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Candle Stick Basics

Updated on December 13, 2011

Candle Sticks

With the popularity of my last hub on reversal patterns, I thought I would take a step back and write an introduction to candle stick trading. We will go over some basic principals to help you become a much better trader. Or if you are a beginner, hopefully you can bookmark this as a helpful guide to help you. I will only go over what I feel is important for trading. Thus for I will not bore you with the details like who created it and why. The history of Candle stick trading is not as important as knowing how to use it. So lets get to business.

Typical candle stick chart
Typical candle stick chart
How a candle stick is created
How a candle stick is created

What is a Candle Stick Chart

A candle stick chart is a mix between a bar chart and a line chart. The candle chart clearly depicts price action by showing us where the open/close and high/low are. One of the best things about the candle sticks over the bar charts is the candle sticks are very easy to read and easier on the eyes. Plus you can add colors to show up ( white) or down ( black ).

We must know 2 important parts of the candle stick.

And candle stick is comprised of 2 parts, the wick ( shadow ) and the body . The wick is the thin part on either end of the candle and the body is the colored wider part in the middle. Please check the picture to see how a candle stick is formed.

For a candle to be Bullish ( white ) the candle must close higher then the opening price. The opposite is true for for a bearish ( black ) candle, it must close lower the its opening price.

Types of Formations

From the the pictures above we can see who price can move and create a candle. The end 2 examples I made to show you that there are many smaller moves inside of the bigger movements. But it still shows as the same in the candle. This is why its always recommended to view a few different time frames before making a final decision.

Lets go over different types of candle stick formations. Try to remember these types of candles as this is what every chart consists of.

  1. White candlestick - signals uptrend movement (those occur in different lengths; the longer the body, the more significant the price increase)
  2. Black candlestick - signals downtrend movement (those occur in different lengths; the longer the body, the more significant the price decrease)
  3. Long lower shadow - bullish signal (the lower wick must be at least the body's size; the longer the lower wick, the more reliable the signal)
  4. Long upper shadow - bearish signal (the upper wick must be at least the body's size; the longer the upper wick, the more reliable the signal)
  5. Hammer - a bullish pattern during a downtrend (long lower wick and small or no body); Shaven head - a bullish pattern during a downtrend & a bearish pattern during an uptrend (no upper wick); Hanging man - bearish pattern during an uptrend (long lower wick, small or no body; wick has the multiple length of the body.
  6. Inverted hammer - signals bottom reversal, however confirmation must be obtained from next trade (may be either a white or black body); Shaven bottom - signaling bottom reversal, however confirmation must be obtained from next trade (no lower wick); Shooting star - a bearish pattern during an uptrend (small body, long upper wick, small or no lower wick)
  7. Spinning top white - neutral pattern, meaningful in combination with other candlestick patterns
  8. Spinning top black - neutral pattern, meaningful in combination with other candlestick patterns
  9. Doji - neutral pattern, meaningful in combination with other candlestick patterns
  10. Long legged doji - signals a top reversal
  11. Dragonfly doji - signals trend reversal (no upper wick, long lower wick)
  12. Gravestone doji - signals trend reversal (no lower wick, long upper wick)
  13. Marubozu white - dominant bullish trades, continued bullish trend (no upper, no lower wick)
  14. Marubozu black - dominant bearish trades, continued bearish trend (no upper, no lower wick)

These are 15 Candles that are easily recognizable and can give you a better insight on price direction.


The interpretation of candlestick charts is based primarily on patterns. These simple patterns are divided into three main groups as “Bullish”, “Bearish”, and “Neutral”.

Once we have confirmed if a candle is Bullish or bearish we can further divide them into types of the patterns as “Reversal”, “Continuation”. The last step that we need to decipher is the reliability of these patters. For an example, the Engulfing candle pattern, is a weaker signal for a reversal then a gravestone candlestick.

For a better understanding of strength and reliability please check out this site. Candlesticker.com When ever I have some doubts of reliability I would check out this site. So Please refer to it as needed.

I have created another hub that entails tips on trading Reversal patterns. This should be your first set of patterns to learn. Check out my hub HERE



A Desirable Profit/Quity Curve.
A Desirable Profit/Quity Curve.

Comments

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    • Midasfx profile imageAUTHOR

      Midasfx 

      7 years ago

      Thank you Green Baron. I know your really into Forex, and hope this hub can help you with your trading! Thank you for the comment!

    • The Green Baron profile image

      The Green Baron 

      7 years ago

      Thank you for the candle stick formations picture, I will have to bookmark this, so I can come back to it while I'm trading. Keep them coming midasfx !

    • Midasfx profile imageAUTHOR

      Midasfx 

      7 years ago

      Thank you BrieC for reading the hub. I hope this hub can help people trade better. I hate to see people waste money of forex systems. Best of luck!

    • profile image

      BrieC 

      7 years ago

      Good information. thank you.

    • profile image

      forex training courses canada 

      8 years ago

      Keep bringing us information, thankyou for this it has been very useful for what i needed it for

    • Midasfx profile imageAUTHOR

      Midasfx 

      8 years ago

      Thank you efeguy for stopping buy to read my hub. You are correct with fundamental news can temporarily persuade the overall movement of a candle. Which is why, I myself, try to avoid trading at those times. typically the late European session and the early USA sessions carry the heaviest news releases so be extremely careful around those times if you are trading any technical or mechanical methods.

      Good luck to you efeguy !

    • efeguy profile image

      efeguy 

      8 years ago

      it nice you take your time and explain candle stick,it very effective,only the fundamental news can beat it at times but in total candle stick is ok.

    • Midasfx profile imageAUTHOR

      Midasfx 

      8 years ago

      Thank you Maita for stopping by. I will be trying to post more helpful hubs on actually trading the markets. Non of that automated sales pitch mumbo jumbo. I know ForexCashBack has some cool hubs on forex. you might want to check his hubs for more info on trading.

      I have not been able to indulge in some good ethnic cuisine in a week or two. But I think after Christmas ( maybe new years day ) I will get to start experimenting with my cooking again.

    • prettydarkhorse profile image

      prettydarkhorse 

      8 years ago from US

      Hi Midas, I am learning and I think this is a good idea, thanks for the info, Hows cooking? Maita

    • ForexCashBack profile image

      ForexCashBack 

      8 years ago from Corvallis, Oregon

      Thats pretty good with $1,000. The account I linked in my previous post has only been around since september, I plan to get it to $100K in 8 months. Right now its at 25K in two months of trading. I use metatrader to trade, however I do really like GFT Forex platform. 3 months with no losing trade is pretty good. Despite my losing trades I've been able to keep a low draw down (under 10%) and still have a 95%+ winning streak. Besides making the buy/sell mistake I've also have accidentally placed the wrong lot size on my account. I adhere to a money management that is based on using the appropriate lot size based on the account balance. I was trading on a demo account with 5 lots switched to my live account placed 3 trades of 5 lots. (I was thinking that I was placing 5 trades at 1 lot) but luckily my 95% winning streak came through for me on those 3 trades.

    • Midasfx profile imageAUTHOR

      Midasfx 

      8 years ago

      This was my last demo account which ran from November 08 to March of this year. Roughly about 5 months. Since then I have opened a real account and I don't use metatrader as my trading platform, I simply use it for charting. I prefer another platform to execute my trades. I went 3 months without losing a trade. Then I made a mistake of clicking sell instead of buy or vise verse. I have made similar mistakes in real accounts and you bet worse things came out of my mouth then " oh crap " lol.

    • ForexCashBack profile image

      ForexCashBack 

      8 years ago from Corvallis, Oregon

      235 trades over how long of a time period? Demo or real? I myself have made that same mistake, thats when you go "OH CRAP" or some other foul language spews forth. lol. I am not as good as you, but here are my trades. (I'm planning to update them next week) If I didn't have any large losing trades I think I would have a very similar equity curve to yours.

      http://alexjbrandtfx.mt4stats.com/

    • Midasfx profile imageAUTHOR

      Midasfx 

      8 years ago

      Most traders do. But then Again most traders don't think this could ever happen. out of 235 trades I made 2 loses. I profit 99.46% of the time. the funny part is those 2 loses were dummy accidents. like clicking the wrong button ( buy instead of sell) or setting a Take Profit incorrectly.

      Which means you should be very careful with what you are doing. I was smart enough to close those 2 accidents at minimal loses do to my stupidity, and I recognized them immediately.

      Hopefully I will be writing another hub on candle stick continuation patterns.

      And to ForexCashBack, your comments/suggestions are always welcomed. Thank you

    • ForexCashBack profile image

      ForexCashBack 

      8 years ago from Corvallis, Oregon

      I want that equity curve! :D

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