Candlesticks Chart - Candlestick bars depict open, high, low and close prices of a currency pair. The candlestick consists of a rectangular section and two thin lines above and below this section. The rectangular section is known as the body, while lines above and below the body are the wicks or shadows. The body of the candlestick represents the difference between the open and the close price. The body will not be filled, or shaded green or blue(blue is used by Stratagem charts for green) if the price closed up and filled or shaded red if the price closed down. The wicks depict the high and low of the respective time period (15 min, 30min, daily, hourly etc).
How to used Candlesticks for trading - Candlestick formations can be used to trade reversals in price or to confirm a trend continuation:
(A) Hammer/Hanging Man Formations: For trend reversals - hammer and hanging man formations have long lower wicks and small bodies. (1) The hammer pattern (it has a long lower wick and a small green or blue body) appears after a currency pair has a significant down move and is typically viewed as a bullish signal, implying a base(down) and a trend reversal(the price will be increasing). This formation is particularly important if it appears after a number of significant down days (i.e more than 3 periods) and it must close as a hammer to confirm the trend reversal. There are 2 ways hammers are traded. Some traders will buy once hammer formation appears. In case the market does not have a pull back and reversal occurs immediately. Other traders will buy after the currency pair attempts to retest the hammer level and does not break through, which implies that the hammer area provides a solid support level, confirming the trend reversal. (2) The hanging man pattern (it has a long lower wick and a small red body) appears after a currency pair has had a significant rally and is typically viewed as a bearish signal, implying a top(up) and a trend reversal(the price will be reducing). it is important to wait for the next period's close to confirm the trend reversal. This is key because the long lower wick of the hanging man candle shows date there is still strength in the price action. The next period's candle must close under the hanging man's body.
(B) The Bearish Engulfing Pattern is a trend reversal pattern that requires two candles. It implies top and a trend reversal . This pattern typically occurs after a severe uptrend and is formed when a red candle "engulfs" a green candle( i.e small green follow by large red candle). This shows that sellers have gained control of the market. The important of the pattern depends on the size of the candles, the smaller the green candle and larger the red candle, the more significant the pattern signal. Traders who are looking at this patterns will sell once the currency pair closes in the formation.
(C) Doji / Double Doji - A true doji formation has a horizontal line instead of a body, with long wicks. This pattern show there has been a large trading range, but the price does not close on an upside or downside bias. A doji provides signals of potential market tops or bottoms. If the market is rallying, a doji is a signal that the price may start to decline. if the market is declining, a doji signals that the market may start to rally. It is important to compare the doji to recent price action. If there has been a series of "near doji" or small candles, the doji formation is less significant. A doji formation is significant if it appears after a long green candle in an uptrend or a long red candle in a downtrend. A double doji shows that buyers and sellers are still in equilibrium, which further indicates that a trend reversal is probably imminent. (D) Bullish engulfing - the pattern involves a red candle that is "engulfed" by a green candle. It is a trend reversal pattern that usually appears after dramatic downtrend and is a signal that the downside momentum may be lost. The longer the green candle, the more significant the trading signal. The candle sizes are important, because if the two candles are equal sizes, it may signal that the market will begin range trading. Typically, traders looking for bullish engulfing pattern will buy once they see the currency pair close after forming this pattern.
(E) Piercing Line - this pattern is a bullish signal that involves the body of a green candle closing within the body of the previous red candle. The pattern shows that there is strong buying power at lower levels and the downward pressure is starting to subside. The more the green candle pierces into the red candle, the more significant the bullish signal. If the green candle only pierces a small part of the red candle, it implies that there are not enough buyers to counter the selling pressure.
(F) A Dark Cloud Cover - is a bearish reversal pattern that signifies weakening buying pressure. This involves the body of a red candle closing within the body of the previous green candle. If the green candle does not close at least halfway into the body of the red candle, traders need to be careful with the formation, as it may be giving a false signal. It is prudent for the traders to wait for a trend reversal confirmation in the next candle. The deeper the second candle covers the first candle, the stronger the signal.
(G) Shooting Star - it is a reversal pattern that typically occurs after gaps. This is a bearish signal that involves a long wick and a small body( either red or green) that is near the end of the trading range. This pattern shows that the market rallied and attempted to make a new high but met with intense selling pressure, which forced the currency pair to end up closing near the bottom of the range. Traders will typically sell if they see the currency pair closes the period with the formation.
(H) Harami - is a reversal pattern that signals an exhausting downtrend or a rally that is losing stream. The formation is comprised of two candles: the first candle has a long body, while the second candle has a smaller body that is within the first candle. The smaller the second candle, the stronger the price reversal signal. The smaller the wicks of the second candle, the more accurate the signal. If the second candle hovers near the top of the first candle during an uptrend, this indicates that there is a higher probability for (consolidation than a reversal). The same is true in a downtrend, which is if the second candle hovers near the bottom of the first candle, it indicates a higher probability for (consolidation as opposed to a reversal).
(I) Evening Star - it occurs in an uptrend and is a reversal pattern that indicates that sellers have gained control of the market, after the market has made a new high. This formation involves 3 candles: first a green candle with along body, followed by small candle with a short body(can be red or green) and then a long red body candle that does not touch the body of the second candle and closes well into the body of the first candle. To confirm the reversal pattern, the third candle must close with this formation. Traders who are trading based on evening stars should not place trades until after seeing the third candle. They must wait for the third candle to appear and close before selling the currency pair.
(J) Morning Star - it occurs in a downtrend and is a bullish reversal pattern that indicates a buyers market after the currency pair has made a new low. It involves 3 candles: first a red candle with a long body, then a small red or green candle with a small body and a green candle with a long body that does not touch the body of the second candle and closes well into the body of the first candle. Traders must wait for the third candle to close prior to buying the currency pair.
Alone, candlestick can not yield great results but when used with other technical analysis indicators, they can give traders extra edge. If all indicators show bullish signal go for it and be suspicious if there are conflicting signals.
How to used Candlesticks for trading - Candlestick formations can be used to trade reversals in price or to confirm a trend continuation:
(A) Hammer/Hanging Man Formations: For trend reversals - hammer and hanging man formations have long lower wicks and small bodies. (1) The hammer pattern (it has a long lower wick and a small green or blue body) appears after a currency pair has a significant down move and is typically viewed as a bullish signal, implying a base(down) and a trend reversal(the price will be increasing). This formation is particularly important if it appears after a number of significant down days (i.e more than 3 periods) and it must close as a hammer to confirm the trend reversal. There are 2 ways hammers are traded. Some traders will buy once hammer formation appears. In case the market does not have a pull back and reversal occurs immediately. Other traders will buy after the currency pair attempts to retest the hammer level and does not break through, which implies that the hammer area provides a solid support level, confirming the trend reversal. (2) The hanging man pattern (it has a long lower wick and a small red body) appears after a currency pair has had a significant rally and is typically viewed as a bearish signal, implying a top(up) and a trend reversal(the price will be reducing). it is important to wait for the next period's close to confirm the trend reversal. This is key because the long lower wick of the hanging man candle shows date there is still strength in the price action. The next period's candle must close under the hanging man's body.
(B) The Bearish Engulfing Pattern is a trend reversal pattern that requires two candles. It implies top and a trend reversal . This pattern typically occurs after a severe uptrend and is formed when a red candle "engulfs" a green candle( i.e small green follow by large red candle). This shows that sellers have gained control of the market. The important of the pattern depends on the size of the candles, the smaller the green candle and larger the red candle, the more significant the pattern signal. Traders who are looking at this patterns will sell once the currency pair closes in the formation.
(C) Doji / Double Doji - A true doji formation has a horizontal line instead of a body, with long wicks. This pattern show there has been a large trading range, but the price does not close on an upside or downside bias. A doji provides signals of potential market tops or bottoms. If the market is rallying, a doji is a signal that the price may start to decline. if the market is declining, a doji signals that the market may start to rally. It is important to compare the doji to recent price action. If there has been a series of "near doji" or small candles, the doji formation is less significant. A doji formation is significant if it appears after a long green candle in an uptrend or a long red candle in a downtrend. A double doji shows that buyers and sellers are still in equilibrium, which further indicates that a trend reversal is probably imminent. (D) Bullish engulfing - the pattern involves a red candle that is "engulfed" by a green candle. It is a trend reversal pattern that usually appears after dramatic downtrend and is a signal that the downside momentum may be lost. The longer the green candle, the more significant the trading signal. The candle sizes are important, because if the two candles are equal sizes, it may signal that the market will begin range trading. Typically, traders looking for bullish engulfing pattern will buy once they see the currency pair close after forming this pattern.
(E) Piercing Line - this pattern is a bullish signal that involves the body of a green candle closing within the body of the previous red candle. The pattern shows that there is strong buying power at lower levels and the downward pressure is starting to subside. The more the green candle pierces into the red candle, the more significant the bullish signal. If the green candle only pierces a small part of the red candle, it implies that there are not enough buyers to counter the selling pressure.
(F) A Dark Cloud Cover - is a bearish reversal pattern that signifies weakening buying pressure. This involves the body of a red candle closing within the body of the previous green candle. If the green candle does not close at least halfway into the body of the red candle, traders need to be careful with the formation, as it may be giving a false signal. It is prudent for the traders to wait for a trend reversal confirmation in the next candle. The deeper the second candle covers the first candle, the stronger the signal.
(G) Shooting Star - it is a reversal pattern that typically occurs after gaps. This is a bearish signal that involves a long wick and a small body( either red or green) that is near the end of the trading range. This pattern shows that the market rallied and attempted to make a new high but met with intense selling pressure, which forced the currency pair to end up closing near the bottom of the range. Traders will typically sell if they see the currency pair closes the period with the formation.
(H) Harami - is a reversal pattern that signals an exhausting downtrend or a rally that is losing stream. The formation is comprised of two candles: the first candle has a long body, while the second candle has a smaller body that is within the first candle. The smaller the second candle, the stronger the price reversal signal. The smaller the wicks of the second candle, the more accurate the signal. If the second candle hovers near the top of the first candle during an uptrend, this indicates that there is a higher probability for (consolidation than a reversal). The same is true in a downtrend, which is if the second candle hovers near the bottom of the first candle, it indicates a higher probability for (consolidation as opposed to a reversal).
(I) Evening Star - it occurs in an uptrend and is a reversal pattern that indicates that sellers have gained control of the market, after the market has made a new high. This formation involves 3 candles: first a green candle with along body, followed by small candle with a short body(can be red or green) and then a long red body candle that does not touch the body of the second candle and closes well into the body of the first candle. To confirm the reversal pattern, the third candle must close with this formation. Traders who are trading based on evening stars should not place trades until after seeing the third candle. They must wait for the third candle to appear and close before selling the currency pair.
(J) Morning Star - it occurs in a downtrend and is a bullish reversal pattern that indicates a buyers market after the currency pair has made a new low. It involves 3 candles: first a red candle with a long body, then a small red or green candle with a small body and a green candle with a long body that does not touch the body of the second candle and closes well into the body of the first candle. Traders must wait for the third candle to close prior to buying the currency pair.
Alone, candlestick can not yield great results but when used with other technical analysis indicators, they can give traders extra edge. If all indicators show bullish signal go for it and be suspicious if there are conflicting signals.
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