Candlestick charts are one of the most popular trading analysis tools. Professional traders need to know more about how they work.
Useful guide about candlestick charts
Trading is a good opportunity to make great profits. After all, a professional trader can conclude deals anytime and anywhere, having the support of a reliable and responsible broker. But it is also a high-risk tool, and just luck is not enough to be successful. You will need knowledge about the basic principles of trading and how do candlestick charts work because they are one of the main tools. Remember that information is an invaluable treasure in the modern world, and knowledge helps to quickly achieve financial independence.
What does a candlestick chart mean?
There are several theories as to when exactly the candlestick chart appeared in trading. It is believed that candlestick analysis has been known to traders for over 100 years. The foundations of understanding charts and basic analysis were laid by the Japanese Honma Sokyu, this man lived in the 18th century and is remembered for his outstanding results in the rice trade. The documents show that at the peak of his trading career, he made more than 100 profitable trades in a row.
In the west, candlestick chart analysis has been used very actively for last twenty years. The main book for the study of this process was the work of trader Steve Neeson, who systematized information obtained from historical sources.
A candlestick is a way to display information about the price movement of an asset. The candlestick chart is one of the most popular components of technical analysis, allowing traders to quickly and easily interpret price information from multiple price bars.
To explain candlestick charts, you need to know the basic terms and parts of the candle. It has three main parametres:
• The body is representing the open-close range.
• Shadow indicating daily high and low.
• The color that shows the direction of the market movement - a green (or white) body indicates an increase in price and a red (or black) body indicates a decline in price.
Over time, individual candles form patterns that traders can use to identify major support and resistance levels. Many candlestick patterns indicate opportunities in the market - some indicate the balance between buying and selling pressures, while others identify continuation or hesitation patterns in the market.
The essence of reading a candlestick chart method is to analyze the configuration of both individual parts and combinations of several. This helps to understand the logic of what is happening in the market and identify reversal places on the chart, as well as assess whether the movement has potential or the trend has already run out.
How to read a candlestick chart
There are a large number of different candlestick charts that clients use to analyze the market and trade successfully. But basic patterns, which are reliable and simple, can be used even by a novice client of trading platforms. By understanding what is a candlestick chart and what information it gives, the user can determine the best time to enter a trade and close it with the maximum profit.
• Engulfing (bullish and bearish). This pattern consists of two candles, with a perfect bearish engulfing, the first candle should be with a large body and small shadows. The next candlestick is bearish, it must rewrite the high, and its body must completely absorb the body of the bullish candlestick. This suggests that the bears have completely taken the initiative into their own hands. A bearish candlestick can engulf several previous ones at once, this only strengthens the received signal. For a bullish engulfing, the situation must be reversed;
• Shooting star and hammer. Both patterns are candlesticks with a small body and a long shadow. In the case of a shooting star, the shadow is formed from the top and vice versa - at the hammer. This means that a shooting star is formed in an upward market, and a hammer - in a downward one. The presence of a small shadow on the other side is allowed, the body should be small;
• Hanged and inverted hammer - models are mirrored to the previous ones. If the hammer is forming on an uptrend, then such a pattern is often called a hanging pattern. A shooting star on a downtrend is an inverted hammer. It doesn't matter how you call these patterns, the main thing is to be able to highlight them on the chart and understand the logic of what is happening;
• Clearance in the clouds and a veil of dark clouds - the first is formed in a downtrend market, the second - in an upward movement. They are similar to engulfing, but the difference lies in the fact that the body of the second candlestick pattern does not absorb the first. Ideally, there isn't much left before the takeover, but it still doesn't happen. In this case, the open price of the bearish candlestick is higher than the Close price of the bullish one, a census of the maximum occurs on the bearish candlestick. In both cases, the bears did not have enough time to complete the takeover.
• Morning Star/Evening Star - This pattern is already formed from three candles and is less common than the others. A morning star forms at the end of a downtrend, and an evening star forms at a high. The Morning Star includes a large bearish candle, followed by a small body and shadows, followed by a large bullish large body and small shadows. A small candlestick indicates that the strengths of bears and bulls have become equal, and the next bullish candlestick already indicates that the bulls have seized the initiative.
• Three White Soldiers - This pattern can form both at the beginning and in the middle of an uptrend. Such a pattern looks like three consecutive white candles with medium bodies and small shadows. The bulls currently have a colossal advantage over the bears. This advantage is so great that the bears lack the strength to even try to turn the tide in their favor (hence the absence of shadows).
• Method of three rising - resembles an inside bar pattern with the difference that instead of one candlestick, there should be at least three candles with a small range inside the parent's range. It is allowed for them to have shadows, as well as shadows going beyond the range of the mother candlestick. The main thing is to close these candles within the mother's range. The best option is when all correction candles are closed near the lower boundary of the parent candlestick (on a downtrend) or the upper boundary in an upward market.
• Triple hit. This pattern consists of at least four candles and implies that the fourth candlestick engulfs at least three previous ones, and more candles can be engulfed. This pattern can be both a reversal and a trend continuation pattern - it all depends on where it was formed.
Such useful information will help you become a professional trader, learn to understand the situation on the market, make the right decisions, and extract maximum profit.