Candlestick Patterns — A Technical Analysis Tool

Candlestick Patterns — A Technical Analysis Tool

Watching candlestick patterns is as old a trading technique as trading itself. According to Wikipedia, a candlestick chart is a style of bar-chart used primarily to describe price movements of a security, derivative, or currency over time.
It is a combination of a line-chart and a bar-chart, in that each bar represents the range of price movement over a given time interval. It is most often used in technical analysis of equity and currency price patterns. They appear superficially similar to error bars, but are unrelated.
But can you make money studying candlestick patterns? How do you know which trading products work and which ones don't? Are automated systems better than manual systems?
The answer is yes AND no. Most systems will work some of the time and not work some of the time. Professional traders know that the best way to consistently conquer the market is to diversify — diversify your risk as well as your systems.
Professional trading coaches will advise their students to think in terms of winning half of their trades. The only way, then, to not just break even is to win more often or win more when you are right. So to avoid having to win more trades, you need to pay attention to your risk reward ratio and shoot for a reward that is twice what you are risking. In other words win the two dollars when you are right and only lose one dollar when you are wrong.
If you stick with just one trading technique or just one automated system, you could end up breaking even on the trades and actually losing money due to trading costs and margin interest.
Using candlestick patterns in your technical analysis is a tool you should become familiar with. To get up to speed on this valuable timing technique, pick up the Candlestick Crash Course.

• You'll improve your chances of winning by learning:
• Intro – Be prepared for the trading day with a solid game plan
• Technical Analysis – What does and does not work
• Candlestick Charts – Get the basics
• Types Of Candlestick – Your most effective patterns
• Entry Signals – What signals get you in at the the most effective time
• Continuation Patterns – The trend is your friend
• Reversal Patterns – What does it mean to your bottom line
• Exit Signals – When to get out
• Filtering – Avoid traps and false signals
• Time Frames – Which ones work best and when

If you are not already using candlestick patterns to diversify your trading systems,  to learn what professional traders know. Beginners and pros alike will benefit from the education by real traders.

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Candlestick Patterns

Candlestick Patterns

Image via Wikipedia

Candlestick patterns are used as a tool in trading and was said to be first developed by the Japanese back in the 18th century who used it to trade rice. It is reliant and formed upon the high, low, opening, and closing price of the day. There are different types of candlestick patterns which can be categorized into 5 main types:
Engulfing: This pattern has two different candles. The first day is a narrow range candle that closes down for the day. The sellers remain in control of the stock but they are not very aggressive. The second day consists of a wide range candle that "engulfs" the body of the first candle and closes near the top of the range. The buyers have overwhelmed the sellers (demand is greater than supply). Buyers are ready to take control of this stock.
Hammer: You normally see a hammer pattern when stop loss orders take a hit at the close of the day. This is normally when you see the professional traders swoop in to buy shares at a lower price.
Harami: the pattern for harami is opposite to the pattern for engulfing.. On the first day you see a wide range candle that closes near the bottom of the range. The sellers are still in control of this stock. Then on the second day, there is only a narrow range candle that closes up for the day. The pattern is often confused with the engulfing pattern but it is important to remember they are in fact opposites.
Piercing: This is also a two-candle reversal pattern where on the first day you see a wide range candle that closes near the bottom of the range. The sellers are in control. On the second day you see a wide range candle that has to close at least halfway into the previous candle. Those that shorted the stock on first day are now sitting at a loss on the proceeding the second day. This can set up a powerful reversal.
Doji: The doji is usually the most popular candlestick pattern. The stock opens up and goes nowhere throughout the day and closes right at or near the opening price. It represents indecision and causes traders to question the current trend. This can often trigger reversals in the opposite direction.
Even to this day candlestick patterns remain a powerful tool for stock traders to read the market and predict the pricing of stock.

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