How to Use Candlestick Patterns to Start Winning More Trades

Candlestick Patterns Strategy

If you can learn how to trade candlestick patterns, it is a powerful weapon for your trading results. Each and every candle is providing traders with information. It is conveying a message how to read and interpret the current status quo of price action. Being able to judge the communications of the market via the comprehension of candles provides a dangerous edge to all traders.

Once you learn how to read candlestick patterns you will be able to properly find out the following stages of market behavior.

  • Bullish Candlestick Patterns
  • Bearish Candlestick Patterns
  • Neutral Candlestick Patterns

Candlestick Patterns

Each candle indicates via its internal composition which side of the market is in control – or whether no side is in charge. When viewing the candle, a Forex trader can understand whether the bears or bulls managed that particular bar. By doing so, a trader can make estimations about the strength of a rally or fall – or the lack of it – and use that for their trading purposes. Candlestick patterns for day trading can be a great strategy to employ if you have time to spend in the markets each day.

The candles can be used to judge:

  • Trend continuation
  • Impulsive continuation
  • End of trend
  • bearish candlestick patterns
  • End of correction
  • Breakouts
  • Failed to break out
  • Failed breakout failure
  • Pullback
  • Bounce

CANDLESTICK PATTERNS BASICS

Let us start with the candlestick patterns basics on how to calculate and recognize what the candle values mean. Each candle has an open, high, low and close.

The proper way to analyze a candle is to compare the open, high, low and close values and the relationship between them.

a)      First of all, the close value minus the open value will determine whether the candle was bullish or bearish, or indecisive (equal values). This information will explain whether the candle is +20 pips or -100 pips and this is called the body of the candle.

b)      Secondly, the difference between the high and close/open and the difference between the low and close/open will determine the size of the wicks on both ends (could be 0 (zero) as well), and this is called the wick of the candle.

c)       When subtracting the high from the low,  that is how you calculate a total candle value. When dividing the size of the candle body/wick by the entire candle length, a ratio is computed. This ratio will provide information regarding the balance of the power in that particular candle.

WHO’S IN CONTROL?

Now let’s discuss what information the ratio and balance of power within a candle conveys to us: who’s controlling the market?

1)      Power from one side: this usually happens when a candle has no or little wick. The wick should be none to small (preferably less than 10-20% of the candle body). The wick is only necessary for closes near highs in bullish cases and closes near lows in bearish cases.

  1. A close near the high/low (h/l) within +/- 0-10%: total control
  2.  A close near the h/l within +/-10-20%: good control
  3. A close near the h/l within +/-20-30%: some control possible (depends on context)
  4. A close near the h/l within +/-30-40%: questionable/no control (depends on context)
  5. A close near the h/l within +/-40+%: no control from one side

2)      Loss of control from one side: this happens when the candle has one big or decent size wick. If the wick is on top, then the Bulls lost control during the candle. If the wick is on the bottom, then the Bears lost control during the candle. The wick percentage of the total candle size shows how much control was given away during that price struggle:

  1. A wick of +/- 0-20% indicates little loss of control
  2. A wick of +/-20-40% indicates some loss of control
  3. A wick of +/- 40-60% indicates loss of control
  4. A wick of more than 60% is a major loss of control

3)      Loss of / no control from both sides: this happens when the candle has two wicks on both sides. There is no clear winner, and the bulls and bears remain in balance. The open and close are often equal to each other or almost equal to each other (small body), which indicates indecision.

 

KEY ASPECTS

Besides the fact whether a candle has a bullish or bearish net gain, whether the close is near the h/l, whether there is a wick, which side(s) there is a wick, what percentage of the candle is the wick and body, it is also important to look at the size of the candle.

A big sized candle will have more value than a small sized candle. Of course, this depends on the time frame. A candle size of 40 pips is a massive sized candle for the 1-hour chart but not for the daily (small). Usually, the larger the candle, the more strength, and information the candle will give, and that helps make a trading decision.

The timeframe itself is of course also necessary. The higher the time frame, the more valuable the information can become because the candle is providing an understanding of the balance of power of a longer period. For example, the effect of a primary wick on the daily chart indicates massive loss of control during the entire day, which has more importance than a wick on a 15-minute chart (bear/Bulls losing control for only 15 min).

When has the candlestick patterns printed is also another factor of analysis? A daily candle printed on Sunday is usually small and provides no information. A 1-hour candle written at 1 am GMT on the EURUSD with a seven pip body also has little value.

Last but not least, the candle needs to be closed before an assessment can be made on the candle itself. When a candle is open, it can close anywhere it wants to. It is certainly possible to make an analysis of that candle, but when the candle is open, a trader is trading/analyzing a lower time frame.

CANDLESTICK PATTERNS In Action

As explained in the previous paragraphs, each candle provides a valued source of information whether the market remains/changes to bullish, bearish or indecisive. Some of the candlesticks, however, do provide more value than others. These candlesticks have various names because they are of more importance than regular and “normal” candles.

Certain candlestick patterns consist of 1 candle. Other candlestick patterns need two candles to be complete, or even up to 3 candles to form a combination formation.

CANDLESTICK PATTERNS IN MARKET STRUCTURE

Candlesticks are the building blocks of what will later become a swing high or swing low. The swing or swing low in turn can either be impulsive / momentum OR corrective / consolidation. The candlestick patterns usually occur at the bottom or top of these swing highs and swing lows, but can also provide information of continuation. Also, candlestick patterns often indicate the beginning and end of momentum and corrections.

The various swing highs and swing lows that are labeled as momentum and correction can, in turn, be the building blocks of a trend channel, trend line, and chart pattern. 

 

CANDLESTICK PATTERNS VIDEO TRAINING

I have posted this video if you are interested in becoming a more advanced candlestick trader.

CANDLESTICK PATTERNS  IN STRATEGIES

Candlesticks can be used for trading Forex strategies. How these candles are used will differ from strategy to strategy, and from trader to trader. Some Forex traders even opt to trade solely based on the information provided by candlesticks. They make their analysis and trading decisions/management based on the candlestick patterns. An example could be for instance trading pin bars. 

Other traders use candlesticks as supportive information. They seek confirmation of their analysis via candlestick patterns. For example, traders could be waiting for a bounce at a trend line by analyzing candles. This strategy means that traders use candles as part of a broader strategy and use it as confluence. Price action signals at major support and resistance, for instance, is a method that capitalizes on candlestick patterns in combination with other technical analysis.

Last but not least, some traders may choose not to use candlestick patterns because they prefer other concepts. All traders need to find a balance in their tools, indicators, and analysis.

Do you use Japanese candlestick patterns for analysis and trade management? If yes, is there any particular candlestick patterns you like most? If not, why not? Let us know down below!

Thanks for sharing this candlestick patterns training article and Good Trading!

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  • Thank you!

  • Phuong Nguyen

    I’m a beginner. Now I’m learning how to trade candlesticks. Your post is very helpful for me. Thank you, Mr.Casey!

  • Funny one Jack 🙂 I missed this from before.

  • I use candlesticks now, too – I lost so much money trading, I can’t pay for electric lights anymore.

  • Phoebe Ejimbe

    Yes, I use candlesticks for my analysis as well as for trade management – mostly the main patterns including bearish/bullish engulfing , twizzer tops and bottoms, pinbars, head & shoulder patterns, triangles and flag pole patterms. They work well! A great article!