Candlestick analysis: basics, strategy

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

For profitable trading in the financial market, traders use analytics and statistical data. Before starting work, they necessarily carry out a forecast of the market movement. One of the most popular methods is candlestick analysis of changes in the direction of the financial market.

What are Japanese candlesticks?

There are specific terms in trading. Japanese candlesticks are graphic representations of changes in market quotes. With the help of such signs, traders analyze the direction of prices of trading assets. The financial market changes its indicators every second, so it is very important for analysts to know any changes in the fluctuations of movements.

Candlestick analysis is based on quote images. They are "bullish" and "bearish" and painted in different colors. Upward candles are green or white, downtrends are black or red. On the charts, they are depicted as rectangles, most often with shadows (“tails” in the form of dashes).

Their function in candlestick analysis is to determine the direction of the market movement so that the trader can know which way to buy orsell to open a deal, as well as when to close it.

Candlestick charts: the history of occurrence

Charts based on Japanese candlesticks became popular among traders at the end of the 20th century. They came to trading from a flourishing country - Japan - and got their name from it. Initially, only selected traders used this technique to forecast market quotes and change the direction of financial market movement, and it was strictly classified.

At the moment, Japanese candlestick analysis is the most informative, advanced and popular way of analytical forecasting in the world. This technique is used by all traders - both professionals and beginners, investors and analysts.

Types of market analysis

To understand in which direction to open a position and find the most favorable point to enter the market, traders use various types of analytical market movement forecast.

Types of analysis:

1. A fundamental way of analytics.
2. Technical methods.
3. Graphic constructions.
4. Analytical and statistical data and other techniques.

The fundamental method is one of the most difficult and serious options for predicting a change in market movement. This is usually a very complex and difficult technique for beginners, so they often use various types of technical analysis.

The technical forecast is based on a variety of tools, such as indicators, expert advisors, trading signals. In addition, you canconduct this type of analytics in non-indicator ways using candlestick market analysis.

Very often, traders combine several types of analytics during work and preliminary preparation before opening deals. They can use different trading instruments and fundamental data at the same time.

Basics of candlestick analysis

This type of analytics and forecasting of changes in market quotes is based on groups of graphic images, which are called patterns. They, in turn, form a variety of Japanese candlestick patterns.

Based on patterns, traders analyze any changes in market movement. Candlestick analysis models help you open trades more accurately and get more profit (profit).

Important! Each combination must be completed and confirmed using other trading tools (indicators, patterns, chart plots).

Classification of models and patterns

All combinations consist of Japanese candlesticks. They are used in the analysis and forecasting of changes in the market movement.

Types of patterns:

1. Single candle configurations.
2. Two candle patterns.
3. Multi-candle patterns.

One-candle configurations include "Hammer", "Hanged Man", "Black or White Umbrella", "Spinning Top" and other types. Usually they use those patterns that are at the bottom or at the top of the chart, that is, they stand somewhat away from all the candles. They can show bullish or bearish direction,i.e. up and down market movement.

Two-candlestick patterns include Engulfing, Morning or Evening Star, Harami and other patterns.

Multi-candle configurations most often form patterns: Double or Triple Bottom, Head and Shoulders, Flag, etc.

With the help of patterns, you can find out not only the direction of the market, but also the points of its reversal. For example, when a trader sees “Bearish engulfing” on the chart, then after the analysis, he assumes that in the near future there will be a reversal of the market movement, that is, it will change its direction. This pattern looks like two charts, with the bullish candle below the bearish candle and smaller.

Before starting trading in the financial market, beginners always study patterns and configurations. In the future, they use them for candlestick analysis at Forex during a market movement forecast. You can find several hundred types of configurations in trading reference books. There are no more than two or three dozen main patterns that need to be studied, since they are the basics of Japanese candlestick analysis. Other types of models are used more rarely, and beginners learn them in the process of trading.

Technical indicators for the forecast

The classic type of candlestick analysis involves the use of analytical data on patterns in trading. Professionals and analysts conduct it without using any additional tools, although in some cases there may be exceptions, for example, graphical constructions: support / resistance lines, banking, average daily, weekly levels and other types.

It can be very difficult for beginners and people who devote little time to trading to identify patterns on their own, so they use special technical indicators in their work. Such tools recognize candlestick configurations and patterns, making trading easier.

Simple Tools for Candlestick Trading

Specialists and developers have made trading in the financial market as easy as possible for beginners. They can use special technical tools in their work.

The most popular candlestick analysis indicators:

1. Bheurekso pattern (with simple settings).
2. Candles Figure (shows reversal, absorption patterns).
3. Candles Star (one of the best, with great customization functionality).
4. Candlestick Patterns Recognition (based on all basic patterns).

These tools help traders identify different candlestick patterns in a timely manner in order to open profitable trades or fix profits in the future, which is especially important when the market changes its direction.

Trading strategy using candlestick analysis and the Moving Average indicator

To open deals and trade profitably using this method, you need to set up a chart. You need to install Japanese candles on it, choose a color for them (green or white foruptrend and black or red for downtrend). Additionally, you need to define the "Moving Average" indicator in the settings. Initially, you need to leave the original indicators of the parameters, which can be changed later.

Now you need to carefully monitor all the movements on the chart and wait for the right moment to enter the market.

Opening a buy deal:

1. The direction of the indicator should have an upward movement, that is, up.
2. We need to wait for the "bullish candle" to overlap the "bear" and be larger.

This pattern is called Bullish Engulfing. This candle must be closed above the Moving Average.

Opening a sell trade:

All actions take place in a similar mode, but only in mirror image. The trader needs to wait for the “bearish candlestick” to overlap the “bullish candlestick”, be large and close below it and the “Moving Average”.

Closing order

Candlestick analysis in the strategy described above is based on one candlestick pattern and indicator. "Moving Average" is an additional confirmation for opening a trade. Similarly, you can trade any other patterns and use the indicator as a filter.

The deal is closed by the "Take Profit" order. Usually it is 20-40 points, depending on the market situation. The Stop Loss order is set below the indicators of the open deal at the level10–20 points. Some traders trade without it. However, in this case, it is necessary to constantly monitor any changes in the market and close transactions on your own in a timely manner.

Advantages of the Candlestick Technique

This is the most popular method. It is used by almost all traders. It is used both as a separate type of analysis and in combination with other methods.

Japanese candlestick chart is considered the most informative way of analytics. This analysis has indicators of the opening and closing of market prices in a certain period of time. As well as the parameters of the maximums and minimums that it reached during this time. The candlestick chart is very convenient, and visually it is quite easy to track any fluctuations and changes in the market.

In conclusion, it is worth noting that trading can only be profitable after a beginner has undergone preliminary training for trading in the financial market. He must necessarily study its foundations and patterns, basic concepts, terms and rules. Particular attention should be paid to "Money Management" and the management of deposit funds. This will allow you to correctly calculate lot volumes and open trades with the correct parameters. It is also very important to study the psychology of the market in order to further understand what is happening on it, in which direction it is moving and who controls it (bear sellers or bull buyers).

After obtaining the necessary knowledge, you must definitely choose a trading strategy for yourself and test it on a special demo account. Oncetrading results will be stable, then you can switch to real Forex and earn money on it.