Candlestick charts are said to have been developed in the 18th century by legendary Japanese rice trader Homma Munehisa. The charts gave Homma and others an overview of open, high, low, and close market prices over a certain period. This style of charting is very popular due to the level of ease in reading and understanding the graphs. Since the 17th century, there has been a lot of effort to relate chart patterns to the ldata points instead of one. The Japanese rice traders also found that the resulting charts would provide a fairly reliable tool to predict future demand.
Learn the candlestick formations and spend some time watching them on the charts. Start noticing how these formations can sometimes lead to trend reversals. You will want to be able to quickly spot them on a chart.
My mentors at Market Traders Institute, http://www.markettraders.com/landings/forexIQ/forexIQ.aspx?id=THEFOREXMOM(Blog), made it very easy for me to understand these candlestick formations and the best rules for trading them. Keeping it simple is the key.
The forex is a battle between the bulls and the bears. When we see a decision candlestick, we know which team is winning. A decision candle must be at least 75% body.
The bearish candlestick on the left tells us the bears are in control. The bullish candlestick on the right tells us the bulls are in control.
This of this another way: When we see a bullish candlestick, we know there are more people wanting to buy than want to sell, so the prices are rising.
When we see a bearish candlestick, we know there are more people wanting to sell than want to buy, so the prices are falling.
These candlesticks tell us there is serious movement in the market. The candles I will show you next, are indecision candles. They tell us there is a serious fight going on between the bulls and the bears. Who is winning? We must wait to see.
The candle on the top left tells us the bulls gained some ground, but the prices went very high and very low. (Spinning top)
The candle on the top right tells us the bears gained quite a bit of ground, but the bulls took most of it back. (Hammer)
The candles on the bottom are called Dojis. Neither the bulls nor the bears gained any ground, the opening price is the same as the closing price.
The first Doji (Doji Star) shows us that the bears took the price down and the bulls brought it back, and the bulls took the price up and bears brought it back.
The second and fourth Doji (Dragonfly Doji) show us that the bears took the price down, but the bulls pushed it right back up.
The third Doji (Gravestone Doji) shows us that the bulls took the price up, but the bears pushed it back down.
Indecision candlestick formations suggest we might see a change in the price trend of the market. If the market has been moving up and we see some indecision candles, we might see the market prices start to drop.
It is more important to be able to read the story the candle is telling you than to memorize the names of the candlestick formations. Ask yourself, who is gaining ground? How fierce is this battle?
A Morning Star candlestick formation is a sign of a possible trend reversal. It is a bullish sign.
An Evening Star candlestick formation is a sign of a possible trend reversal. It is a bearish sign.
If a bullish candle follows a bearish candle, and it completely engulfs the previous candle (it is higher and lower than the previous candle), than it is a Bullish Engulfing Candlestick Formation. This is a bullish sign and a trend reversal usually follows.
If a bearish candle follows a bullish candle, and it completely engulfs the previous candle (it is higher and lower than the previous candle), than it is a Bearish Engulfing Candlestick Formation. This is a bearish sign and a trend reversal usually follows.
Tweezer Candlestick Formations are a sign of a potential trend reversal.
Tweezer tops consist of 2 or more candles that have long wicks on the north side of the body. The wicks need to be at least 60% of the candle. The tops of the two candles forming the tweezer tops must be within a couple of pips in height. Bodies can be bullish, bearish, or both. There can be other candles in between the tweezer top candles.
A Piercing Line Candlestick Formation consists of a decision bearish candle followed by a decision bullish candle. Both candles need to have long bodies. The bullish candle must closer higher than 50% of the body of the bearish candle.
A Dark Cloud Candlestick Formation consists of a decision bullish candle followed by a decision bearish candle. Both candles need to have long bodies. The bearish candle must closer lower than 50% of the body of the bullish candle.
Bullish Candlestick Formations –
- Engulfing Bullish
- Morning Star
- Tweezer Bottoms
- Piercing Line
Bearish Candlestick Formations –
- Engulfing Bearish
- Evening Star
- Tweezer Tops
- Dark Cloud