Japanese candlesticks are a commonly utilized technical analysis tool. Using them you can both learn something new (which is always of value in trading) and improve your results. Read the full article to get a deeper understanding of candlestick patterns.
A lot of traders consider Japanese candlesticks to be their preferred technical analysis tool. Regardless of the asset, candles bring the chart to life in a way that makes the battle between bulls and bears exciting to watch. However, though these tools can give a clearer view of the market and provide valuable signals, they are not always easy to read. A bearish looking candle could appear at any point in a bull market, which is why knowing what to do about it is the real key to your success.
The first step on the road to success is to know your candles. Of course you have to know a down candle from an up candle, or a doji from a spinning top, but there is more to it. You should also know everything you can about the candles formed by the market you are trading at any given moment. Every market is different and every chart is different, so that means all candles are different.
A long candle in one market may only be average in another, while a doji in one may be incredibly significant on one chart and a commonplace on another. If you are working with EUR/USD or the SPY you should know the difference between a long and a medium candle, as well as strong and insignificant. An average candle is formed on an average day, the strong candles form during the periods of high volume, high volatility that mark major market movements.
This ties in with knowing your candles. A signal is simply a signal until its a strong signal that you should act on. The first thing you need to know is what makes a good signal, and then to understand that the signal is only reliable when the candles are larger than normal, have longer shadows than normal or a combination of both. If you look at the chart below, you can spot a couple of technically accurate candle signals that turned out to mean nothing because they were formed by average, day to day market action.
A candle signal may form at any price level on a chart. A really strong signal will usually form at or near the key support or resistance target. Support and resistance targets are price levels where buyers or sellers should be expected to enter the market, a session of high volume or high volatility at one of these levels means a lot people agree with that analysis. The question is, what signal is formed? Is it a bullish signal, a bearish signal, a continuation signal or a reversal signal? A bullish candle breaking above the resistance is a sign of bullishness but may not lead to the continuation if it forms in a downtrend. Always keep in mind that relativity is everything.
One of the most important things about using candles is waiting for them to close. Remember, what you see in front of you is not a signal until the candle closes. Long-legged shooting star dojis start out as long, strong bull candles, but they don’t end up as one. Waiting for the close sometimes means waiting for the next day’s close as well. When prices are at or near resistance/support a long, strong candle may form and it may look like a continuation is going to happen but if the next candle turns out to be a smaller one within the body of the first (known as Harami), a reversal becomes more likely. That being said, make sure the candle closes before taking further action.
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NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future.
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