By some accounts there are over 700 candlestick patters, by others over 3000. Surely, very few people would ever had the need to learn them all. Serious practitioners of this charting technique try to assign both name and meaning to every single candle as it develops, looking for explanation of trading public psychology every step of the way. For me this is both unnecessary and even useless. I don’t believe it possible to predict every market move. My focus goes to finding some market situations where odds of something happening are enhanced, and try to make a few bucks in the process. That’s why after years of using candlesticks I look only for the most common and easy to identify patterns, something that can be noticed at a glance, without having to go through trouble of classifying this development. No ancient mysteries are hidden behind some of the more esoteric and arcane patterns like “Homing pigeon”, “Three stars in the south”, “Stick sandwich”, “Deliberation” or myriad of other ones. As a matter of fact, I don’t even assign names to candles as they form, but rather pay attention to their bullishness/bearishness strength or weakness.
Candlestick patterns are divided into two categories- reversal and continuation. This classification alone indicates that they can not be used as a stand a lone tool, but at the very least candles must be combined with trend analysis, and, preferably, additional techniques. Just because something falls under “reversals” it doesn’t mean trend will turn there. Rather possibility of changed market behavior is hinted, with reversal being one of the option. Should a reversal pattern happen after a strong and prolonged directional move, chances for an actual reversal are better than after a short move.
This is a weekly chart of GBP-CHF. I used it early in the year for a long trade which netted about 1100 pips. This trade was covered as it happened.
After a long and steep sell off large “hammer” formed at point “A”. Because of where and when in trend it formed, for me it was a “strong bullish candle”. I entered into long trade just above the high for this candle. This trade produced desired results. Notice that combined with candle to the left(bearish) and to the right(bullish) this “hammer” creates a very strong three candle bullish formation. Many people look for these kind of developments, since multiple candle formations are believed to be more meaningful. Perhaps, but in this case one still would be in this trade.
Somebody can say “What was so special about this “hammer”, there are at least 2 more similar ones on this chart?” Marked as “1″ we can indeed see another large “hammer”. Few differences, though. Entire candle is contained within preceding one, which makes it a “harami”. More importantly, it doesn’t make a new low, something that “hammer” is expected to do. Altogether, this was a “weak bullish candle”, by my classification.
About the same time I was selling EUR-GBP, using daily charts. This also turned out to be very good trade, with over 700 pips in profits.
At point “A” market created a “bearish engulfing line”. Since it happened after a long uptrend and I was looking for a trade to the downside, this became a “strong bearish candle” for me. Price rebounded couple of weeks later. Once it approached 62% retracement of previous down swing I started to look for trades on the short side. At point “B” a variation of “evening star” developed. Following candle made it “strong bearish formation”. This resulted in a string of smaller short trades. All of them produced decent results.
Using candlestick charting can be simple and effective. They must be combined with other market analysis methods. There is one quality given by candles which is very hard to define- they provide additional “dimension” to the chart. Traders who have been using these charts for a long time, simply don’t go back to bar or line graphs. Even if they do not seek any specific patterns or formations, most people become partial to the feel and look of candles.
Mike K.
So, you simplify this issue by choosing few candlesticks pattern, even though you can recognize many more. What I find really interesting, is how you manage to blend all elements of analysis into trading. With very good results. Something that probably only experience can bring.
Yes, a lot of stuff comes with experience. In the long run, there is no substitute for placing trades. One of these businesses, wher you learn by doing.
700 or more patterns? Sounds like a science on its own. Any books about candlesticks that you could recommend? I’d like to learn more on the subject.
A lot of gaps on the open today. Are you trading any of them? Some look very inviting.
Stan, Steve Nison’s book mentioned earlier. He also had a follow up book “Beyong Candlesticks”. Another one was by Gregory Morris “candlesticks charting explained”. Number of ither titles came up over the years, some of them claim to be Forex specific. These days plenty of information is available over the web. Even programs with auto recognition of patterens. Much more info than when I started.
Michelle, plenty of gaps indeed. I’ll cover them in the next post.
All the candlesticks you brought up reversal type. Do you use any of the continuation patterns? Which ones?.
“Falling 3 method’ and “Rising 3 method” are very common. In all their variations (2,3,4,5)they happen left and right on all time frames. Easy to spot and very helpfull if happen in conjunction with breakouts
Yup. Falling 3 Method and Rising 3 Method are very common.
Nice info, diffidently i’ll try it.
I use candlestick charts, but only because it is easy to tell down period from up. Never bought into the funny names patterns. Whenever I saw predictions based on these charts, only thing they could tell was buy or sell. No targets, nothing.
Andy, candlesticks are charting tool, not a trading system. They don’t provide targets, stops, etc. That’s why they should be used with other analytic tools.
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well can anybody explain more about kicker candlestick or signal. i really want to know more about that