Learn the Basics of candlestick trading in the stock market. Beginners Bible to candlesticks.
I firmly believe that 80% of the trading war can be won using the candlestick pattern analysis. Candlesticks define the emotions and sentiment of the market, they give us viable information on price action, they give us entry and exit signals and a lot more. If you are a trader and you do not know how to read the candlestick chart patterns, my friend feel free to share the amount of loss you have made till now.
Before I start my blog as always I would want all of you to meet my friend Robin. Who started trading recently, did a lot of loss, did 500 online courses, and still does not know the real essence of candlesticks. He is sad and seeking help, let us help him.
In this blog, I would try to explain the basics of Candlesticks the way I wanted someone to explain to me when I first started trading.
Candlestick patterns were developed by a Japanese rice trader Munehisa Homma in the early 1700s. He firmly believed that there was a pattern in which the prices of rice fluctuated every day and they never fluctuated on anyone’s will or prayers. After a few years of research on price moment of rice, he successfully came up with the candlestick chart patterns. He initially gave two types of candlesticks which were
1) Bullish candlestick — White in color
2) Bearish candlesticks — Black in color.
The colors he selected for the candlesticks were based on chess as it was a very popular game in the 1700s in Japan.
Gradually the Candlestick pattern became popular in Japan and then the rest of the world. Today it is the best and the most popular stock market analysis tool with over Billions of people using it globally. One of the early books was candlestick charting by Steve Nison who is also credited to give the Red and green color to the bullish and bearish candlesticks respectively.
FORMATION AND HOW TO READ CANDLESTICKS
Each candlestick that you see is made up of a wick/tail and Real(main body). A candlestick depicts Open, close, high, and low prices of the stock for the time frame selected. Let us look at the image below to understand how and where can we see the 4 data points on the candlestick.
The picture above is enough to explain the formation of candlesticks. The 4 data points (the price of the stock) open, close, high, and low are very crucial points. this might take some time for you to understand but trust me it is very simple once you get a hang of it.
Open Price: For a bullish candle the lower part of the real body indicates the open price and for a bearish/red candle the upper part of the real body tells the open price.
High price: It is the maximum price at which the stock reached on the timeframe selected. The top of the upper tail/wick tells us the highest price. If there is no wick then the open/close price could be the highest price depending on the type of candle.
Close price: It is the last traded price on the candlestick, again it depends on the type of candle either bearish or bullish.
Low Price: It is the lowest price for which the stock was traded during the selected time frame. The lowest part of the lower wick tells us the lowest price at which the stock was traded.
Until now we have discussed about 2 types of candlesticks (Bearish and bullish) but there is one more type of candlestick which is found on the chart patterns which is the DOJI candlesticks.
DOJI Candlestick: It is a type of candlestick in which the open and close prices are almost the same. Many new traders do not realize the power of DOJI candle but trust me guys, this one heck of a powerful candlestick. This Single candlestick can define trend reversal. Look at the image below to understand what the DOJI candle looks like.
What do candlestick patterns tell us?
The candlestick patterns are key to a successful trade. They generate extremely powerful signals and guide us towards the next action.No wonder they are used so extensively due to the abundance of information they provide.
I would enlist 5 things which we can infer from the candlestick patterns
1)It tells us the trend of a stock (Uptrend or downtrend). It also tells us a possible reversal in trends. Patterns like the three white soldiers tell us a possible uptrend and a bull market.
Similarly the three black crow patterns would signal a downtrend.
3) It helps us plot resistance and support level of a stock, hence giving us an extra edge over other traders.
4) Candlesticks, when combined with volumes, become lethal and tell us if the bears are in control or bulls are in charge.
5) It helps us put stop loss, targets and entry, exit points of a stock. It helps us define proper lines and points.
There are many other things which the candlesticks tell us, which can be learned when one starts trading and implementing the basic knowledge.
Before we move onto further details of Candlestick patterns we need to keep in my three extremely important factors/ thumb rules
In the stock market, a retail investor cannot decide where the market would be moving, its the big players or what we call as operators define the course of action. It’s on you to decide if you want to go against the big players or make profits by working with them.
We need to understand that nothing in this world is 100%. the candlestick patterns are man-made and would have some flaws. They would generate wrong signals too. As a teenager, I thought if I learned candlesticks and all other possible analyses I would have 100% accuracy. But to date, I have not been able to achieve 100% accuracy. And in case you find any person on this planet claiming to have a 100% full proof strategy to win in the stock market he is either lying or he is god.
Always remember history repeats itself. Always and always look at the past price movement ( trend). Looking at the trend is immensely important to identify possible reversals.
TYPES OF CANDLESTICK PATTERNS
A candlestick pattern sets a stage for the trader to trade. The candlesticks generate powerful signals when certain patterns are formed, these patterns could be two or 3 candles. But not to forget a single candlestick like DOJI can generate powerful signals too.
Hence we can easily classify candlesticks into
1) Single candlestick pattern
2) Multiple candlestick pattern
Originally published at https://yourfinancialguruji.blogspot.com on May 23, 2020.
