How to Trade with Candlestick Charts Like a Pro (Everything You Need to Know+Trading Applications+ Free E-Book)

Bonus Material: Get the Free E-book on Candlesticks

WHILE everyone is used to seeing the conventional line charts found in everyday life, the candlestick chart is a chart variant that has been used for around 300 years and discloses more information than your conventional line chart.

The candlestick is a thin vertical line showing the period’s trading range.

A wide bar on the vertical line illustrates the difference between the open and close.

Note: The daily candlestick line contains the currency’s value at open, high, low and close of a specific day.
The candlestick has a wide part, which is called the “real body“.

This real body represents the range between the open and close of that day’s trading.

When the real body is filled in or black, it means the close was lower than the open.

If the real body is empty, it means the opposite: the close was higher than the open.

Candlestick Charts

Just above and below the real body are the “shadows.”

Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day’s trading.

When the upper shadow (the top wick) on a down day is short, the open that day was closer to the high of the day.

And a short upper shadow on an up day dictates that the close was near the high.

The relationship between the day’s open, high, low and close determine the look of the daily candlestick.

After viewing it, it is easy to see the wealth of information displayed on each candlestick.

At just a glance, you can see where a currency’s opening and closing rates, its high and low, and also whether it closed higher than it opened.

When you see a series of candlesticks, you are able to see another important concept of charting: the trend.

 

PART 1- Single Candles

Long Black Day– Long black day candlestick consists of real body which is much more longer than it’s shadow lines. This indicate the great difference between the open price and the close price for a trading day. Long black day candlestick shows that the open price is near the high, price closes lower and near the low. The longer the body of the candlestick is, the more bearish the signal.

Long White Day– Long white day candlestick consists of real body which is much more longer than its shadow lines. This indicate the great difference between the open price and the close price for a trading day. Long white day candlestick shows that the open price is near the low, price closes higher and near the high. The longer the body of the candlestick is, the more bullish the signal.

Short White Day– In theory, the short white candle cannot make up its mind between a reversal or continuation of the existing trend. In the real world, it performs as a reversal 52% of the time, which is close to the theoretical indecision.

Short Black Day– The same is valid for the short black day candles. They are showing hesitance between a bullish and a bearish state. Not much happens with this candle, unless it is part of an “inside bar” candlestick formation.

White Spinning Tops– A type of candlestick formation where the real body is small despite a wide range of price movement throughout the trading day. This candle is often regarded as neutral and used to signal indecision about the future direction of the underlying asset. Usually in an uptrend when far away from resistance, it is considered a continuation pattern. It is the “breath” that the market takes just before a continuation of its current trend.

Black Spinning Tops– Тhe interpretation here is the same: A type of candlestick formation where the real body is small despite a wide range of price movement throughout the trading day. This candle is often regarded as neutral and used to signal indecision about the future direction of the underlying asset. In a downtrend, when there is no imminent support level, this is considered as a continuation pattern.

Dragonfly Doji– A type of candlestick pattern that signals indecision among traders. The pattern is formed when the stock’s opening and closing prices are equal and occur at the high of the day. The long lower shadow suggests that the forces of supply and demand are nearing a balance and that the direction of the trend may be nearing a major turning point.

Gravestone Doji– A type of candlestick pattern that is formed when the opening and closing price of the underlying asset are equal and occur at the low of the day. The long upper shadow suggests that the day’s buying buying pressure was countered by the sellers and that the forces of supply and demand are nearing a balance. This pattern is commonly used to suggest that the direction of the trend maybe be nearing a major turning point. If it forms around  major resistance area, it might be considered as a reversal candle.

Long-Legged Doji– A type of candlestick formation where the opening and closing prices are nearly equal despite a lot of price movement throughout the trading day. This candlestick is often used to signal indecision about the future direction of the underlying asset. Usually in the middle of the range, it could be taken as a continuation signal of the previous trend.

 

PART 2 – Candlestick Patterns (2 candles)

Harami– this candlestick is also known as an “Inside Bar“. A candlestick that forms within the real body of the previous candlestick is in harami position. Harami means ‘pregnant’ in Japanese and the second candlestick is nestled inside the first. The first candlestick usually has a large real body and the second a smaller real body than the first. The shadows (high/low) of the second candlestick do not have to be contained within the first, though it’s preferable if they are. Doji and spinning tops have small real bodies and can form in the harami position as well.

Hammer– a.k.a. “Pin Bar”. it signals a reversal after a downtrend – control has shifted from sellers to buyers. The shadow should be at least twice the height of the body. If it occurs after an up trend, it is called a ‘hanging man‘ and is a bearish signal. A gravestone is identified by open and close near the bottom of the trading range. This is really the converse of a hammer and signals a reversal when it occurs after an up-trend.

Dark Cloud– it is a pattern encountered after an up-trend and is a reversal signal warning of “rainy days” ahead. A bearish reversal pattern that continues the uptrend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.

The Piercing Line– it is the opposite of the Dark Cloud pattern and is a reversal signal if it appears after a downtrend. The first day, in a downtrend, is a long black day. The next day opens at a new low, then closes above the midpoint of the body of the first day.

Engulfing– Engulfing patterns (shown above) consist of two bodies without any shadows and where the second body ‘engulfs’ the first. The picture on the left is an example of a bullish engulfing pattern. They usually mean a bullish continuation. The candlestick pattern on the right is a bearish engulfing pattern. It is very significant at market tops, where sellers are “engulfing” the last standing buyers and push the price lower.

These signals are especially significant after a prolonged trend. I spend a lot of time on this candlestick pattern in my trading course. I am using it extensively and together with the pin bar, they are two of the most commonly used candlestick patterns by me. They are crucial when it comes to the “scaling-in method” I use.

 

PART 3- Candlestick Patterns (3 candles)

Stars– Stars are made up of a long body followed by a short body with a much smaller shadow (trading range). The bodies of the two must not overlap, though the shadows may. There are three major star candlestick patterns, which I will discuss below.

Morning Star

The Morning Star pattern is a bullish reversal signal after a downtrend (as portrayed above). The first bar has a long black body, the second body gaps down from the first (the shadows may still overlap) and may be filled or hollow. This is followed by a long white body, which closes in the top half of the body of the first bar.

Evening Star Pattern

The Evening star pattern is opposite to Morning Star and is a reversal signal at the end of an up-trend. Evening star is a three-candle pattern that comes after a rally. The first candle has a tall white real body, the second has a small real body that gaps higher to form a star, and the third is a black candle that closes well into the first session’s white real body.

Doji Star

A Doji Star formation is weaker than the Morning or Evening Star – the doji represents indecision. With a Shooting Star the body on the second bar must be near the low – at the bottom end of the trading range. The upper shadow must be longer. This is also a weaker reversal signal after a trend. Both of these patterns require confirmation – by the next bar closing below halfway on the first bar.

A lot can be said and written about candlestick charts. In the end what matters is how are you going to apply that knowledge. Some of the most important sub-topics of that article are:

• What are candlesticks and how are they used

• Different types of single candles

• Candlestick formations (two or more candles)

• Applications

In the last past (Applications), I walked you through two different approaches of using candlesticks. First, I showed you how to use candlesticks in conjunction with support and resistance.

Second, I showed you how candlesticks are used with moving averages. I also gave a few real life examples down the line to make it more visual. All in all, I hope that this detailed candlesticks article has given you enough information, so you can make a more informed trading decision.