When you begin your adventure with trading, all is new to you. And many things seem to be more complicated than they really are. It is, however, important that you know well the basics. And from this article, you will learn how to read candlestick patterns like a pro.
The basics of reading candlestick patterns
There are many different approaches to trading but reading candlestick patterns is one of the most basic ones. First, you should know that each candle on the price chart has 4 critical points. It has an opening, closing, high and low. Most often you will see red and green candles on the chart. Sometimes they are white and black. It all depends on the chart settings. But as red and green are the most popularly utilised, let’s focus on them.
A green candle gives information that it closes higher within a certain period of time. A green body of a candle shows its opening and closing. Then, a candle might have wicks (also known as shadows). And so the lowest point of a candle will mark its low and the highest point its high. All these are being calculated within a specific time period. If you are using a daily chart, a candle will show the opening, closing, high and low of the day. With 10 minutes chart, it will show the opening, closing, high and low within 10 minutes period.
A red bar tells us that it closes lower within a period of time. A candle high will be still its highest point and a candle low the lowest. But the opening and closing will be situated differently. A candle opens at the top of the red body and closes at the bottom.
In the beginning, you may be overwhelmed by so many kinds of candlestick patterns. You will see all these names like Hammer, Bullish Engulfing, Three White Soldiers, Shooting Star and you will think, how to learn them all? But I have good news. You really do not have to memorise all of them. Instead, you should understand what candles tell you.
The first question you should ask is where the price closes relative to the range (the distance between lows and highs). You will then know who is in control. If the price closes near the high of the range, it means the buyers are in control and they are quite powerful. If, for instance, the price closes higher within a time period (which says the buyers are in control) but the distance of the closing from the high is relatively large, the strength of the buyers is pretty weak.
The next question should be about the size of the pattern when compared to the ones that appeared earlier on the chart. The answer will tell you how big the conviction behind the move is. If you see a candle is just about the same size as the previous ones, there is no strong conviction. But when the candle is relatively big, also the conviction behind the move is immense.
Below is the image where you can see 2 candlestick patterns. Both are bullish engulfing. Note how strongly the market shot up after the second pattern. The size of the candles in the pattern itself was clearly larger than the preceding candles that day.
Pros and Cons of Reading Candlestick Patterns
Understanding the advantages and disadvantages of reading candlestick patterns can help you make informed trading decisions. Here are the pros and cons:
- Provides valuable information about price behavior and market sentiment.
- Helps identify potential trend reversals and entry/exit points.
- Offers a visual representation of supply and demand dynamics.
- Can be used across various time frames and financial instruments.
- Requires experience and practice to accurately interpret patterns.
- Patterns are not 100% reliable and can produce false signals.
- May require additional technical analysis tools for confirmation.
- Subject to market volatility and external factors that can impact price movements.
|Indicates a potential bullish reversal.
|Suggests a bullish trend reversal.
|Three White Soldiers
|Signals a strong bullish trend continuation.
|Indicates a potential bearish reversal.
I believe the candlestick patterns are no more magic to you. Each candle provides information about the OHLC for a specific period of time. Then, you should just ask two questions. The first one is about the place the price closes in relation to the range and the second is about the size of the pattern in relation to the previous ones.
You may also combine candlestick patterns on various chart timeframes. Go to the higher timeframe and you will get a different view of what is going on in the market.
Now, head to the Olymp Trade demo account to practice reading the candlestick patterns. The account is completely free and you are not going to lose your money. So make good use of it and train yourself in understanding the candlestick charts.
All the best!
Q&A: Common Questions About Reading Candlestick Patterns
- Q: What are the critical points of a candlestick?
- A: A candlestick has an opening, closing, high, and low.
- Q: How can candlestick patterns help in trading?
- A: Candlestick patterns provide insights into price behavior, trend reversals, and entry/exit points.
- Q: Are candlestick patterns always accurate?
- A: No, candlestick patterns are not infallible and can produce false signals. Confirmation from other technical indicators is recommended.
- Q: Can candlestick patterns be used for different time frames and financial instruments?
- A: Yes, candlestick patterns can be applied to various time frames and financial instruments, including stocks, forex, and cryptocurrencies.
- Q: How can I improve my proficiency in reading candlestick patterns?
- A: Practice and experience are key. Study different patterns and observe their behavior in real-time market conditions.
Remember, reading candlestick patterns is a skill that develops over time. Always conduct thorough analysis and consider multiple factors before making trading decisions.
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