TIME YOUR MARKET ENTRIES WITH CANDLESTICK PATTERNS
Have you read our article on the 400 years old Japanese Candlestick? If you have not, you should read it now! For those who have read, you are certainly aware of the power of the candlestick patterns. The candlestick patterns are able to tell you two important clues to be profitable in the markets. First, you are told when it is a good time to enter the markets. Second, the candlestick patterns tell you the directions you should take in the markets, whether to buy long or to sell short.
But, many traders are not familiar with the concept of candlestick patterns. Many traders do not know how to use and to read the candlestick patterns. At such, many of them ended up trading with line charts, which do not give any useful information for them to trade the markets.
What useful information can you get from the above line chart?
Keep the above question in mind and we will revisit again later after we learn more about the candlestick patterns. To learn the candlestick patterns, we need to first learn how to read a candlestick.
Let us first take a look at the green bullish candlestick. Open refers to the opening price of the trading period while close refers to the final closing price when the trading period ends. High and low refers to the highest and lowest possible traded price that happened throughout the trading period. The two end tails are called wicks. These wicks are formed when the price trades intermittently above and below the opening price resulting in a high and a low price to be registered. If the price fails to close at the high or the low before the trading period ends, it results in the formation of wicks. The length of the wicks depends on the extent of the high and the low of the trading prices reached, as well as the eventual closing price.
In the case of a red bearish candlestick, all these still apply, but with exception to the relative positions of the open and the close price. In the green bull candlestick, the close price is higher than the open price which suggests an upward momentum. Conversely, in the red bear candlestick, the close price is lower than the open price which suggests a downward momentum. The relative space between the open and the close price is called the body of the candlestick.
You can set your trading charts to see the price actions for trading periods like 15 minutes, 30 minutes, 1 hour, 4 hours or even 1 day. This candlestick is constantly moving throughout the trading period and it will eventually form a visual candlestick after the trading period ends. You may want to refer to this live chart to see the developments of a “live” candlestick. Try selecting the 1 minute time frame and see the full development of a candlestick on a 1 minute chart.
Candlestick Pattern #1: Bullish/ Bearish Engulfing Candlestick Patterns
This candlestick pattern is a 2 bar pattern. Typically, it happens after an exhausting downtrend. This candlestick pattern serves as a trading signal to reverse the downtrend into an uptrend for a “buy” signal.
This candlestick pattern is a bullish engulfing pattern because the second green bullish candlestick engulfs the first red bearish candlestick. Typically, the greater the bull candlestick engulfs the bear candlestick (larger bull candlestick body), the stronger the bullish momentum, therefore the stronger the reversal pattern.
This candlestick pattern is the opposite of a bullish engulfing pattern. Typically, it happens after an exhausting uptrend. This candlestick pattern serves as a trading signal to reverse the uptrend into a downtrend for a “sell” signal. All that were mentioned for the bullish engulfing pattern are applicable to the bearish engulfing pattern.
Candlestick Pattern #2: Bullish/ Bearish Pin-Bar Reversal Candlestick Patterns
This candlestick pattern resembles a “pin”, therefore it is named as a Pin-Bar. The one in green is a bullish pin bar, while the one is red is a bearish pin bar. Each pin bar pattern has the role of reversing the market trends. This bullish pin bar on the left typically reverses a downtrend into an uptrend and vice versa for the red pin bar.
Let me explain why pin bars are good reversal candlestick patterns. Let us take the green bullish pin bar as our illustrating example. During the trading period, the price opens and traded down massively, but later recovered and closed even higher than the opening price. This suggests to us that the buyers have significantly over-powered the selling pressure to salvage the market and pushed the market momentum higher. The reverse is also true for the bearish candlestick pattern. Therefore, during a downtrend, a bullish pin bar reversal is taken to be a potential “buy” signal in anticipation for the trend to turn upwards.
Candlestick Pattern #3: 3 Bars Reversal Candlestick Patterns
This candlestick pattern is called the “morning star” pattern. This name can be seen as a sunrise in the morning which serves as an analogy for upward momentum in the markets. As you could guess, this candlestick pattern is meant for a reversal to the upside. Therefore, it usually reverses a downtrend into an uptrend.
The way to see this is that, as the market collapses, the prices are expected to decline which are presumably omitted on the left side of this morning star pattern. It comes to a point where the market stops falling and gives you this 3 bar reversal pattern. After the green candlestick bar is formed, you will see a 3 bar morning star candlestick pattern which suggests a potential “buy” signal as your entry.
If you are sharp, you would probably ask if the middle red bar could be a pin bar candlestick instead. Indeed, in the real market, the 3 bar morning star pattern could also be made up of a pin bar as the middle candlestick. The crux to trading the markets using candlestick patterns is to view them flexibly and logically. You should not be too caught up with memorizing the candlestick patterns names and structures, but rather to know how to identify them when it appears in front of you.
Can you guess what is the name of the above candlestick pattern? It is the opposite of the 3 bar morning star pattern with the name of “evening star”.
Do you still remember the above line chart? How meaningful was it compared to the candlestick chart? Line chart does not tell us when we should enter into the markets, neither does it tell us which direction we should enter.
Now, the above candlestick chart was directly converted from the previous line chart. Does this candlestick chart tell you more stories than before? Does this chart give you clearer signals of when to enter and which direction to enter? Can you see the candlestick patterns that were marked out?
The challenge to you now is to change all your charts into candlestick charts. In your future trading, learn to spot the candlestick patterns and predict the next market move with high probabilities. Do that diligently and you will be surprised how profitable you can be.
Personally, I have read numerous books and resources for candlestick patterns. One of the most comprehensible e-book that I have came across was the “Forex Candlestick Made Easy”. The copy is in a PDF format. This candlestick e-resource is highly suitable for traders whom are very new to candlestick patterns. Even if you are an expert, you will still find it amazing on how this e-book can give you concise summary insights about candlestick patterns. If you are interested, you can read the short review for this e-resource. So, do check out the “Forex Candlestick Made Easy” resource. It will certainly improve your candlestick trading.
Finally, we hope that you are able to appreciate the POWER of the candlestick patterns. It enables you to know the precise points of entries and the precise directions to trade in the markets. Only candlestick patterns can tell you the incumbent sentiments of all market participants.
You will want to know this sentiment because the way to be profitable is to be on the correct side of the markets