Understanding Candlestick Charts

Understanding Candlestick Charts

What would be the fate of trading without candlestick charting? It’s there but many traders ignore its potential and use, just because it’s freely available. Candlestick charting has taken much space on the trading floors and exchanges that is has now become an integral part of trading.

For many traders candlestick charting is a new concept but many other traders have known its importance and used it to increase their trading potential. What are you waiting for?
Let’s get started.

What are candlestick charts

The origin of candlestick charts lies in Japan and was known as technical charting decades before. Developed back then as technical charting, the japanese used this type of charting for a long time before a futures trader named Homma discovered that despite supply and demand are correlated, there was another factor which heavily weighed on charting. Market sentiment was the factor evoked as being the cause of creating the difference while charting.

Candlestick charting is not solely governed by supply and demand but also by market sentiment. Homma also discovered that emotions of traders played an important role in the equation of the value and price of an asset. The difference he then discovered has now become a current affair on the trading floors.

Nature of candlestick charts

Candlestick charts are different from the normal bar charts that people are normally used to see. Charts normally reflect short-term readings which may sometimes last less than eight to ten sessions. Complex yet extremely redeeming, candlestick charting can divulge much about assets to be traded and give you the predictions that you need to strike trading chord.

Components of a CandleStick

A daily candlestick comprise of a market’s open, high, low and close of a specific day.

 
 
 

What you see above is the body but you should also notice that above and below the real body lie the shadows. According to Nison Trading principle, a candlestick line should bear two criteria which are:

  • The shape of the line or pattern
  • The preceding trend

A candlestick also comprise of a Doji and a Trend:

While using a northern doji as a signal, there should be an uptrend forming on the given chart and should look like this:

 

On the other hand, if the doji is found within a box: therefore there is no trend to be signaled: see below:

 
 

One cannot simply start evaluating signals by thinking outside of the market concept. In fact, candle signals should be evaluated by remaining in the market context, which is why fundamentals play a vital role by giving more indications on current economies. Though candle charting is specially used by technical analysts or traders, there is always room for some fundamentals. A small example is the U.S. elections (Trump V/S Clinton) in November 2016. Trading on this specific day implies a lot of trading opportunities. It is simple mind mathematics. You cannot ignore what’s going on and who is dominating the market most, for they are the ones having most effects in provoking trends.

Here’s a look at the evolution of a Doji by staying in the market context:
Purpose of Candlestick charting

Candlestick are a real definition of patterns forming price direction as soon as all the chart elements fall into place on the chart. They are a technical tool packed with a multitude of data bearing the capacity of changing much of what is happening to the asset being traded. They are a source of proper indications of knowing when to carefully place a trade. Different from traditional charting, they are more useful. There exist many formations of charting techniques which are now very famous among top traders. That is why BinaryOnline wants you to adopt these techniques to be among the best.

Candlestick charting exhibits the relationship between an opening price and a closing price. In North America much interest is placed on the progression of today’s closing price from yesterday’s closing price, but in Japan, from where candlestick was born, more emphasis is laid on the relationship between closing price and opening price

 
Is candlestick charting reliable?

Yes, candlestick charting is reliable, but not all techniques available are worth the trial. There are reliable patterns that can be used to divulge the best trading practices.

Below are 5 top charting techniques:

 
Top 5 Candlestick Patterns

This analysis relies on the work of Thomas Bulkowski, who built performance rankings for candlestick patterns in his 2008 book, “Encyclopedia of Candlestick Charts.” He offers statistics for two kinds of expected pattern outcomes: reversal and continuation. Candlestick reversal patterns predict a change in price direction while continuation patterns predict an extension in the current price direction.

In the following examples, the hollow white candlestick denotes a closing print higher than the opening print while the black candlestick denotes a closing print lower than the opening print.

 
 
 
 

The bullish three line strike reversal pattern carves out three black candles within a downtrend. Each bar posts a lower low and closes near the intrabar low. The fourth bar opens even lower but reverses in a wide-range outside bar that closes above the high of the first candle in the series. The opening print also marks the low of the fourth bar. According to Bulkowski, this reversal predicts higher prices with an 84% accuracy rate.

 
 
 
 

The bearish two black gapping continuation pattern appears after a notable top in an uptrend, with a gap down that yields two black bars posting lower lows. This pattern predicts the decline will continue to even lower lows, perhaps triggering a broader scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 68% accuracy rate.

 
 
 
 

The bearish three black crows reversal pattern starts at or near the high of an uptrend, with three black bars posting lower lows that close near intrabar lows. This pattern predicts the decline will continue to even lower lows, perhaps triggering a broader scale downtrend. The most bearish version starts at a new high (A) because it traps buyers entering momentum plays. According to Bulkowski, this pattern predicts lower prices with a 78% accuracy rate.

 
 
 
 

The bearish evening star reversal pattern starts with a tall white bar that carries an uptrend to a new high. The market gaps higher on the next bar but fresh buyers fail to appear, yielding a narrow range candlestick. A gap down on the third bar completes the pattern, which predicts the decline will continue to even lower lows, perhaps triggering a broader scale downtrend. According to Bulkowski, this pattern predicts lower prices with a 72% accuracy rate.

 
 
 

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. According to Bulkowski, this pattern predicts higher prices with a 70% accuracy rate.

The bottom line

Candlestick charting is a very interesting technique, when applied can generate trading opportunities like no other trading technique. It is the most useful way of deciphering trends and applying them. Charts are definitely recommended by BinaryOnline for they give potential notion on the performance of an asset being traded.

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