He has a monthly readership of , traders and has taught over 20, students. Candlestick charts originated in Japan during the 18th century. Since no defined currency standard existed in Japan during this time rice represented a medium of exchange. Various feudal lords deposited rice in warehouses in Osaka and would then sell or trade the coupon receipts, thus rice become the first futures market. In the s legendary Japanese rice trader Homma Munehisa studied all aspects of rice trading from the fundamentals to market psychology.
Homma subsequently dominated the Japanese rice markets and built a huge fortune. His trading techniques and principles eventually evolved into the candlestick methodology which was then used by Japanese technical analysts when the Japanese stock market began in the s. Candlestick charts show the same information as bar charts but in a graphical format that provides a more detailed and accurate representation of price action. Candlestick charts visually display the supply and demand situation by showing who is winning the battle between the bulls and the bears.
Candlestick formations make all single bar and multi-bar patterns significantly easier to spot in real time, thus increasing your chances of catching high probability trade setups. In addition, because candlestick charts use the same data as bar charts open, high, low, and close , all Western technical signals used on a bar chart can easily be applied to a candlestick chart.
Candlestick charts offer everything bar charts do and more, using them is a win-win situation because you can use all the trading signals normally used on bar charts with the added clarity and additional signals generated by candlesticks.
Candlesticks have a central portion that displays the price distance between the open and the close. This area is known as the real body or simply the body. The highest price paid for a particular period is the marked by the high of the upper shadow.
The real body displays the opening and closing price of the security being traded. Closing prices have added significance because they determine the conviction of the bulls or bears. If the security closed higher than it opened, the real body is white or unfilled, with the opening price at the bottom of the real body and the closing price at the top. If the security closed lower than it opened, the real body is black, with the opening price at the top and the closing price at the bottom.
Depending on the price action for the period being analyzed a candlestick might not have a body or a wick. To better highlight or visualize price movements, modern candlestick charts especially those displayed digitally often replace the black or white of the candlestick real body with colors such as red for a lower closing and blue or green for a higher closing.
There are multiple forms of candlestick patterns; here is a brief overview of the most popular and widely used single and multi-bar patterns commonly used today. Signals uptrend movement, they occur in different lengths; the longer the body, the more significant the price increase. Signals downtrend movement, they occur in different lengths; the longer the body, the more significant the price decrease.
These candles provide a bullish signal, the lower shadow must be at least the size of the real body; the longer the lower shadow the more reliable the signal. Long upper shadow These candles provide a bearish signal, the upper shadow must be at least the size of the real body; the longer the upper shadow the more reliable the signal.
The hammer is a bullish signal that occurs during a downtrend. The lower shadow should be at least twice the length of the real-body. Hammers have little or no upper shadow. This candle has a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session that develops during or after and uptrend.
This pattern often signals reversal of downtrend. This pattern often signals reversal of an uptrend. This candle has a very long upper or lower shadow and a small real body. If the opening and closing price are the same the candle has no real body and is then called a Long-Legged Doji. The first picture is a high wave candle the second is a Long-Legged Doji.
The bullish engulfing pattern consists of large white real body that engulfs a small black real body in a downtrend. The bearish engulfing pattern occurs when the bears overwhelm the bulls and is reflected by a long black real body engulfing a small white real body in an uptrend. My favorite price action setups consist of the pin bar , the inside bar , and my proprietary fakey setup. The above candlestick patterns can easily be condensed down to one of my three price action setups or may be applicable to more than one of my price action setups.
It can be difficult to keep track of the various forms of candlestick patterns. This is why I feel like my three main price action setups do a great comprehensive job of including all the relative candlestick patterns and make them easier to understand in the context of daily price action. The pin bar can include the following previously described candlestick patterns; long lower shadow candles and long upper shadow candles, hammers and shooting stars, dragonfly and gravestone dojis.
Inside bars can technically encompass any candlestick pattern because they are simply a series of at least two candlesticks where the first candlestick completely engulfs the entire range of the subsequent candlestick, however, more often than not inside bars end up being spinning tops or dojis.
I generally trade inside bars in the context of a strongly trending market as they are often great entry points into trends.
However, often times inside bars will occur at major market turning points as well as the previous trend loses momentum, pauses and forms an inside bar, and then changes direction. The Fakey Setup My fakey setup is essentially a multi-bar pattern that consists of a false break from an inside bar pattern or a key level.
The fakey can consist of a number of different candlestick patterns. Often times the fakey setup will consist of a bullish or bearish engulfing pattern which is completely engulfing the range of a spinning top or doji candle which gives rise to a false break bar that can take the form of any of the candlesticks above that qualify as pin bars.
Candlestick charts offer a more vivid depiction of price action than what a standard bar chart can provide. Candlestick patterns in and of themselves are useful, however there are many different names and interpretations of candlestick patterns which often can induce confusion and can be hard to keep track of.
You will find that my price action educational material condenses all of the important candlestick patterns into 3 simple yet highly effective price action setups. I feel that my take on candlestick patterns expressed via my proprietary ideas on price action trading is a much more efficient, simple, and profitable way to trade candlesticks and I think after studying my forex trading course you will feel the same way. Additionally, for a newbie in Forex , what do you recommend in the first place?
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Please remember that the past performance of any trading system or methodology is not necessarily indicative of future results. Candlesticks charts are more fun to look at. Bullish Candle Signals uptrend movement, they occur in different lengths; the longer the body, the more significant the price increase Bearish Candle Signals downtrend movement, they occur in different lengths; the longer the body, the more significant the price decrease.
Long Lower Shadow These candles provide a bullish signal, the lower shadow must be at least the size of the real body; the longer the lower shadow the more reliable the signal. Hammer The hammer is a bullish signal that occurs during a downtrend. Shooting Star This candle has a long upper shadow with little, or no lower shadow, and a small real body near the lows of the session that develops during or after and uptrend.
Engulfing candles The bullish engulfing pattern consists of large white real body that engulfs a small black real body in a downtrend. Spinning tops Spinning tops are simply candles with small real bodies. Pin Bars The pin bar can include the following previously described candlestick patterns; long lower shadow candles and long upper shadow candles, hammers and shooting stars, dragonfly and gravestone dojis. Inside Bars Inside bars can technically encompass any candlestick pattern because they are simply a series of at least two candlesticks where the first candlestick completely engulfs the entire range of the subsequent candlestick, however, more often than not inside bars end up being spinning tops or dojis.
In Conclusion Candlestick charts offer a more vivid depiction of price action than what a standard bar chart can provide. Earnest March 1, at 2: Loved this so much. Nader January 25, at Thanks Nial for your help and lucid explanation about every aspect of trading. I really appreciate your concerns. Leave a Comment Cancel reply Your email address will not be published.
Recent Popular Comments Nial Fuller. Price Action Trading Patterns: Very helpful Coach, many thanks Great article and lesson from the great mind of Ni Sure to put this 'creed' in to my trading style im Nice lesson very helpfull for newer just like me This is just fantastic coach.More...