The Anatomy of a Candlestick Chart – Candlestick Patterns
Candlestick Patterns:- In school we have all learnt of the different types of charts. Most of these are used today in businesses, educational centres and during seminars. These include Bar Charts, Pie Charts, Line Charts. For the purpose of this educational lesson we will focus on Candle Stick Charts. Japanese Candlesticks result in clear and easy to identify patterns that demonstrate highly accurate turns in investor sentiment. The Candlestick Forum is a great visual aid into learning how to use the Japanese Candlestick trading signals correctly.
The Anatomy of a Candlestick
A Candle Stick is designed in three phases. A High, A Low and The Body . The extremes of the daily price movement, represented by lines extending from the body, are called “shadows or tails.” (See Exhibit 1: Below)
Candlesticks are easy to interpret, and are a good place for beginners to start figuring out binary and forex chart analysis. With candlesticks you can identify market turning points , chart patterns and it is easy on the eye.
I personally draw my support , resistance and range lines every morning using line charts for pinpoint entries and then switch my charting software to candle stick charts for the rest of the day.
Basic Chart Diagrams
1) Spinning Tops
The pattern indicates the indecision between the buyers and sellers.
The small real body shows little movement from open to close and there is anindecision between the buyers and sellers. This could be a sign that a possible reversal may occur. But always wait for confirmation before making a decision
A doji should have a very small body that appears as a thin line.
The Doji is composed of one candle . It is formed where the open and close are much less the same for a specific timeframe. At this point buyers and sellers are pretty much cancelling each other out..Doji’s can be long legged or short but the deifinition pretty much means the same i.e. an indecision of market behaviour.
When a Doji forms on your chart, pay special attention to the preceding candlesticks. This could be a sign of a reversal or an end of a trend indicating tiredness by the buyers and the sellers. Again always look for confirmation on the next candle before making any decision.
The hammer sounds like just that a hammer candle big stout with thin body.
When price is falling, hammers signal that the bottom is near and price will start rising again. I would recommend waiting on a bullish candle or a bearish candle to close after the hammer for additional confirmation before placing a buy or a sell trade.
Candle Stick Patterns
So Now I will give you a few examples on to identifying a few chart patterns using what we have learnt above
1 ) Inverted Hammer and Shooting Star
Using the hammer candle to identify possible reversal points.
2) Engulfing Candles
The bullish or bearish engulfing pattern is a two candlestick pattern that signals a strong up or strong down move may be coming. It happens when a candle is immediately followed by two opposite candles in the opposite direction.
3) Evening and Morning Stars
The morning star and the evening star are triple candlestick patterns that you can usually find at the end of a trend. They are reversal patterns that can be recognized. See example above.
4) Three White Soldiers and Black Crows
This occurs after a long uptrend or down trend indicating a change in market direction. It is one of the strongest indicators out there.
5) Double Top or Double Bottom
A double top is a reversal pattern that is formed after there is an extended move up. These are peaks kind of like the shooting star and indicate a resistance or support. Once I remember seeing a triple top with a USD/CAD was so excited as it won by 200 pips.
5) Head and Shoulders
A head and shoulders pattern is similar to double top/bottom in that it is a reversal formation. It goes by the name head and two shoulders. This could be also a bearish pic with the rotated 360 degrees but that is a bit harder to spot.
6) The Abandoned Baby
The bullish abandoned baby reversal pattern appears at the low of a downtrend, after a series of black candles print lower lows. The market gaps lower on the next bar but fresh sellers fail to appear, yielding a narrow range doji candlestick with opening and closing prints at the same price. A bullish gap on the third bar completes the pattern, which predicts the recovery will continue to even higher highs, perhaps triggering a broader scale uptrend.
All in all, these four candlestick patterns, when identified correctly, can be extremely useful for investors. Their movement is an excellent sentiment gauge as long as you can understand what they are trying to tell you. Also, finding them at support or resistance can give you a heads up on direction change and offer an edge in your trading.
This now concludes my session. I hope you found the information useful and look forward to hearing your comments.