Candlesticks are a method of following
market price action and identifying market
reversal points and trends. Some people
have tried to trivialize the technique
- but I believe the more you know about
them, the better you will become at trading
with them. I explain it like learning
a language. If you only learn five words
- you won't be able to speak and understand
the language well - right? If you learn
to speak and understand the entire language
base, then you will be fluent in it -
and thus be able to use it more effectively.
same thing applies to candlesticks. The
more you know and the more you practice,
the better you will become at using them.
"Reading a candlestick chart"
is something that comes after much experience
with them - I call it the "Grasshopper
Effect". After sometime, my clients
contact me and normally say "It's
Great! I see what you are saying now".
This is when they have achieved a level
of understand that allows them to "see
the chart in TOTALITY" - they are
able to see everything and how it all
inter-relates. This is the ultimate goal
of most traders - where they will get
the most out of using candlesticks.
get to this level, beginners must start
with the basics and build upon this foundation
to achieve a higher level of understanding.
Let me start by explaing some of the basics..
Candlestick Basics (for beginners)
Candles are also called "Empty"
Black Candles are also called
The open~close range is call
the "Body" of the
The upper and lower wicks
on the candle are called the
"Upper Shadow" and
Dojis are generall any small
ranged bar where the open~close
range is equal or very close
to one another.
True Dojis are when the open
= the close.
are a sign of congestion/weakness
in the markets.
The body of all Dojis are
Size, Shape and Location are
key factors when analysing
Size - shows
the strength of the move.
A larger candle shows more
strength than a smaller candle.
Shape - different
candle shapes (patterns) provide
clues as to the potential
future moves in the market.
- where the pattern forms
can help determine the potential
future market moves.
Candlestick patterns are the
basis of the Japanese candlestick
technique. We use the patterns
as clues to the future of
the market movement. The trick
is to NOT concentrate on just
one or two patterns, but to
"read the entire chart".
For example, if a BUY signal
formed today, we would want
to review the entire chart
(most recent activity - 3
months or so) for other clues
to the potential future moves
in this chart.
next level of analysis (for intermediate
level users) is to blend (or filter) Western
Technical indicators into the candlestick
analysis. This process is somewhat simple,
it requires the users to be familliar
with technical indicators and their actions/reactions
to price movement on the chart.
when we find a potential "trigger"
(buy or sell), we should review the candlestick
chart for other patterns that help confirm
or deny the current signal. At the same
time, we should look at the technical
indicators for signs of strength or weakness
in this signal. We want to find triggers
that are "timed" well with our
technical indicator levels/conditions.
important fact is to review a longer term
chart (normally a weekly chart for end-of-day
traders), for other signs of strength
or weakness. For example, if the weekly
chart also shows a buy signal with good
technical indicator conditions, we may
have found a really strong contender.
But if the weekly chart shows weekness
or the technical indicators are not "timed"
with this buy signal, then we may have
only found a short-term "pop"
in the market.
Candlestick Theory for Intermediate
the candlestick pattern, then
look for conditional "timed"
setups in the technical indicators.
Remember to review the rest
of the chart for other clues..
Try to find support/resistance
(dojis) and other clues to
help support this signal.
Now, use the longer-term chart
to provide further confirmation
of this potential.
try to force the trade. Let
the trade come to you - be
this point, we are getting into some of
the more advanced topics of candlesticks.
This is for people who already have experience
with them and have mastered most of the
basic skills. This next section is designed
to help those people who need more than
the basics above.
advanced topics are partially from my
own experience with candlesticks and the
Candlestick Theory for Advanced
the longer term charts
It is best to follow longer
term charts (weekly for end-of-day
traders and 15, 30, 60 minute
for intra-day traders) to
identify longer term trends.
Then fall back to the shorter
time frame (Daily for end-of-day
traders and less then 15 minute
for intra-day traders) to
execute trades. In other words,
never loose focus of the overall
market trends. The reason
everyone needs to follow the
longer-term trends is simple
- you need to know what direction
the market is moving. The
shorter term charts focus
on the "mirco trends".
The longer term charts focus
on the overall trends. Blend
the two together for the best
Risk Management to Protect
Use appropriate risk management
when trading. Don't trade
out of fear or greed. Wait
for the trades to come to
you and execute a "smart"
what to do at all times
Know what will happen before
it happens. In other words,
know what to do if your decision
is correct and know what to
do if your decision is wrong.
Have a plan and use it. The
most important factor here
is "what to do if you're
targets and have an "Exit
Identify a profit target or
projected target level. If
you buy a stock, know where
you think it will go, then
plan an exit strategy at (or
near) that level.
say I purchased 500
share of XYZ at $13
off a buy signal. I
should know exactly
what to expect if I'm
wrong or right about
this trade. If I'm wrong,
My $0.50 stop will protect
me from extended loss.
If, I'm right, my initial
target will be $14.50
(where I'll probably
sell 300~400 shares).
At this target, I'll
move my stop above my
entry price and continue
to trail the stop higher
as the stock trends.
is the type of "plan"
you should have for all your
trades. The only thing you
want to leave to chance is
the price action. You should
know exactly what to do in
any event within your trade.
your Entry Trades to Maximize
Profits and Minimize Risk
Time your entry trades. You
don't have to just use market
orders to enter trades. Let's
say you see a buy signal on
the weekly chart, but see
some weakness on the daily
chart (or market volatility
- up and down swings in price).
You could enter a MARKET order
and your STOP to enter the
trade, or you could try to
"time" the entry
using a LIMIT order and a
say I wanted purchased
500 share of XYZ at
off a buy signal (say
it closed at $13). If
I see some potential
for a better entry price
(below $13), I might
try to use a LIMIT order
to enter the trade.
Say I place a limit
order to buy 500 shares
of XYZ @ $12.75. If,
I'm correct, I'll have
cut my risk in half
and added $0.25 to my
potential profit target.
If I'm wrong, I might
have to get in at a
can see how, if properly used,
this technique can help you
maximize your potential. The
drawback to this is then you
were right and the market
just runs. Then, you might
have to get in with a market
order (after canceling your
leave exposed profits on the
If you entered a trade and
it is moving in your direction,
use a trailing stop to find
the best place to protect
your trade. I like to use
DOJIS and support/resistance
for these levels. Here are
my trades move in my
favor, I try to find
the best place to move
my stop to breakeven
or better. Normally,
you have to see a decent
price move before you
can safely do this.
moving higher, I might
try to move my stop
above breakeven (to
try to lock in profits).
the stock reaches your
initial target, liquidate
50+% of the trade (you've
achieved your goal -
a profitable trade).
Now, move your stop
to lock in the rest.
the first sign of weakness
(especially if your
target has been reached),
move your stop to protect
against a pullback.
Think of it this way,
better to place a tighter
stop and lock in profits,
than leave it unprotected.
So what if it gets stopped
out, you made a profit
and will get the next
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