Candlestick Patterns Trading Guide – ThinkMarkets

 

 

INTRODUCTION TO
CANDLESTICK PATTERNS
Learning to Read Basic Candlestick Patterns

www.thinkmarkets.com

CANDLESTICKS TECHNICAL ANALYSIS

Contents

Risk Warning ……………………………………………………………………………………………………………………. 2

What are Candlesticks? ………………………………………………………………………………………………………. 3

Why do Candlesticks Work? ………………………………………………………………………………………………. 5

What are Candlesticks? ………………………………………………………………………………………………………. 6

Doji …………………………………………………………………………………………………………………………………. 6

Hammer……………………………………………………………………………………………………………………………. 7

Hanging Man ……………………………………………………………………………………………………………………. 8

Shooting Star …………………………………………………………………………………………………………………….. 8

Checkmate………………………………………………………………………………………………………………………… 9

Evening Star ……………………………………………………………………………………………………………………. 10

Morning Star …………………………………………………………………………………………………………………… 10

Bullish Engulfing …………………………………………………………………………………………………………….. 11

Bearish Engulfing ……………………………………………………………………………………………………………. 11

Harami/Inside Bar ……………………………………………………………………………………………………………. 12

Kicker …………………………………………………………………………………………………………………………….. 12

Piercing Line …………………………………………………………………………………………………………………… 13

Dark Cloud Cover ……………………………………………………………………………………………………………. 13

Three White Soldiers ……………………………………………………………………………………………………….. 14

Three Black Crows ………………………………………………………………………………………………………….. 14

Tweezer Pattern ………………………………………………………………………………………………………………. 15

Confluence ……………………………………………………………………………………………………………………… 16

Doji at Support ………………………………………………………………………………………………………………… 16

Hammer, Dojis, and Bullish Checkmate at 200 Exponential Moving Average ………………………… 17

Educate Your Trading ………………………………………………………………………………………………………. 18

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CANDLESTICKS TECHNICAL ANALYSIS

Risk Warning

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CANDLESTICKS TECHNICAL ANALYSIS

What are Candlesticks?

Put simply, candlesticks are a way of communicating information about how price is moving.

Candlestick charts are available on ThinkForex trading platforms for all assets individuals can trade

on the platforms. Below is a sample of a candlestick chart derived from the ThinkForex web trading

platform:

This chart shows price on the right (vertical) axis, and time on the bottom (horizontal) axis.

Moreover, the chart is made of bars that have little lines stemming from the top and the bottom; these

are known as candles. The candle conveys four pieces of information:

1. The open price

2. The close price

3. The high price

4. The low price

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CANDLESTICKS TECHNICAL ANALYSIS

Candles refer to that information for a specific unit of time. For instance, the chart above is a daily

chart; each chart represents one day. And thus, each candle constitutes, the open, close, high, and low

price for that given day. The horizontal axis at the bottom of the chart can be used to understand

which day corresponds to which candle. Below is an image that illustrates how those four pieces of

information the open, low, high, and close for a given period of time are visualized in the context of

a candle:

The wicks, or shadows, are the thin lines that go outside the rectangular body of the candle.

They represent the high and the low price during that time period.

The color of the candle is also significant in understanding whether the open price was higher or

lower than the close price. If the candle is red, or denoted as bearish in some other manner, this

means that the open price is lower than the close; and the opposite is true if the candle is green, or

denoted as bearish.

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CANDLESTICKS TECHNICAL ANALYSIS

Consider the candle above. The absolute highest point on the candle, the top of the upper line above

therectangular body, is the high price; the absolute lowest point shows how far price fell during the

time period in question. The top of the candle is the opening price of the time period, while the

bottom of the candle is the closing price. Thus, from this candle, we see that price rallied and fell

from its open but bears were ultimately able to push it lower than the open, while bulls came in

before the close to push price up a bit.

Why do Candlesticks Work?

Price action traders rely on candlesticks because they convey a great deal of information about each

trading period in a visual format that is easy to interpret, allowing traders to compare the behavior of

price in different time periods with a quick glance at a price action chart. Each candlestick can be

“read” as a meaningful part of the developing narrative of price. They communicate the “market

sentiment”: whether (and to what extent) bears or bulls were in control, and how far traders managed

to push price in both directions. For example, a long candle’s body with no wicks indicates a

definitive shift in this struggle for

power, whereas a candle with a long upper wick beyond its body indicates a more contentious period

with an effort by bulls to push price higher that was pushed back by pressure from bears before the

close of the candle. Certain re-occurring candlestick patterns have become popular among traders as

reliable signals of future market behavior. This guide is intended as an introduction to some of these

patterns, which helptraders make sense of market conditions and recognize advantageous times to

enter trades.

patterns help traders.

The ability to read candlesticks allows the price action trader to become a meta-strategist, taking into

account the behaviors of other traders and large-scale market-movers. In other words, candlestick

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CANDLESTICKS TECHNICAL ANALYSIS

What are Candlesticks?

Calibrate their own trading with the fluctuations and reversals of larger, more influential participants

in market, often referred to as “Smart Money”, so that traders can identify and participate in

significant price moves.

remainder of this guide.

The chart below demonstrates some of the innumerable patterns formed by candlesticks in the

context of a daily price action chart. These patterns will be discussed and elaborated upon in the

Doji

This candle has zero or almost zero range between its open and close.

Rather than implying potential reversal or the clear dominance of either bears

or bulls, these candles suggest indecision or balance between the two forces.

Neither buyers nor sellers are fully in control. A doji that occurs in the context

of a strong trend implies the weakening of the dominant force that resulted in

that trend. A “long-legged doji” has long wicks in both directions, implying strong,

balanced pressure from both buyers and sellers.

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CANDLESTICKS TECHNICAL ANALYSIS

The “dragonfly” and “gravestone” doji imply, respectively, that sellers and buyers controlled the

market for most of the trading period, but then the opposite group managed to push price back to the

open before the close. While tradition and long-legged dojis are reflective of indecision and stalling,

gravestone and dragonfly are generally clearer, stronger indicators that a force is stepping in to push

the market in the direction of the wick and away from the body. In this respect, gravestone and

dragonfly dojis are similar to hammer and hanging man patterns, which are discussed later in this

guide.

Hammer

A “hammer” is a candlestick with a small body (a small range from open to

close), a long wick protruding below the body, and little to no wick above.

In this respect it is very similar to a dragonfly doji; the primary difference

is that a dragonfly doji will have essentially no body, meaning the open and

close prices are equal.

When a hammer appears at the bottom of a downtrend, its long wick implies

an unsuccessful effort by bears to push price down, and a corresponding

effort by bulls to step in and push price back up quickly before the period

closed. As such, a hammer candlestick in the context of a downtrend suggests the potential

exhaustion of the downtrend and the onset of a bullish reversal. The “neckline,” often determined

by the high of the previous bar, is the level that price must hit on the next candlestick in order to

confirm the hammer’s reversal signal.

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