Candlestick charts applicability in Trading
Trading technical analysis is based on examining past price behavior in order to find a possible next trend and to determine the volatility. In this sense, employing graphs to represent historical price data is very effective. Among different kind of charts there are: bar charts, line charts, bubble charts and candlestick charts.
This last one, the candlestick strategy, is the most used by traders and investors. This is because candlestick charts give more detail of price performance for each period of time, working well during high volatility or in stable periods, and are friendly to use with other indicators required for technical analysis.
Candlesticks describe the price movement for different time frames, from just one minute to weekly or monthly periods. From its reading, the user can easily determine if the price closed higher or lower than it has opened in a given period. This difference between the closing and opening price is represented by the candlestick body. Usually, these candles are colored in green or red.
When the candle is red, it means that the close price was lower than the open one. This is known as a bearish candlestick, while a green candlestick is a bullish one and means that the close price was higher than the initial. Also, a candlestick has two shadows or wicks, which are the lines on the top and down of the body. These lines indicate the highest and lowest price for the examined extent of time.
When a candlestick is colored in red indicates a bearish price development and a green one means that open price was lower than closing and is called a bullish candlestick.
The candlestick can describe different patterns, on the next paragraphs the most important of them are going to be described.
Every trading technique pursuits developing strategies to identify possible price direction and trade points to entry and exit. Candlestick chart is an essential trading skill and, if handled correctly, it makes easier to interpret what direction will the price take. So, let see the forms that a candlestick may have.
When the candlestick body is narrow, showing that the opening and the close price finished at the same level or very closely, it is called a Doji. A Doji means that buyers and sellers are equally pushing for price.
If historical price data represent a downward tendency, the presence of a doji is anticipating that price may increase next. On the other hand, during an uptrend a doji is warning about a possible trend reversal.
On the left side, you can see a typical candlestick; on the right side, there is a doji representing a reversal.
Pin candlestick: a pin candlestick occurs when the body candlestick is down and both shadows (wicks) are almost at the top same level. During a downtrend this shape represents that sellers are beginning to be disadvantageous and probably a rise price may occur.
The opposite situation is characterized during an upward tendency confirming that in spite of bear’s effort; it was not enough to change the climbing trend.
During a downtrend a pin candlestick may indicate an upward coming.
A pin candlestick points to an upward tendency confirmation.
Reverse pin candlestick: when the candlestick body is up and both shadows are almost at the same bottom level the pattern indicates a reverse pin. During a downtrend the presence of a reverse pin expresses the tendency consolidation, while if a reverse pin is observed in the course of an uptrend a bearish trend is expected.
Reverse pin candlesticks observed in an upward tendency suggest a reversal
Hammers: Hammers are a variant of pins. The difference is the movement pronunciation or what is the same the size of the shadow. To say that a pin may be a hammer, the argument is that the shadow has to duplicate the candlestick body. As with the pins, the interpretation is the same: if a hammer appears during an upward tendency, it means the continuation of the direction.
Reverse Hammers: Meanwhile, a reverse hammer points to the continuation of a downtrend and an uptrend reverse. But also, hammers may anticipate the intensity of the movement, meaning that with a larger wick, a heavier reversal is coming.
Hammers reveal a trend reversal is coming.
Through an upward trend, the presence of inverted hammer reveals a trend reversal is coming.
Morning Star: is a pattern that indicates that the price will grow up. The morning star is formed by three candles: a bearish candle, a neutral candle and a bullish candle. It means that after a downtrend and market hesitation, it is finally beginning an upward trend.
Evening Star: as the morning stars, this figure is composed by three candles but in opposite order. So a bullish candle, followed by a neutral candle and then a bearish candle are the signal that sellers are taking control and a downtrend is around the corner. Sometimes may happen that between the three candles can be gaps, usually observed in daily or weekly periods.
Whenever appears an evening or a morning star, always point to trend change.
Bearish Engulfing: when a bear candle is followed by a bigger one, which is called Bearish engulfing — since the body of this bigger candle is enveloping the previous one. Whatever the trend is, this figure suggests that the price will fall.
Bullish engulfing: when a bullish candle is followed by one much bigger is called a Bullish engulfing and express that price will get higher.
In spite of tendency, if a bearish engulfing is formed, then the price will fall.
If a bullish engulfing is found, then the price will get higher levels even during a downtrend.
Now as you know more about this type of analysis, it is time to compare Forex brokers and pick up the one that matches your needs best.