Hello and Welcome to the ditto educational series that will provide you with the skills you need to become a forex trader!
Today we are going to further our understanding of candlesticks and what they can mean when interpreting them in the market. More importantly than learning that each individual formation has a name and remembering all of the names it is far easier to understand what is occurring to produce a particular type of candlestick. Being able to read whether a candlestick is positive or negative and how extreme those positive and negative signals are is far more important.
Let’s begin with a simple overview or cheat sheet to understanding what candles mean hand how they may influence our bias! Sometimes these candlesticks are referred to as black-and-white but as we always use green and red candles we will continue to for the purpose of this video.
Candlesticks with a Big green body with little to no wick are considered very positive or bullish.
Big red body candlesticks signify the opposite and are considered very negative or bearish.
Green opening candlesticks are considered quite positive, a step down from the assurance level of the large body candlesticks but still with a bullish outlook.
Green closing candlesticks are considered positive. Even less so again than the previous green opening candlestick but again bullish all the same.
Red closing candlesticks are considered negative the opposite of the green closing candlesticks.
Red opening candlesticks are considered quite negative the opposite of the green opening version.
So far we have listed these candles from a range of very positive or negative quite positive or negative and positive or negative. We have use this to indicate the strength of the positivity or negativity when reading each individual formation.
Green candles and red candles such as these with wicks on the tops and bottoms don’t really give us any general direction and therefore are fairly meaningless in terms of assessing potential direction.
Next we have the dragonfly dodgy this formation shows a potential reversal but is not an especially strong indication.
Then we have a doji star which again shows us a possibility of reversal.
Next we have a gravestone doji which is a more stable reversal signal.
Here we have a long legged doji which is another reversal signal.
And here we have a four price doji another reversal signal. These reversal signals are generally not very indicative of market reversal without other analysis but should be considered when reading your charts.
However the green, hanging man and the red, hanging man formations are considered much more indicative of trend reversals around popular support and resistance levels.
All of these candlesticks are subject to interpretation depending on the circumstances that they fall under. That is something you will learn more and more as time goes by depending on what trade set up you are looking at. Don’t forget that the market can go against you even when set ups and analysis are perfect. We simply look to trade the higher probability set ups to reduce the likelihood of us losing our trades.
Always remember the psychological impact of multiple market participants looking at charts or reading charts the same way. For instance when many people read rising power in the marketplace during an uptrend the likelihood of that uptrend continuing increases.
Let’s continue now with some examples within a formation.
Here we have a triangle formation. A triangle formation is often regarded as a continuation pattern, sometimes it can also be a reversal pattern. No clues are given here as to which side it may break so we must look to our candlesticks to help us decide our position.
We see mainly candlesticks with rising power in the last couple of weeks of the formation. When price breaks up it was no real surprise as we had this triangle or flag formation coupled with rising power candlesticks as well as already being in an uptrend. Viewing candlesticks on lower time frames as well will give us different formations so assessing them can be an important insight, however using very low timeframes may contribute to false signals such as a 15 minute candle settling over a support or resistance area signifying a break but when the hourly candle finally settles it shows respect for that support or resistance area showing that it was in fact not broken.
Now that you can see the importance of reading basic Patterns let’s look at different basic patterns and the indication of the price evolution that could be expected.
The closing price closed higher than the opening price. The Green body has a normal average size compared to recent prices, this example signifies a rising pattern.
The opposite is a red body The closing price closed below the opening price. The red body has a normal average size compared to recent prices.
A falling pattern.
Big Green Candle
A less frequently seen candle is the long green body with little or no shadows. High price and closing price are close together, and low price and opening price are also close together.this is a stronger rising pattern. If there is no other support nearby we can use the midpoint of the green body as a support level.
Big Red Candle
Equally rare A long red body with little or no shadows compared to recent prices. High price and opening price are close together, and low price and closing price are also close together.
A stronger falling pattern. If there is no other resistance nearby, you can use the midpoint of the red body as a resistance level.
A doji is where the opening price and closing price are very close together with upper and lower shadows.
Doji’s are part of many candlestick patterns. A doji with bigger shadows is more important in terms of showing potential reversal.
Doji candles are very complex so here are some basic rules to follow when considering including them in your analysis for potential set ups.
• A doji in an up-move with a closing price below the previous closing price is a strong reversal indication.
• A doji in an up-move with a closing price above the previous closing price needs confirmation for a reversal.
• A doji or any other reversal pattern followed by a candle with a window mostly is a sure reversal indication.
• There is extra pressure on the market when more doji’s appear together.
• A doji in a downtrend has much less value than a doji in an uptrend. A doji in a downtrend always needs confirmation as a reversal signal.
• A doji during a flat, neutral trading period has no meaning.
• A doji or any other candle pattern confirms existing support or resistance.
Spinning Tops and Bottoms
Spinning tops and bottoms are very common in a consolidation zones at a price top or bottom. They signify indecision in the market but also show potential reversals are imminent, these can be bullish or Bearish and should be judged in accordance with circumstance, for instance spinning tops appearing at prominent support and resistance may indicate reversal whereas if they are between support and resistance areas we are less likely to consider them a reversal signal.
Tweezer Tops and Bottoms
Two or more candles with tops or bottoms at the same price level indicate resistance or support. The first candle is preferably the bigger candle; the second is the smaller one. The same price level does not have to be the high or low prices. A combination with a closing or an opening price is also acceptable. Tweezer tops and bottoms are reliable reversal patterns.
I hope you now have a better understanding of the reasons for the formation of candlesticks and what they potentially show us in the market. Please take these ideas and apply them to your analysis contemplating what you have learned remember contemplation is the key to learning.