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Candlestick Charts: A Comprehensive Guide

TABLE OF CONTENTS

Candlestick Charts: A Comprehensive Guide

Candlestick Charts: A Comprehensive Guide

Vantage Updated Updated Mon, 2023 December 18 05:57

Candlestick charts are a popular tool used by traders to visualise price movements and trends in financial markets. Each candlestick on the chart represents a specific time period and shows crucial information such as the opening, closing, high, and low prices of an asset. 

This form of charting, helps traders quickly assess market sentiment and make informed decisions. Whether you’re analysing stocks, forex, or commodities, candlestick charts offer a simple yet powerful way to understand price action and predict future market movements. Read on to learn how they work and how to use them in your trading strategy.

What are Candlesticks in Trading?

Candlesticks are a key tool used in trading to represent price movements of an asset over a specific time period. Each candlestick displays four essential pieces of information: 

Figure 1 – Anatomy of a Candlestick 

Open: The open is the price of an asset at the start of the trading period, showing where the market begins. It provides a baseline for comparison with the close to determine whether the price has risen or fallen.

Close: The close is the final price of an asset at the end of the trading period. It is a key indicator of market sentiment and is compared with the open to assess if the market ended higher (bullish) or lower (bearish).

High: The high represents the maximum price reached by the asset during the trading period. It reflects the strongest point of buyer interest before the price retraces.

Low: The low is the minimum price the asset reached within the trading period. It shows the lowest point of selling pressure before the price rebounded.

With all this information derived from one humble candlestick, do not underestimate the value of using candlesticks in your trading as each candlestick tells a certain story.

How to Read Candlesticks Charts

Interpreting candlestick charts is key to understanding market sentiment. 

A bullish candle indicates that the price closed higher than it opened, signalling buyer dominance and an upward trend. This is typically represented by a green candle. In contrast, a bearish candle shows that the price closed lower than it opened, reflecting stronger selling pressure and a downward trend. This is usually represented by a red candle.

Beyond the basic colour of the candlestick, the length of the candle’s body and wicks can provide further insight. 

A long body suggests strong buying or selling pressure, while a short body indicates indecision or a lack of significant movement. Long wicks on either side of the body may reveal price rejection at those levels, suggesting potential reversals or trend changes. As you continue reading, these different types of candlesticks and their significance will be explained in greater detail in the sections below.

Why Use Candlesticks? 

Candlestick charts are widely used by traders because they provide a clear visual representation of price movements within a specific period. One of the key advantages of candlesticks is that they offer more detail than simple line charts, allowing traders to quickly grasp market sentiment and identify potential trends.

The distinct shapes, colours, and patterns formed by candlesticks provide deeper insights into whether an asset is in a bullish or bearish trend, helping traders refine both their short-term and long-term strategies.

Additionally, candlestick charts can reveal important reversal or continuation patterns that may not be easily spotted using other chart types. By recognising these patterns, traders can make more informed decisions about when to enter or exit a trade, potentially capitalising on market opportunities.

Ready to start trading with candlestick analysis? Open a live account with Vantage today and unlock the potential of these market indicators. 

Types of Candlestick Chart Patterns

No matter what candlestick pattern a trader uses, it is always best 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 the common characteristic of both the shooting star and the hammer is that the candles have a prominent wick and relatively small candle body.  

Both patterns serve to illustrate market indecision and hint a potential reversal in the market.  

Figure 2 – Diagram of Hammer & Shooting Star Doji 

Case Study 1 – Hammer Doji

Figure 3 – EURCHF H4 Hammer Doji (https://www.tradingview.com/x/UVH0SZTI/) 

In figure 3, the formation of the Hammer Doji at a support level provides the trader with insight that markets could turn from bearish to bullish.  

Case Study 2 – Shooting Star Doji

Figure 4 – GBPCAD H4 Shooting Star Doji (https://www.tradingview.com/x/SBKDcOD2/) 

Figure 4 depicts a Shooting Star Doji forming at a critical resistance level. This should hint a trader that markets 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”. Through this simple two candled pattern, traders can then make trading decisions. 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 

Case Study 3 – Bullish Engulfing

Figure 6 – EURGBP D1 Bullish Engulfing Pattern (https://www.tradingview.com/x/TUmh2YhU/) 

Figure 6 shows the bullish engulfing pattern in action. At a significant support, a bullish engulfing on EURGBP led to shift from bearish to bullish market structure.  

Case Study 4 – Bearish Engulfing

Figure 7 – EURJPY H1 Bearish Engulfing Pattern (https://www.tradingview.com/x/cR9Rl96x/) 

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, also providing the most information and confirmation compared to the Dojis and Engulfings.  

Figure 8 – Diagram of Three White Soldiers & Three Black Crows 

Case Study 5 – 3 White Knights

Figure 9 – USDCAD H1 Three White Soldiers Pattern (https://www.tradingview.com/x/ZkLuq0vF/) 

Figure 9 shows the 3-White Knight pattern forming at support. The three candles involved progressively gets larger, signifying a possible emergence of a bull market.  

Case Study 6 – 3 Black Crows

Figure 10 – GBPUSD D1 Three Black Crows Pattern (https://www.tradingview.com/x/jzvNPiWS/) 

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 expected market direction after the pattern has occurred.  

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 

Advanced Candlestick Patterns

Apart from the patterns mentioned, there are other candlestick patterns that may be of tremendous use for a trader.

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 the trader to make decision based on current context. 

Figure 11 – Adaptive Candlestick Indicator on MT4 

Technical Insights

The Technical Insights function offered by Vantage Protrader Tools highlights key price action patterns on major & minor Forex pairs, and commodities.  

Figure 12 – Vantage Technical Insights Alerts 

Figure 13 – Vantage Technical Insights (XAGJPY) 

Want to have access to advanced candlestick patterns at your fingertips? Sign up for Vantage Live Account!

Using Candlesticks to Identify Market Trends

Traders can use candlestick patterns to identify and capitalise on market trends. Patterns such as the hammer, shooting star, bullish engulfing, and three white soldiers provide clear signals of potential trend reversals or continuations. Trends are important for traders, as they help determine the best times to enter or exit a trade, allowing them to maximise their potential profit and minimise losses.

For example, a bullish engulfing pattern at a support level might indicate the start of an uptrend, while the three black crows pattern at resistance suggests a possible downtrend. Recognising these patterns allows traders to anticipate price movements and adjust their strategies accordingly. By closely monitoring these candlestick patterns, traders can accurately identify the beginning, continuation, or end of a trend before placing their trades.

Combining Candlesticks with Other Indicators

While candlestick patterns are powerful on their own, combining them with other technical indicators can provide even more reliable signals for traders. Indicators such as moving averages, the Relative Strength Index (RSI), and Bollinger Bands help confirm the signals provided by candlesticks, giving traders a clearer picture of market conditions. 

For example, when a bullish engulfing pattern aligns with a moving average crossover, it can offer stronger confirmation of an upcoming uptrend. Similarly, the RSI indicates whether an asset is overbought or oversold, and when used alongside candlestick patterns, it helps traders more easily spot potential reversals. Bollinger Bands, which measure market volatility, combined with candlestick analysis, can alert traders to potential breakouts or trend shifts. 

By using multiple indicators together, traders can better confirm market trends and fine-tune their entry and exit points for more informed trading decisions.

Getting Started with Candlestick Trading

Here’s how you can get started with candlestick trading: 

  • Choosing a Trading Platform

When selecting a trading platform, prioritise those that are known for their reliability and robust charting capabilities. Choose a platform that provides real-time market data, which is crucial for accurate chart analysis. Look for a user-friendly interface that is easy to navigate, particularly for those new to trading. 

Additionally, consider platforms that offer educational resources, such as tutorials, guides, and webinars on effectively using candlestick charts. Lastly, ensure the platform includes a demo account, allowing you to practise trading strategies without financial risk.

  • Setting Up a Candlestick Chart

To set up a candlestick chart, start by accessing the charting section on your trading platform. Select the financial asset you wish to trade, such as stocks, forex, or commodities. Customise the time intervals of the candlesticks to align with your trading strategy, choosing from options like 1-minute, 30-minute, or daily intervals.

Enhance the readability of your chart by adjusting the colour and style of the candlesticks. Finally, save your chart settings to maintain consistency in your analysis for future trading sessions.

  • Identifying Potential Trading Opportunities

To effectively identify trading opportunities using candlestick charts, start by learning to recognise key patterns such as bullish engulfing and shooting stars, which indicate potential market movements. Observe how these patterns correlate with current market trends to pinpoint optimal buying or selling points. 

Sharpen your skills by practising with your platform’s demo account, allowing you to respond to real-time market conditions without risk. Additionally, reviewing historical chart data can improve your predictive accuracy by showing how similar patterns have influenced market movements in the past. 

Once you’ve identified the trading opportunities, place your trade accordingly. It’s essential to set up your risk management strategy at this point, including setting stop-loss and take-profit orders to protect your trades and lock in potential profits. This systematic approach helps manage risk and enhances the potential for successful trading outcomes.

The Power of Candlestick Analysis in Your Trading Journey

Candlestick analysis is a vital tool for traders who need to decipher market sentiment and identify potential trends effectively. It provides a visual representation of price movements, offering insights into the open, high, low, and close values within a specific period. 

By integrating these patterns with other technical indicators like RSI and moving averages, traders can obtain more reliable signals and refine their trading strategies. This comprehensive approach not only helps in making informed decisions but also aids in better risk management.

Ready to unlock the full potential of candlestick analysis in your trading? Sign up for a live trading account today with Vantage today.

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