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Vantage/Academy/Candlestick Pattern Complete Guide: How to Use It
Candlestick Pattern Complete Guide: How to Use It
What Are Candlesticks?
Candlesticks provide a wealth of information for traders to understand about the price movement of a certain asset class. Within a candlestick, there are four pieces of information a trader can derive from.
Open
Close
High
Low
On the daily chart, each candle represents 24 hours’ worth of information. When looking at one daily candle, the candle’s open and close represents the price of the asset when market opens (12AM) and the price of the same asset when market closes (11 PM). The high and low represents the highest and lowest price of the asset within the 24 hours.
An additional point to note is the colour of the candle. A green (bullish) candle means the asset is trading higher than its opening price. A red (bearish) candle means that the close is lower than its opening price.
With all this information derived from one humble candlestick, you shall not underestimate the value of using candlesticks in your trading routine as each candlestick tells a certain story.
Why Use Candlesticks?
If a singular candlestick can provide so much information, imagine a group of them together. A group of candlesticks together form critical patterns that traders use to make trading decisions. Simple candlestick patterns can involve one or two candles while more complex patterns involve three.
How Reliable Are Candlestick Patterns?
Steve Nison also known as Mr. Candlestick, widely considered the pioneer of modern-day Candlestick charts, who highlighted the value of candlesticks to the west by learning it from a Japanese broker. For years, he studied and wrote books revolving around this topic, and candlesticks ultimately gained global popularity in the 1990s [1].
Since then, candlesticks have become widely discussed and candlestick patterns began to form. The reliability of the candlesticks has also slowly been improving. It is most useful when used in tandem with other technical analysis techniques.
Types of Candlestick Patterns
No matter what candlestick pattern a trader uses, it is always advisable to use it in conjunction with other tools. For the case studies below, the candlestick patterns will be used in tandem with the concept of support and resistance.
Famous One-Candlestick Patterns – Hammer & Shooting Star Doji
In this segment, one candle stick pattern will be the focus. Note that both the Shooting Star and the Hammer Doji share a common feature in which the candles have a prominent wick and a relatively small candle body.
Both patterns serve to illustrate market indecision and hint at a potential reversal in the market.
Figure 4 depicts a Shooting Star Doji forming at a critical resistance level. This should hint traders that the market could turn from bullish to bearish.
Famous Two-Candlestick Patterns – Bullish & Bearish Engulfing
Engulfing patterns involve two candlesticks of opposite colours. The second candle’s body must be bigger than the first candle; hence the term “engulfing”. Bullish and bearish engulfing patterns are popular because they can be spotted easily and traded. When such patterns occur at a bottom or the top of a trend, it signals a potential reversal.
Figure 5 – Diagram of Bullish & Bearish Engulfing Pattern
Figure 6 shows the bullish engulfing pattern in action. At a significant support, a bullish engulfing on EURGBP led to a shift from bearish to bullish market structure.
In figure 7, a prominent resistance can be seen and at the 3rd tap of the resistance line, market prints a bearish engulfing pattern. What follows suit is a strong bearish push to the downside.
Famous Three-Candlestick Patterns – 3 white soldiers & 3 black crows
Three candlesticks are the maximum number for a candlestick pattern.
Figure 8 – Diagram of Three White Soldiers & Three Black Crows
Figure 9 shows the 3-White Knight pattern forming at support. The three candles involved progressively become larger, signifying a potential emergence of a bull market.
The formation of 3-Black Crows at a resistance in figure 10 highlights a high possibility of a incoming bearish market.
Summary of Candlestick Patterns
Table 1 showcases the basic characteristics of each candlestick pattern and the theoretical market direction that follows.
Pattern
Characteristic
Market direction after
Hammer
One candle pattern Small bullish body with long bottom wick Appears at support
Bullish
Shooting Star
One candle pattern Small bearish body with long top wick Appears at resistance
Bearish
Bullish Engulfing
Two candle patterns Second bullish candle body engulfs first candle body Appears at support
Bullish
Bearish Engulfing
Two candle patterns Second bearish candle body engulfs first candle body Appears at resistance
Bearish
Three White Soldiers
Three candle patterns All three candles are bullish Candle body size increases Appears at support
Bullish
Three Black Crows
Three candle patterns All three candles are bearish Candle body size increases Appears at resistance
Bearish
Table 1 – Candlestick Pattern Help Sheet
Candlestick Pattern Tools
Apart from the patterns mentioned, there are other candlestick patterns that may be of tremendous use for traders.
(Vantage’s Indicator – Adaptive Candlesticks)
Candlestick patterns that illustrate important changes in supply and demand, the Adaptive Candlesticks scans for 16 trusted candlestick patterns on any chart. A combination of unique technical and quantitative analysis helps traders to make informed decision based on current context.
Figure 11 – Adaptive Candlestick Indicator on MT4
(Vantage’s Protrader Tools – Technical Insights)
The Technical Insights function offered by Vantage Protrader Tools highlights key price action patterns on major & minor Forex pairs, and commodities.
Interested to gain access to advanced candlestick patterns at your fingertips? Sign up for Vantage Live Account!
Conclusion
Candlestick patterns have withstood the test of time and have proven to be effective in financial trading. However, such patterns appear more frequently than not and should be used in conjunction with other technical concepts such as support & resistance.
Can’t wait to turn your learning of candlestick patterns into practice? Sign up for your own Forex Demo Account and try it out now!
Disclaimer Vantage does not represent or warrant that the material provided here is accurate, current, or complete, and therefore should not be relied upon as such. The information provided here, whether from a third party or not, is not to be considered as a recommendation; or an offer to buy or sell; or the solicitation of an offer to buy or sell any financial instruments; or to participate in any specific trading strategy. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. We advise any readers of this content to seek their own advice. Past performance is not an indication of future results whereas reference to examples and/or charts is solely made for illustration and/or educational purposes. Without the approval of Vantage, reproduction or redistribution of this information is not permitted.
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