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Japanese Candlesticks Ebook
The main difference between simple and complex Candlestick patterns is the number of Candlesticks required to form the patterns.
While a simple Candlestick pattern, like the Hammer, requires a single Candlestick, the more complex Candlestick patterns usually require two or more Candlesticks to form. For example, the Bullish Harami requires two Candlesticks, the Three White Soldiers pattern requires three Candlesticks, and the Bullish 3 Method formation requires 4 candles.
Once again, remember that regardless of the complexity, the location of all these simple and complex Candlestick patterns is one the most vital aspects of reading forex charts while using Candlesticks.
By now, you should have a good idea about what a Candlestick is and how to read simple and complex Candlestick patterns. So, let us now try to read trading charts to see how we can trade using these patterns. On the third try, the GBPJPY did penetrate the support level, but the market swiftly reversed and formed an Engulfing Bullish Candlestick pattern that signaled further bullishness in the market.
At this point, some beginner traders may recognize the bullish setup and immediately enter a buy order. However, professional traders are not only waiting for Candlestick patterns to form around key pivot zones, like this support level in figure 4, but they will also wait for the proper confirmation to enter the trade.
The next day, the GBPJPY price penetrated above the high of this Engulfing Bullish Candlestick, which confirmed that there would be additional bullishness in the market over the next few days. Professional traders wait for this confirmation because they understand the concept of order flow and self-fulfilling prophecy.
You see, most large banks and hedge funds also watch key market levels and price action around critical levels. Once the Engulfing Bullish Candlestick formed around this crucial support level, it prompted a significant number of pending buy orders just above the high of this Engulfing Bullish Candlestick.
Once the price penetrated above the high, it triggered those orders, which added the additional bullish momentum in the market. Hence, waiting for the price to penetrate above the Candlestick pattern can help you increase the odds of winning on the trade.
As you can see in figure 4, once the buy order confirmation came, it did trigger a large uptrend move over the next few days. As we briefly discussed earlier, the location of the Engulfing Bullish Candlestick for this particular trade was the most important factor.
When you apply Candlestick patterns with additional technical confluence , it provides for a powerful combination of factors that can help increase your odds of winning. And this is exactly what professional traders try to do. If the same Engulfing Bullish Candlestick pattern appeared at the top of a longstanding uptrend, it would have also signaled additional bullishness in the market, but that signal would be much less powerful.
Since the market was already in an uptrend, it may not have had the legs to push the price much higher. However, on this instance, the market was already trading in a range for several days. As you may know, when the market consolidates for a while, it is basically setting up to breakout in one direction or the other. The formation of this bullish Candlestick pattern provided a signal as to of which way the market was about to break.
If you knew how to read a simple Candlestick pattern like the Engulfing Bullish pattern, you could have entered this trade at the right time and earned a handsome profit with this high reward to risk ratio setup. In figure 5, we can see two different Candlestick patterns triggering two different trades. On the first occasion, the Engulfing Bearish Candlestick pattern appears during a downtrend that provides traders with a trend continuation signal. On the second occasion, a Three White Soldiers Candlestick pattern emerges at the bottom of the downtrend, which triggers a new bullish trend.
Once the Engulfing Bearish Candlestick broke below the support level, it opened up the possibility of a trend continuation. It is strongly recommended that beginning traders stick to using Engulfing Bearish or Bullish patterns to confirm a trend reversal, as those tend to be higher probability trades. However, this particular example in figure 5 demonstrates that if you know how to use the confluence of support and resistance levels along with Candlestick patterns, these can be used to trigger trend continuation signals as well.
In the second trade, the Three White Soldiers Candlestick pattern emerged near the bottom of this downtrend. At this point, professional traders for preparing for the market to reverse the prevailing downtrend. The prudent course of action would be to wait for the market to confirm this signal, which means that unless the price broke above the high of this Three White Soldiers Candlestick pattern, you would not have entered the trade.
Hence, the reason why an asset is moving in a certain direction is often not necessarily important to technical traders. Instead, they are more interested in interpreting what the price action is doing at the current moment and how they can take advantage of that.
Candlestick chart reading can be most useful during these volatile periods of irrational market behavior. Traders can apply overbought and oversold technical indicators like Stochastics or Relative Strength Index RSI to find out when such irrational market conditions may be present. For example, by using oscillating technical indicators , a trader will first wait for a signal that the market has moved into an overbought or oversold condition.
At that point, they would look for a reversal signal of the prevailing trend. Many times, this reversal signal will come in the form of a candlestick formation. Formation of a simple or complex Candlestick pattern during such market condition confirms and verifies the impending contrarian price action for the trader. Placing their order in the market using this combination of technical factors can significantly improve the accuracy of their trades.
Once you learn how to correctly read Candlestick patterns and combine this skill as part of a broader trading strategy, then you will likely improve the consistency of your market entries and your overall performance as a trader. When dealing with such small time horizons , viewing a chart and using technical analysis are efficient tools, because a chart and associated patterns can indicate a wealth of information in a small amount of time.
In this section, we will discuss the "candlestick chart" and the importance of identifying trends. In the next lesson, we'll get into a common chart pattern called the "head and shoulders. While everyone is used to seeing the conventional line charts found in everyday life, the candlestick chart is a chart variant that has been used for around years and discloses more information than your conventional line chart. The candlestick is a thin vertical line showing the period's trading range.
A wide bar on the vertical line illustrates the difference between the open and close. The daily candlestick line contains the currency's value at open , high , low and close of a specific day.
The candlestick has a wide part, which is called the "real body". This real body represents the range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: Just above and below the real body are the " shadows. When the upper shadow the top wick on a down day is short, the open that day was closer to the high of the day.
And a short upper shadow on an up day dictates that the close was near the high. The relationship between the day's open, high, low and close determine the look of the daily candlestick.