Many traders rely on candlestick patterns, especially for determining entry and exit points in their trades. For new traders, gaining an understanding of basic candlestick patterns can add a powerful tool to your trading arsenal.
What Are Candlestick Patterns
In simple terms, candlestick patterns are the visual representation of a price movement that you can see on a stock chart.
But if you know how to read them, candlesticks provide an abundance of information. For example, an individual stick will show you the opening and closing prices and the highest and lowest price points over a specific period.
Trading is more than just measuring supply versus demand to determine price movements. As with any human endeavor, emotion is a significant factor in determining the price of a stock. Candlesticks will give an insight into the sentiment behind a particular entity. You should be able to assess whether buyers or sellers are in control.
Easy To See Patterns
One reason for the popularity of candlestick patterns in millennial investing is that you can easily spot a pattern. They may not look the same every time, but the definite similarities mean it is possible to see repetition. This opens the possibility of gaining an insight into expected future movements by the market.
How Candlesticks Are Formed
Candlesticks are not some new flash in the pan idea. Traders have used them in the west since 1989. Prior to that, however, the tool has been used in Japan for over 200 years. In the old days, traders would gather the data and draw the charts out by hand. In today’s fast-paced trading environment, computer programs generate candlesticks.
Candlesticks represent a specific period. You can have candles that show price movements for times ranging from one minute to months and years.
How To Read Candlestick Charts
Once you know what you’re looking at, reading candlesticks is a simple process. The body of the candle will tell you:
If the price goes up, then the candle will be white or green. If the price moves down, then it will be red or black.
The shadows look like wicks coming out the top and bottom of the candle. They will show you where the highest price point and lowest price points were during the period in question.
Trending Candles Vs. Non-Trending Candles
Trending candles will confirm a trend on a candlestick chart. If a candle goes against the trend, it is thought to be a non-trending candle.
Strong trending candles tend to have little or no shadow at the top or the bottom. This indicates that the high price and low price were at the beginning or end of each period. Lack of a candle can also point to resistance or support points.
Getting The Context Right Is Crucial
To gain the most insight from a candlestick chart, you must look at individual candles in the context of the overall chart. For example, a group of candles with little or no shadow points to a strong trend in one direction, as the prices are holding. Conversely, if you can see an upper shadow, it means that the prices aren’t holding.
Candles with a long body moving away from a short shadow can also indicate a trend. It is essential to remember that candlesticks provide an insight into the current trend; they show past price movements. They can indicate future price movements, but there are no guarantees. Trends can and do change. Therefore, before trading using candles, it is highly advisable to practice reading the charts and learn how to spot different patterns and interpret their meaning.
The Benefits of Candlestick Patterns
Candlestick pattern charts provide detailed information that will help you in your trading decisions. By using them, you can determine the strength of a price action. They can help you spot trends, and the prices where buyers move in for support or where they stop and the price meets resistance. Candles also provide a window into market sentiment and whether it is buyers or sellers who are the heaviest in number.
Types Of Candlestick Patterns
Before attempting to trade candlestick patterns, you must learn to spot them. There will be times when they tell you not to trade, which is just as important. It is best to start with a single pattern and work on trading that until you are comfortable with it. Master one pattern at a time.
Bullish Candlestick Patterns
Bullish patterns can indicate a reversal of a bearish trend or the continuation of a bull run. You should remember that patterns occur over several candles and can include the odd bearish signal.
Bearish Candlestick Patterns
Bearish charts generally mean lower prices are coming. Again, this could be a reversal or the continuation of a trend.
Trading with candlestick patterns can be rewarding, but it will take patience and discipline. It is best to start off by studying the charts and learning how to sport patterns before actually trading.
There are many different patterns to learn for a vast range of situations. Everyone should trade according to their own unique style and what suits them. As a rule, though, it is better to master trading one or two specific patterns than to know a bit of a lot of different patterns.
Beginners should learn how to spot one simple pattern and then develop a strategy for trading it. Master this one before learning the next pattern.