Candlestick Chart Analysis: Beyond the Basics of Japanese Candlesticks

Candle Patterns differ in the electronic marketplace and for each financial market. How you use candles for stock trading will be different than how you use candles for FOREX as an example. The candle patterns that are the most reliable for the best entries are not the candlesticks that most traders have learned. Because the markets are electronic order processing, the candles that form vary. Traders need to learn to identify which candles are most reliable and most common for the trading instrument they are using.

Stock candlestick entries are different than FOREX candlestick entries as an example.

Another huge factor that alters how candles form in our markets is the fact that institutions account for 80% of all activity. When the Japanese created candlesticks several centuries ago, there were no huge institutions, only individual Japanese traders.

It is common for institutions buy incrementally, at predefined price ranges, over a long period of time. This is not how the rice commodity markets of ancient Japan traded. When a trader understands this, it is easy to see why the modern market alters candlestick patterns. Another great example is when High Frequency Traders move in and start trading in the millisecond, trading millions of shares within seconds. This changes how price behaves and the candle patterns. Ancient Japanese candlestick charting was developed for a much slower paced, non-computer era.

Since none of these market participants were around in the early days of the Japanese candlestick charting, using candlesticks as the Japanese did will create problems for modernt traders. All short term traders must adapt how they use candlesticks to compensate for these variables in trading activity.

In addition, the Japanese candlesticks were created for the rice commodity market. Commodities trade differently and form different candlestick patterns and groups of candles than other markets.

Therefore, not only are the market participants–those who are trading a particular market, but also, the type of asset or trading instrument, and the mode at which orders are filled all affect how candles form and which are the most important, most reliable, consistent, and common for that particular market.

While the Japanese candlesticks provide a foundation of knowledge to begin using candlestick charting, if you do not adapt and adjust how you use and interpret the candlestick patterns for the modern electronic marketplace, and for each different market–stocks, bonds, forex, commodities, futures, and so on, you will not only miss many good trading opportunities, you will increase your risk on every trade.

Most whipsaw trade results occur because the trader doesn't understand the candlestick formations in relation to the trading instrument they are using. As an example, when trading stocks, certain groups of candles indicate that the stock is poised to move suddenly and with momentum or velocity. If a trader is unaware of these patterns, they will miss the entry point.

Instead of looking for one particular candle, studying a group of candlesticks on the chart reveals more about what is likely to occur next. As an example, it is very common on the electronic for the STOCK Market are a group of candles that form a horizontal pattern with very small tightly packed candles on the chart. This is called a consolidation and is common on stocks prior to a breakout move.

If you trade FOREX and do not consider the unique patterns of that market, you will encounter many whipsaw trades and disappointing results using candlesticks.

When selling short, most traders assume that the uptrend and downtrend are the same. This is a big mistake many traders make that can cost them plenty of profits. The downside price action behaves differently than the upside price action.

Candlesticks are ideal for new traders as well as seasoned veterans but few traders really use this invaluable tool as well as they could. Using Candlestick charts means understanding the relationships between different candle patterns. to learn more about using candlestick charting, go to the library and view our video on candlestick trading.

Candlestick Charting Lesson Novices

Candlestick charts make reading stock charts fun and easy. Candlesticks take the guesswork out of reading a chart and increase your success rate by helping you differentiate between an ideal stock pick and a mediocre stock. Chart analysis has become more and more popular in the past decade as on-line trading expands as more and more ordinary people learn how to successful trade the markets for monthly income.

Charts can be used for more than just analyzing stocks. You can use them for commodity trading, futures trading, options trading, FOREX trading, Bond trading, etc. Charts are a graphical view of what is going on with price. Since every transaction, no matter how small or how large is recorded and documented it is possible to make a precise and highly accurate recording of what price is doing.

To continue reading, please download the free PDF lesson.

Just Starting Trading?

If you are new to the market or a novice trader, what you need to know first is that white candles represent up days, and black candles represent down days.

If you are an advanced trader, you must understand the use of candlesticks and indicators in your trading. Your success is dependent upon strong and practiced technical analysis skills.

Candlesticks and indicators are a key component of your trading and you cannot afford to overlook that part of your training.

Price is the most important aspect of a stock chart and is, itself, an indicator. The size, placement, color, and length of the wick and tail of a candlestick all tell you critical information about price action.

Candlesticks also give you better profit stop placement on your stocks, protecting more of your profits as a stock moves up. Candlesticks work extremely well with indicators in your analysis. The combination of the two gives you a complete and reliable stock analysis before you ever risk your capital.

TechniTrader® starts with the basics of candlesticks, teaching you all concepts of candlesticks in your trading. We teach you the most common and reliable buy and sell signals that form in today's market.

You will learn what groups of candlesticks mean in price action. When you can see the relationship between up days and down days and current market conditions, you have complete information about what is going on behind the scenes in stocks.

This training gives you far more reliable entries, exits, and potential point gain calculation than traders who simply guess or buy and sell at market.

Candlestick Charting Lesson for Advanced to Expert Traders

Advanced Traders have already taken seminars or read books on Japanese Candlesticks. However, most are still using candlesticks the way the Japanese did for the ancient commodity market of several centuries ago.

The first change you need to make is to accept that pure price action reveals more about what price will do in the near term than any indicator you are currently using. All indicators: MACD, Stochastic, Bollinger Bands®, etc are all derivatives of price and time, two of the 3 pieces of data that are part of the candlestick chart.

Using a candlestick as the entry signal instead of an indicator crossover will dramatically improve your trading results, and help eliminate chronic whipsaw trades, and mediocre profits.

In each market condition, different candlestick entry signals will be the most common that form. By exploiting this phenomenon, you will streamline stock pick selection, increase your success ratio, and lower risk.

Instead of trying to use candlesticks merely as continuation and reversal patterns to confirm indicator crossovers, switch to using candlestick entry signals that are the most reliable for that particular market condition and use the indicators to confirm the buy or sell signal.

When you make this subtle change in your approach to entries and exits you will be surprised at how much faster you find great stocks to trade, and how much your trading improves.