms after a strong move. The possible reversal is confirmed if the indecision candle is followed by a candle moving in the opposite direction. In the pictures down from, you can see several examples of indecision patterns that you should consider reversal patterns.
Why are these considered reversal patterns though? To answer that lets once again delve into the minds of buyers and sellers.
Ok so let’s look at the before all else part of a reversal. This is something I call the preceding trend/candle. Simply put, this is a strong move by the bull/bears indicating a lot of buying/selling pressure. In this example, the preceding trend/candle is a very strong bearish move, indicating that there are a lot of sellers in the marketplace and very few buyers.
You may be thinking ‘exactly why is really a preceding trend/candle that an vital portion of a change? ‘. Well the answer is very simple. If an indecision candle forms without a preceding trend/candle what the heck could it possibly be reversing from? If it is not reversing from everything it cannot be considered a reversal candle, right? I will explain this a little more later. Now I am going to add another of these stupid pictures:
So this is the preceding bearish trend. You can see the bears have a lot of power while the bulls have very little. This is why the amount is moving down, but then…
Look at that. We have an indecision candle forming in the middle of a strong bearish trend. Let’s think about what happened here for a second. In the picture above, we see that there was a lot of selling pressure and the bears had control. All of a sudden, we obtain this indecision pattern, and if you have been paying attention you know what that means. An indecision pattern means that the bulls and bears now have equal power. In other words, it means some sellers have left the marketplace and some buyers are coming into the marketplace. This transition of power is reflected by the indecision candle.
The reversal confirmation is the point at which, in the example above, buyers flood the marketplace and selling pressure decreases. So now we have a bull controlled marketplace and it begins to move up. A trade is entered somewhere on this candle.
That is what a reversal trade is. We are looking for that transition of power. The indecision candle is our indicator that we might be about to see one. For more information on how and where I actually enter a reversal trade please refer to my Forex Trading Strategy. In this post, I want to give you a better understanding of what candles are, what they mean. Here are some more of the dumb power slider pics again that show the entire progression of a reversal trade.
How I Interpret My Charts
When I look at my charts, I am constantly thinking like this about the candles. I look at my candles and I can tell when the bulls are in power, when they are about to lose power, and when the bears are about to gain power. This is critical information and it really is extremely helpful to my trading. I read the candles on my chart like a story in a book and after having read that similarly story, thousands of times, I usually know what’s coming next. This is part of that intuition I always talk about. This is why I exit trades at the best times and why I rarely obtain caught in a losing trade. It is all about being able to read the candles and trading accordingly.