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A Guide to Using Candlesticks and Candlestick Formations

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I use Candlesticks in my trading. Other traders use bars, lines, or just numbers. Candlesticks are more effective in longer time frames such as Daily/Weekly/Monthly, but I also use them right down to 4hr/1hr and 30 mins to get a general idea for fine tuning an entry/exit.  

What is a Candlestick?

If you look on my recent simple chart for Gold below, the red and blue vertical rectangles are called candlesticks. Blue is a bullish candle and red is a bearish candle. Various colours can be used, such as black/white/green/red etc, but the main thing is to be able to quickly glance at charts and recognise instantly what is going on with the price action in that particular time frame.


Each Candlestick tells a story and consists of an opening price, closing price, high and low for that time period, such as below. In this scenario, the white candle is bullish and the black is bearish.


Candlesticks can be used to determine potential trade setups due to the patterns they can make. These are Candlestick formations and show me the price action and areas of potential trend reversals, or confirmation of the trend. There are numerous formations, but by studying these patterns you will come to see them over and over again in your charts. They are not be any means definitive, some have a higher chance of success than others and what can look like a definite reversal can turn out to be completely wrong. These formations are a guide, but the market can change direction quickly and violently at any point rendering your 'perfect setup' invalid. This is just the nature of the beast and over time you will come to recognise 'painting the charts' and other tactics to entice traders into to wrong side of the market.

Brief description of many common candlestick formations:





By looking at the charts, we begin to see how these formations signal possible price reversals in a down trend:


...and in an uptrend:


Patience is the name of the game and not rushing into the market, but instead allowing the market to present you the best opportunity for your entries and exits.

Edited by Guest

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