Tag Archives | reading candlesticks

Burning at Both Ends part 3: Types of Candlesticks

In our last post, we learned about reading candlesticks to understand market behavior and predict trend momentum. As you become more familiar with with these symbols, you’ll notice that they work together to form distinct patterns that can act as signals of market behavior. In this post, we’re going to go over a three of these patterns and how they should be interpreted.

Boxcars are signals of reversalThese are called boxcars. They are signals of a reversal. The candles leading into the boxcars are relatively small, and the two large ones should have virtually no wicks. The moment following the close of the bearish candle is a great place to go in short. The inverse is true at the end of a downtrend.

 

 

 

Doji candles signal market indecisionThese are doji candles. After you’ve seen a significant expansion in the market, you might run into one of these. These candles signal total market indecision. They represent a price that pushed in either one direction, the other direction, or both, then finished right back where it started.

 

 

 

 

 

Spinning tops denote market indecision

Like the doji, the spinning top denotes general market indecision. It’s not hard to tell why it’s called the
spinning top; its narrow price range combined with short high and low resemble the child’s toy.

 

 

There are many of these patterns, and they all go by many names. Don’t get too caught up in the terminology—the important thing is that you understand what the symbols and patterns are signaling. Clue in to these patterns; they can tell you a lot!

 

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Burning at Both Ends part 2: Reading Candlesticks

Now that we know the fundamental purposes and components of a candlestick, let’s delve a bit deeper and discuss how to read them. Because candlesticks tell us a lot about price action, we as traders use them to gather basic information about market behavior at a glance.

As traders, we’re all looking at the same information. Some of us may have a few extra filters and guides turned on, but we all use the same sources, same graphs, same charts. If it makes sense to us, it’s probably making sense to other people. If we’re considering an action based on what we’re seeing, they are too. And that’s okay! But, if we’re not seeing what everyone else sees, that presents a problem. That’s why it’s important to have a strong understanding of money management and act in accordance with that understanding.

A reversal signal at the end of a runThere are certain candlesticks that signal reversal and continuation. When we notice these in combination with the rest of the overall market’s price direction, we want to pay attention to that. They give us good indications of where the momentum is in the market.

Found at the bottom of a trend, a green candle like the one to the right should tell us that the price moved all the way to the bottom of the wick, but was forced to close much higher. This is a strong reversal signal at the end of a run.

A blue candle showing less momentumThis blue candle has made the same movement down and closed lower than its open. The green candle at the bottom of a downtrend shows us there’s more momentum—if it’s the blue, there’s less momentum—because it closed lower. Because the green closed at the high, we can see it has a higher upward momentum. The blue opened higher, pushed down to the same low, and didn’t carry the momentum upward and closed lower than the open. While both of these candlesticks signal reversal, the green is stronger than the blue.

 

 

 

The inverse of this is true.

A green candle at the end of an uptrendA blue candle at the end of an uptrend

 

At the end of the uptrend, these wicks both signal that the price reached the same high, but was rejected at that level. With the blue, we have the opening price push all the way to the top and close at the bottom. This is a stronger reversal pattern. The green closed higher, so it is a weaker reversal signal of an upward trend.

Pay attention to this when you trade! These candles aren’t enough to trade on all by themselves, but they work well in combination with other things (trend, momentum, etc.).

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Burning at Both Ends part 1: Understanding Candlesticks

Any new pursuit brings with it an entirely new vocabulary, and the world of trading is no different. Candlestick is a word you’re going to run into a lot, so we’d like to give you a simple explanation of this important symbol. Now that you’re a trader, you’ll never see candlesticks the same way again!

What is the Candlestick?
Candlesticks are visual summaries of price movements. In the early 18th century, a Japanese rice merchant named Munehisa Homma began to keep track of the prices of rice sales in his local market. With these records he plotted charts to help him better understand the effect that price movement had on people’s decision to buy or sell rice. The charts in Homma’s records were the seeds that have since sprouted into modern candlestick charts.

Individual candlesticks represent smaller periods of time within the larger time frame of your chart. For example, if you choose to view a one-hour chart, that means each candlestick on your chart will represent one hour—if you choose a fifteen-minute chart, each candlestick will represent fifteen minutes. The chart you use will depend on the type of trading you do. If you prefer to do lots of smaller trades, you’ll want to use a shorter chart like the one-, five-, or fifteen-minute charts. If you like your trades to last all day, you may find a one- or four-hour chart more useful. It’s up to you!

Elements of the Candlestick
Four pieces of information are contained in a single candlestick: the Open, the Close, the High, and the Low.

Parts of a candlestick

The Open is the price at the beginning of the period.
The Close is the price at the end of the period.
The High is the highest point the price reached within the period.
The Low is the lowest point the price reached within the period.

Now you might see why they’re called candlesticks; the high and low lines resemble a wick on a candle. The colors of a candlestick can also quickly relay information about overall price movement. Generally, a green candlestick shows an upward, or bullish, movement. A bullish movement is one in which the close is higher than the open. A red candlestick shows a downward, or bearish, movement—a movement in which the close is lower than the open. The green-red contrast is fairly standard, but you can set these to whichever colors work best for you.

The candlestick has been designed to make it easier for you to see what’s happening on your chart. Now that you understand these important symbols a bit better, you’re that much closer to forecasting price movements and potential market trends! In the next blog post, we’ll discuss reading candlestick charts, noticing trends, and translating that knowledge into successful trading.

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