If you have been trading stock for sometime, you will have across candlestick patterns. By understanding and using candlesticks, you will have a higher probability of identifying winning trades. So read on.
What Is Candlestick Patterns?
Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders.
Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.
When To Use Candlesticks?
Candlesticks Patterns must always be analysed in the context of the price trend. This is critical. I often see traders blindly using the candlesticks pattern without checking the price trend. A recipe for losing trade.
We only go long when a bullish candlestick pattern appears at either:
(1) the support of an uptrend OR
(2) the bottom of a downtrend when extreme oversold conditions are met (counter trend)
We only go short when a bearish candlestick pattern appears at either
(1) the resistance of an downtrend OR
(2) the top of an uptrend when extreme overbought conditions are met (counter trend)
Note that the counter trend trading mentioned above should only be used if you are experienced and feel you are ready for it.
A gentle reminder again (I cannot repeat this enough) … Follow the Trend! For example, don’t short the market if the trend is moving upwards even though the candlestick pattern is showing bearish sign. All the signals must align!
Here’s The Video On Five Power Candlesticks Pattern
In the video below, Adam shares five powerful candlestick pattern that you can use today. Personally I have been using the bullish pin bar and bearish pin bar in my own option trading helping me improved my winning rate significantly.
If you want to revise a particular pattern, jump to the following part of the video above.
1. 5:00 Bullish Pin bar
2. 10:00 Bearish Pin Bar
3. 13:49 Tweezer Bottoms, Tweezer Tops
4. 19:40 One white soldier, One Black Crow
5: 29:30 Morning Star, Evening Star
6. 41:04 Bullish Engulfing, Bearing Engulfing
For your ease of reference, I have also extracted out the candlestick patterns as follow. Do watch the video to fully understand how to use them before you start:
Bullish Pin Bar
Bearish Pin Bar
Tweezer Bottoms (bullish), Tweezer Tops (bearish)
One white soldier (bullish)
One Black Crow (bearish)
Morning Star (bullish)
Evening Star (bearish)