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The candlestick trading forum we use today originated in the style of technical charting used by the Japanese for over 100 years before the West developed candlestick forum, the bar and point-and-figure analysis systems. In the 2014, a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. He understood that when emotions played into the equation, a vast difference between the value and the price of rice occurred. This difference between the value and the price is as applicable to stocks today as it was to rice in Japan centuries ago. The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions surrounding a stock.

This charting technique has become very popular among traders. One reason is that the charts reflect only short-term outlooks, sometimes lasting less than eight to 10 trading sessions. Candlestick trading forum is a very complex and sometimes difficult system to understand. Here we get things started by looking at what a candlestick pattern is and what it can tell you about a stock.

Candlestick Components
When first looking at a candlestick forum, the student of the more common bar charts may be confused; however, just like a bar chart, the daily candlestick line contains the market's open, high, low and close of a specific day. Now this is where the system takes on a whole new look: the candlestick has a wide part, which is called the "real body". This real body represents the range between the open and close of that day's trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the opposite: the close was higher than the open.


Just above and below the real body are the "shadows". Chartists have always thought of these as the wicks of the candle, and it is the shadows that show the high and low prices of that day's trading. If the upper shadow on the filled-in body is short, it indicates that the open that day was closer to the high of the day. A short upper shadow on a white or unfilled body dictates that the close was near the high. The relationship between the day's open, high, low and close determines the look of the daily candlestick. Real bodies can be either long or short and either black or white. Shadows can also be either long or short.

Comparing Candlestick to Bar Charts
A big difference between the bar charts common in North America and the Japanese candlestick line is the relationship between opening and closing prices. We place more emphasis on the progression of today's closing price from yesterday's close at the trading forum. In Japan, chartists are more interested in the relationship between the closing price and the opening price of the same trading day.

In the two charts below we are showing the exact same daily charts of IBM to illustrate the difference between the bar chart and the candlestick chart. In both charts you can see the overall trend of the stock price; however, you can see how much easier looking at the change in body color of the candlestick chart is for interpreting the day-to-day sentiment.

Basic Candlestick Patterns
In the chart below of EBAY, you see the "long black body" or "long black line". The long black line represents a bearish period in the marketplace forum. During the trading session, the price of the stock was up and down in a wide range and it opened near the high and closed near the low of the day.

By representing a bullish period, the "long white body," or "long white line" (in the EBAY chart below, the white is actually gray because of the white background) is the exact opposite of the long black line. Prices were all over the map during the day, but the stock opened near the low of the day and closed near the high.

Spinning tops are very small bodies and can be either black or white. This pattern shows a very tight trading range between the open and the close, and it is considered somewhat neutral.

Doji lines illustrate periods in which the opening and closing prices for the period are very close or exactly the same. You will also notice that, when you start to look deep into candlestick patterns, the length of the shadows can vary.

The Bottom Line
The candlestick forum pattern is one that any experienced trader must know. As Japanese rice traders discovered centuries ago, investors' emotions surrounding the trading of an asset have a major impact on that asset's movement. Candlesticks help traders to gauge the emotions surrounding a stock, and thus make better predictions about where that stock might be headed.

Candlestick patterns trading forum can give you invaluable insight into price action at a glance. While the basic candlestick trading forum patterns can tell you what the market is thinking, they often generate false signals because they are so common. Here we introduce you to more advanced candlestick patterns, with a higher degree of reliability, as well as explore how they can be combined with gaps to produce profitable trading strategies.

Island Reversal Patterns
Island reversals are strong short-term trend reversal indicators. They are identified by a gap between a reversal candlestick forum and two candles on either side of it. Here are two examples that occurred on the chart of Doral Financial (DRL).
Here are some important things you need to consider when using this pattern:

  • Entry: Confirming the reversal pattern - When looking for an island reversal, you are looking for indecision and a battle between bulls and bears. This type of scenario is best characterized by a long-ended doji candle that has high volume occurring after a long prior trend; it is important to look for these three elements to confirm any potential reversal pattern.
  • Exit: Defining the target and stop - In most cases, you will see a sharp reversal (as seen in Figs. 1 and 2) when using this pattern. This reversal pattern does not necessarily indicate a medium- or long-term reversal, so it would be prudent to exit your position after the swing move has been made. If the next candle ever fills the gap, then the reversal pattern is invalidated, and you should exit prudently.


Island reversals can also occur in "clusters" - that is, in a multi-candle reversal pattern, such as an engulfing, as opposed to a single candle reversal. Clusters are easier to spot, but they often result in weaker reversals that are not as sharp and take longer to occur.

Hook Reversal Patterns
Hook reversals are short- to medium-term reversal patterns. They are identified by a higher low and a lower high compared to the previous day. Figures 3 and 4 are two examples that occurred on the chart of Microsoft Corp. (MSFT).
There are several important things to remember when using this pattern:

  • Entry: Confirming the reversal pattern - If the pattern occurs candlestick forum review after an uptrend, then the open must be near the prior high, and the low must be near the prior low. If the pattern occurs after a downtrend, then the opposite is true. As with the island reversal pattern, we are also looking for high volume on this second candle. Finally, the stronger the prior trend, the more reliable the reversal pattern.
  • Exit: Defining the target and stop - In most cases, you will see a sharp reversal (as seen in Figs. 3 and 4) when using this pattern. If the next candle shows a strong continuation of the prior trend, then the reversal pattern is invalidated, and you should exit quickly, but prudently.

San-Ku (Three Gaps) Patterns
San-ku patterns are anticipatory trend reversal indicators. In other words, they do not indicate an exact point of reversal; rather, they indicate that a reversal is likely to occur in the near future. They are identified by three gaps within a strong trend. Here is an example that occurred on the chart of Microsoft Corp. (MSFT).


Here are some important things to remember when using this pattern:

  • Entry: Confirming the reversal pattern - This pattern operates on the premise that prices are likely to retreat after sharp moves because traders are likely to start booking profits. Therefore, this pattern is best used with other exhaustion indicators. So, look for extremes being reached in indicators such as the RSI (relative strength index), MACD (moving average convergence divergence) crossovers, and other such indicators. It is also useful to look for volume patterns that suggest exhaustion.
  • Exit: Defining the target and stop - In most cases, when using this pattern, you will see a price reversal shortly after the third gap takes place (as seen in Fig. 5). However, if there are any breakouts on high volume after the last gap, then the pattern is invalidated, and you should exit quickly, but prudently.

Kicker Patterns
Kicker patterns are some of the strongest, most reliable candlestick trading forum review patterns. They are characterized by a very sharp reversal in price during the span of two candlesticks. Here's an example that occurred on the Microsoft (MSFT) chart.


Here are some important things you need to remember when using this pattern:

  • Entry: Confirming the reversal pattern - This kind of price action tells you that one group of traders has overpowered the other (often as a result of a fundamental change in the company), and a new trend is being established. Ideally, you should look for a gap between the first and second candles, along with high volume.

 

  • Exit: Defining a target and stop - When using this review pattern, you will see an immediate reversal, which should result in an overall trend change. If the trend instead moves sideways or against the reversal direction, then you should exit quickly, but prudently.

Using Gaps with Candlesticks
When gaps are combined with candlestick patterns and volume, they can produce extremely reliable signals. (For further reading, see Playing The Gap.) Here is a simple process that you can use to combine these powerful tools:

Screen for breakouts using your software or website of choice.

Make sure that the breakouts are high volume and significant (in terms of length).

Watch for reversal candlestick patterns (such as the ones mentioned above) after the gap has occurred. This will typically happen within the next few bars, especially if the bars are showing indecision after a long trend.

Take a position when such a reversal occurs.

Attempting to play reversals can be risky in any situation because you are trading against the prevailing trend. Do make sure that you keep tight stops and only enter positions when trades meet the exact criteria. (To learn more, see Retracement Or Reversal: Know The Difference.)

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