Candlestick Trading

Candlesticks are one of the most important tools we have in the forex and stock market technical analysis. The information that the candlesticks give us are the best and most accurate. If you like to become a good trader and you like to have successful and profitable trades, it is highly recommended to learn to read the candlesticks’ signals. What are the Japanese Candlesticks? Candlesticks are the oldest form of technical analysis in the world. Japanese Candlesticks were invented by a Japanese rice trader, Sakata, in 17th century. He spent about ten years of his life in researching and analyzing of the effect of weather, psychology of buyers and sellers and many different conditions on the rice price. Then he made 100 successful trades and retired a rich man and wrote two books about technical analysis. I highlighted the “psychology of buyers and sellers” because candlesticks are the indicators of the market psychology. This is the first and most important thing you have to know about the candlesticks. Price volatility is the result of nothing but the behavior of the buyers (Bulls) and sellers (Bears). When there is more buying than selling, the price goes up and visa versa. Candlesticks are the indicators that reflect the feelings (fear and greed) of the buyers and sellers. Candlesticks has their own language which is very easy to learn. If you learn their language, you will see that they really talk to you and tell you what will happen in the future. Candlesticks are the only real time indicators that we have and when you combine them with other useful indicators like Bollinger Bands, they will become the best trading tools. All other indicators like Stochastic, MACD and RSI are delayed and produce a lot of false signals. Ignoring the candlesticks and trading based on these indicators is like driving with closed eyes and just by listening to the directions that someone else gives you. It is clear that he can not give you the directions “on time”. Your reflections will not be on time too and you will be delayed which can be too dangerous. Candlesticks, candlestick trading and the related technical analysis were introduced to the western countries in 1985 and became so popular. Candlestick is basically a rectangle that gives 4 different information in a special time frame. If you use the daily time frame, for each day we will have one candlestick and if you use a 5 minutes time frame, for each 5 minutes you will have a candlestick and so on. Each candlestick includes 4 numbers: 1. Open price 2. Close price 3. High price 4. Low price For example, in the one hour time frame, the open price is the price of the currency pair at the time that the candlestick is started. In the one hour time frame, it takes one hour for each candlestick to be formed completely. So let’s say when a candlestick is just started in the one hour chart, the price is 1.9825. This is the open price. The prices goes up and down during one hour and finally, when one hour is over, the price is 2.0080. This is the close price. When the close price is higher than the open price, the candle is Bullish. It means the price has gone up during the formation of the candlestick. If the open price is higher than the close price, the formed candlestick is a Bearish candlestick. It means the price has gone down during the formation of the candlestick. High price is the maximum price and low price is the minimum price during the formation of the candlesticks. The shape and color of a candlestick may change several times during its formation and you have to wait for the candlestick to be formed completely and then read the candlestick signal and make your analysis and decision. Candlesticks have two main parts: 1. Body and 2. Shadows Psychology of the market: Candlestick trading means knowing the psychology of the market using the candlesticks shapes and colors. Candlesticks are the indicators of the market psychology. They show us if there is more buying than selling or there is more fear than greed in the market and visa versa. Using this information, you will be able to predict the direction of the price. You will learn about it here. Different shapes of the candlesticks: Because of the price changes, candlesticks can have several different shapes. For example the open price and close price can be the same. Or the high price can be the same as the close price. Lets see how many different shapes the candlesticks can have: 1. Typical candlesticks: All of the four prices are different from each other. A typical candlestick can be Bullish or Bearish. Typical Candlesticks 2. Marubozu: Marubozu means shaven. The candlesticks that have no shadow are called Marubozu. What does Marubozu mean in the market? In Bullish Marubozu, the open price is the same as the low price and the close price is the same as the high price. Bullish Marubozu means that Bulls are so strong and didn’t let the Bears take the price down when the candlestick became completed. It means there is a lot of buying activity in the market. The longer the candlestick, the stronger the Bulls. In Bearish Marubozu, the open price is the same as the high price and the close price is the same as the low price. A Bearish Marubozu means that Bears are strong and there is a lot of sell activity in the market specially when the Bearish Marubozu is longer than the previous candlesticks. What does it mean in general? 1. When you see a Bullish Marubozu, you should not take a short position because the Bulls are strong and the price can go higher. 2. When you see a Bearish Marubozu, you should not take a long position. 3. When you see a Bullish Marubozu at end of a downtrend, it is a reversal signal. You can just wait for the next candlestick and if it is Bullish too, you can take a long position. 4. When you see a Bearish Marubozu at end of an uptrend, it is a reversal signal. You can just wait for the next candlestick and if it is Bearish too, you can take a short position. 5. If you already have a long position and you see a Bearish Marubozu at the end of the uptrend, you should close your position and take your profit. 6. If you already have a short position and you see a Bullish Marubozu at the end of the downtrend, you should close your position and take your profit. Of course we will talk about the candlesticks patterns and you will learn more about taking the right decision when you see different kinds of candlesticks but by now, just keep in mind that Bullish/Bearish Marubozu means the Bulls/Bears are strong. 3. Doji: Doji means unskillfully. These kinds of candlesticks are called Doji or unskillfully because they don’t have a body. Why? When the open price and close price are the same we will have a Doji. So Doji candlesticks have no color and so they are neither Bullish nor Bearish. What does it mean? It means Both Bulls and Bears have the same power and are matched and the price doesn’t know where to go. It doesn’t know if it goes up or down because Bulls are not able to increase the price and Bears are not able to decrease it. So Doji candlesticks are indecision and uncertainty signals. All kinds of Doji candlesticks need confirmation. I will tell you what the confirmation means. There are different types of Doji candlesticks. The most important one is called Rickshaw man. In Rickshaw man the cross bar is roughly central. Rickshaw man is a strong indecision signal. So when you see it at the top of an uptrend, it means the price can go higher, or go down or becomes range. Another kind of Doji is called Gravestone: This kind of Doji also means indecision and when it is seen at the top of an uptrend it means the prices wants to bounce down. At the bottom of the market sometimes you see the Inverted Gravestone: Inverted Gravestone is also known as Dragonfly. Of course it doesn’t mean that inverted gravestone or gravestone can not be seen at the top or bottom of the market. In both cases they signal indecision. Doji can be seen in some other different shapes too: Sometimes Doji has a small body: What should you do when you see a Doji? As I said, Doji means indecision and uncertainty. When it is seen at the top of an uptrend or at the bottom of a downtrend, it means the price is uncertain to go up or down or sideways. When you see a Doji, if you already have a position, you have to take your profit and if you don’t have any position, you have to wait for the confirmation to choose a direction and enter to a trade. What do I mean by confirmation? The next candle sticks can work as a confirmation. For example when you see a Gravestone at the top of an uptrend, you should get ready to go short but first you have to wait for the next candlestick or even next two candlesticks. If they are Bearish, it means the price has changed the direction and you can go short. Please note that Doji candlesticks that have longer shadows, are stronger. As you see the Doji is confirmed by the next candlestick and the price went down. TO BE CONTINUED IN THE NEXT POST