MILLIONAIRE TRADER

Candlestick Pattern Trading

1
Candlestick patterns are one of the oldest forms of technical and price action
trading analysis.

Candlesticks are used to predict and give descriptions of price movements of a

Candlestick charting consists of bars and lines with a body, representing

It dates back to the 16th century when Homma Munehisa used this to trade rice
contracts. He was also thought to have developed the candlestick charts that were
later brought to the Western world by Steve Nison.

Steve Nison introduced candlesticks to the world in his 1991 book “Japanese
Candlestick Charting Techniques,” and they are now very popular because of their
simplicity and unique insight into the sentiment of the market.

Candlestick charts are most often used in the technical analysis of equity and
currency price patterns, and in this post, we go through exactly how you can use
them in your own trading.

2
What are Candlestick Charts?

Candlesticks are visual representations of market movements. Traders use

A candlestick is a chart that shows a specific period of time that displays the prices
opening, closing, high and low of a security, for example, a Forex pair. It is a
fundamental component of technical analysis because it can help you understand
the movement of the market at a glance. It is a very suitable technique for trading
liquid financial assets such as Forex and futures.

3
What is the Difference Between Candlestick Charts and Bars?

Bars and candlestick charts are both used for technical analysis to study the supply
and demand of a security or commodity in a marketplace and represent the trading
range of a security.

Bar charts have a small tick symbol on the left side to represent the opening price
and a small tick on the right side to indicate the closing price.

As for a candlestick chart, it has a body and shadows or what are also called wicks.
Bodies are defined as the range between the opening and closing price. Shadows
represent the range of the day outside of the opening and closing of the prices.

As you can see in the example below, there are bar charts on the left and
candlesticks on the right.

4
Mastering Candlestick Charts

Candlestick patterns are an efficient way for you to view an asset’s price chart. It
shows you which way the price moved during a specific period of time using colors
and how far the price moved during that period.

Time frames are shown for the time frame you are using or have selected. For
example, if you are using a 5-minute time frame, a candle will show the HIGH, LOW,
OPEN, and CLOSING in 5 minute intervals.

Bullish Candle and Bearish Candle

Bullish and bearish represents buyers and sellers.

The intra-session high represents bulls, and the intra-session low represents the
bears. If the close is closer to high, then the bulls are in control. If the close is closer
to the low, then the bears are in control.

A bullish candle shows that the price has increased over the set time period. For the
bearish candle, it shows that the price has decreased over the time period. Each
fully formed candle represents the price action of a specific time period.

5
Candlesticks have two parts, a real body and a wick (tail). The open and close prices
are the first and last transaction prices of that time frame. If no real body was
shown or the real body is tiny, then it means that the open and close are almost the
same. Also, real bodies have color but differ in every charting platform.

The most common color of real bodies is green, red, white, and black. However you
can change this to your liking.

A green or white candle means the price finished higher or the closing price is
above the open price. A red or black candle means that the price has decreased
over the time period, or the top of the real body is the open price, and below is the
closing price.

6
The bullish candle and the bearish candle similarly reflect the difference between
the open and close price during that period.

Most charting platforms allow you to make adjustments to your candlesticks to be

You can alter the colors of your up and down candles to make the contrast distinct.

What are Some of the Best Candlestick Chart Patterns?

Bullish Engulfing Candlestick

Quite a name for a candlestick. This pattern consists of two candles and shows
when the price of a security moves beyond the high and low of the previous

7
sessions range. This candle is your signal for a sustained upward move or trend
change back higher.

Doji Candlestick

A Doji candlestick is one of the most popular candlestick patterns. The Doji pattern
usually has a very small body with a close near the open price. It also has a long
wick formed to the high and low. This candlestick offers a heads up that the
sentiment may be changing.

8
Harami Candlestick

The bullish and bearish harami is a two candlestick pattern that is considered a
reversal pattern.

For a bullish reversal, the first candle needs to be a large bearish candle. A small
bullish candle then follows this.

For a bearish harami, the inverse needs to occur. The first candle needs to be a
strong bullish candle followed by a smaller bearish candle.

9
Bearish Engulfing Candlestick

This pattern is the opposite of the bullish engulfing candle.

This can be a precursor to a sharp, sustained drop and indicate potential reversal,
or trend change back lower is about to occur.

Hammer Candlestick Pattern

The hammer candlestick pattern signals a potential reversal higher after the price
has recently been making a swing lower.

A hammer is formed with;

● A small candlestick body

10
 ● A long wick or shadow that points lower
● Price finishes in the top quarter of the candlestick.

See the example below of how price formed a hammer pattern right before
reversing back higher.

11
Inside Bar Pattern

The inside bar pattern is a pattern you will see on all of your different markets and
time frames. It is very common and can be traded in a few different ways.

For an inside bar to be valid, you will need to see the candlestick form completely
within the previous candlestick.

This candle can signal both a potential reversal or a continuation depending on

12
Shooting Star Candlestick Pattern

The shooting star pattern is not as common as some other candlestick patterns, but
it is one of the more powerful.

This pattern signals a potential reversal back lower after the price has been rising
higher.

The example below shows a shooting star example and how price forms a large
upper wick and a small real body. Price then sells off back lower, completing the
reversal.

13
Using Advanced Candlestick Patterns

One of the best features of candlestick charting is that it helps you visualize market
movements without overpopulating your monitor with numbers or complicated
indicators and news feeds.

Because of the candlestick, you can quickly understand what’s going on with a
security price at a single glance.

You can also tell whether the sellers or buyers have dominated on a given day along
with the sense of the trend. It is an excellent way for traders to identify and decide
when is the best time to buy, sell, or wait.

After learning how to use and read the candlestick basics, you can easily start to
spot the opening and closing price of a security and see patterns forming.

You can then begin using more advanced patterns like the hanging man candlestick
pattern in your trading.

One of the major bonuses of using candlesticks in your trading is that you can start
to use more and more advanced patterns as you start to become better at using
them. Whilst one and two candlestick patterns are commonly used, you can start to
use other patterns like the head and shoulders pattern and the 123 reversal
pattern.

14
High Profit Candlestick Patterns

As we are about to go through, some of the most high profit candlestick patterns
and trading strategies are when you use confluence.

Whilst candlesticks can be successfully used by themselves; they are often far
better when combined with other strategies and indicators. These can include
using your other favorite indicators or technical analysis tools to confirm high
probability trades.

Candlestick Patterns Trading Strategy

Whilst there are endless ways you can use candlestick patterns with other
indicators and price action methods, you will often find that the simplest strategies
will work the best. These strategies include finding and trading with the obvious
trends and trading from key market support and resistance areas.

Using Candlestick Patterns With the Trend

As the old saying goes, the trend is your friend until it bends. This is the same when
using candlesticks in your trading. You can use the trend to find and make very high
probability trades.

15
After you have found a clear trend, you can use your favorite candlestick patterns to
fine-tune your entry signal.

An example of how you could do this is on the chart below. Price has been in a
strong trend lower. When we notice price pullback higher into a value area, we start
to look for short trades. Short trades could then be entered when price forms a
bearish engulfing bar signaling a reversal back lower.

16
Using Candlestick Patterns at Key Support and Resistance Levels

Another successful way to use candlesticks in your trading is with key support and
resistance levels.

In the example below, price has repeatedly rejected an important resistance.

When price moves up to this level again and forms a bearish engulfing bar, we could
make short trades and profit as price moves away from this resistance level.

17