Candlestick charts are the most powerful technical trading tool you will find. They pack the most amount of information into a single space, and this means that you can get the data that you need just a little more quickly than before. However, there is a big caveat to this. You need to be thoroughly familiar with candlesticks and what they mean before you jump in using them as they’re meant to be used. The whole point of having candlestick charts on your side is that they do reveal more info, but if you’re not able to fully decipher them, they will do more harm than good. Here are the basics that you need to get started with these.
First, a candlestick chart shows you a few important things. It shows you the high and low prices for a session, it shows you the opening and closing prices, and it shows you the direction of the trade as per the color coding of the candlestick. When a chart is formed of many candlesticks, the information is very clear. You can see exactly what the general direction of trading is by the candlesticks themselves, but you can also get a very good feel for trader sentiment, too, by the color coding. This helps you to get a feel for both the long and the short term in a single glance–something that you cannot accomplish with any other type of charting system.
There are a few types of candlestick patterns that you need to be aware of. Some patterns indicate that prices will go down, some mean that it will go up, and others mean that nothing at all will change. All three are very valuable for your short term trading routine and can affect your profit making ability. Look at the engulfing pattern to begin with. When this occurs, you have a candle with a narrow body that has ended down for the session followed by a second candle. That second candle is a very positive one, with a body of trading that completely covers the first candle, hence the name “engulfing.” This usually means that trading sentiment has completely reversed itself, and the next few sessions will see increases in price–although perhaps not as dramatic as the first up candle.
There are tons of these little things that go on with candlestick patterns. Some of the big ones here include the shooting star, the harami, the doji, and the dark cloud cover. Being able to recognize them quickly will help you a lot, but it really is foolish to try and pursue every single pattern that has been previously documented. This will only lead to you overextending yourself, which will undoubtedly lead to bad results for you. The trick here is to realize that direction matters. The same pattern can mean opposite things, based upon trading direction, so you definitely need to be aware of this fact.
Why do candlestick patterns work so effectively? Well, they don’t really share a ton more technical information than bar charts, but they do have a secret element that often goes unnoticed. This is the fact that they capture the psychology of the trading patterns behind them. Originally used for tracking rice prices in Japan, candlestick charts not only track prices, but try to explain the thought process behind them, too. Obviously, this is never an exact science and it will sometimes be wrong. But centuries of experience and observation have created enough evidence to show us that they will work more often than not. It’s just one more tool that you can use to better your trading and make more money.