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If you have been trading for more than two weeks, you probably know about candlesticks. They are one of the most innovative tools in enlightening a trader on day-to-day momentum. They are excellent for intraday trading and, more importantly, for entry and exit signals. The other four tools—support/resistance, Fibonacci retracements, ATR, and MAs—can give you set numbers to target candlestick charts to seal the deal. As I suggested in the macro technical analysis, you have to have some redundancy in your trading indicators to answer the core questions, “Where is the market going?,” “How fast is it getting there?,” and “When will it arrive?” You need the same type of redundancy in the micro analysis of entry and exit. Candlesticks do just that; once you have your favorite entry/exit price selection technique, use the candlesticks to set up the timing. If you are unfamiliar with candlestick patterns, they employ two-dimensional bodies to depict the open-to-close trading range and upper and lower stems (or shadows) to mark the day’s high and low. Steve Nison introduced the United States to candlestick charts, although they had been used in Japan since the sixteenth century. While there are volumes of books and videos on the various types of candlestick patterns, we have only two goals when we use candlesticks: (1) we want it to confirm our entry or exit into or out of a trade, and (2) we want it to confirm a market’s turnaround or continuation. When we know the price at which we are entering or exiting the market, we want to give it a 2– to 4-day time period to let the proper candlestick pattern to show up to confirm our trade. Once we get the confirmation, we act immediately! I have narrowed down the candlestick chart patterns to 10 key patterns that I watch. You can use my set, or you can use/develop your own set. Even with the 10 that we see here, you will find that you may favor just a few as confirmation indicators. The trick to understanding how to apply candlesticks is to realize that they can give you information for only a limited time. They are not designed to be a macro indicator, but they are great at gauging the market’s sentiment right now. They do not necessarily give you a price to enter or exit; they just tell you the “when,” which is important if you already have an opinion of the market, but if you do not have an opinion, you can find yourself chasing every candlestick pattern with little discretion, which can be detrimental in the long run. When you have an overall context on how you are approaching the market, the candlestick patterns are the icing on the cake. Memorize these candlestick patterns. Photocopy these pages and make flash cards if need be—just remember them so that when you have all of the setups in place, you simply can see the proper candlestick and execute the trade. There is some overlap between the various entry and exit technical analysis tools and the macro tools, particularly when it comes to answering the question, “When will the market arrive?” That’s perfectly fine. We have taken a top-down approach to the technical analysis that will allow us to look at a chart and within a few minutes be able to determine how and when we will interact with the market. Having exact prices to target is what is all important. Now that we have discovered the prices we are targeting for our entry and exit, we are capable of matching them up with the proper risk management technique that will help us have the optimum opportunity for success. Top 12 Candlestick Indicators and What They Look Like Doji: A doji line that gaps from a long green candlestick. Bullish engulfing signal: A bullish engulfing pattern occurs when buying pressure overwhelms selling pressure, reflected by a long green real body engulfing a small red real body in a downtrend. Bearish engulfing signal: A bearish engulfing pattern occurs when selling pressure overwhelms buying pressure, reflected by a long red real body engulfing a small green real body in an uptrend. Hanging man: A small real body (green or red) with little or no upper shadow. It is a bearish reversal pattern when appearing during an uptrend. Bearish shooting star: A candlestick with a long upper shadow with little or no lower shadow and a small real body near the lows of the session. Bullish hammer: A bottoming candlestick line with a small real body (red or green) at the top of the trading range with a very long shadow with little or no upper shadow. 7. Inverted hammer: A candlestick that has a long upper shadow and a small real body at the lower end of the session. It is a bullish bottom reversal signal. 8. Bullish harami: A two-candlestick pattern in which a small real body holds within the prior session’s unusually large real body. The harami implies that the preceding trend is getting ready to conclude. 9. Bearish harami: A two-candlestick pattern in which a small real body holds within the prior session’s unusually large real body. The harami implies that the preceding trend is getting ready to conclude. 10. Dark cloud: A bearish reversal signal. In an uptrend, a long green candlestick is followed by a long red candlestick that opens above the prior green candlestick’s high. The second candlestick must close well into the first candlestick’s real body. 11. Piercing pattern: A long red candlestick is followed by a gap lower during the next session. This session finishes as a bullish green real body that closes more than halfway into the previous session’s real body. 12. Bearish/bullish kicker signal: The first candle opens and moves in the direction of the trend, either up or down, depending on whether or not it’s a bullish or bearish kicker signal. The second day’s candle opens at the same price of the previous day and goes in the opposite direction. This means the two candlesticks must be opposite colors (one white and one black). It’s important to remember that the candle of the second day should never retrace the previous days trading range.
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candlesticks, atr, doji, fibonacci retracements, harami,
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