A Beginner’s Guide to Trading Candlestick Patterns
Candlestick charts are commonly utilized in financial market trading. Candlestick patterns help traders of all levels, including novices, understand market trends, price moves, and probable reversals.
Candlestick charts were invented by Japanese rice dealers in the 18th century to monitor rice prices. They are now used in technical analysis for stocks, currency, commodities, and cryptocurrencies.
Candlestick Chart Basics
Candlestick charts show price fluctuation over time. Candlesticks depict trading sessions of a day, hour, or minute. A rectangular candle’s hue indicates whether the closing price was greater (green or white) or lower (red or black) than the starting price.
In addition to the body, candlesticks contain shadows or wicks. Upper shadow denotes session high, lower shadow represents session low. Shadow length indicates trading session volatility and range.
Candlestick Patterns
Many candlestick patterns help traders spot market reversals, trend continuations, and indecision. Beginners should know these candlestick patterns:
1. Doji
Opening and closing prices close together create a doji candlestick with a tiny body. It signals market hesitation and a trend reversal.
2. Hammer
Small candlesticks with lengthy lower shadows resemble hammers. It generally follows a downturn and suggests a bullish turn.
3. Shooting Star
A shooting star has a tiny body and lengthy upper shadow opposite the hammer. It usually comes after an upswing and predicts a negative turn.
4. Enveloping Pattern
enveloping candlesticks have the second candle totally enveloping the first. If the second candle is bullish, the trend may reverse up, while a bearish engulfing pattern may reverse down.
Trading using Candlestick Patterns
When combined with other technical analysis tools and indicators, candlestick patterns may help traders make effective bets. Traders use various indicators or several candlestick patterns to verify their research.
Beginners utilizing candlesticks should consider:
1) Trend Analysis
Candlestick patterns work best in a trend. Determine the trend and seek for candlestick patterns that match it. If the trend is positive, a hammer candlestick at support might imply a buy.
2. Timeline
Candlestick patterns vary in importance by era. Hourly chart patterns may be useful for short-term traders, but daily or weekly patterns may be more useful for long-term investors.
3. Manage Risk
Candlestick patterns need risk management like any trading method. Stop-loss orders and target levels based on support and resistance levels may minimize losses and enhance profits.
Sources and Links
Candlestick patterns and trading are covered in these sources:
Japanese Candlestick Charting Techniques by Steve Nison
Bulkowski, Thomas N. “Encyclopedia of Candlestick Charts”
Understand candlestick charts: https://www.investopedia.com/articles/technical/03/091703.asp
Candlestick patterns: https://www.tradingview.com/wiki/Candlestick_Patterns
Beginners may improve their trading analysis and financial market judgments by studying candlestick patterns.