Candlesticks
are a type of price charts, used to identify the highs, lows, opening
and closing prices of a financial commodity for a particular time
period. Originally employed by Japanese rice traders hundreds of years
ago, what started off as a means of tracking prices in rice markets has
today become a tremendous indicator in various commodity markets.
By studying the patterns and sequences of a candlestick, the future price movements for assets can be gauged while Forex trading in Malaysia. While they do indicate a certain movement in the nearing future, there is no guarantee that this method works all the time! This is why candlesticks are combined with other indicators and Forex trading strategies to derive only the useful signals and filter out unnecessary ones.
For most candlestick patterns, both bullish and bearish trends can be seen.
Here are 4 predominantly seen styles to use Candlesticks in Forex Trading:
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| Tips to Use Candlestick Pattern in Forex Trading |
1)
Kicker Pattern: A reversal signal that is rarely seen, the kicker
pattern is incredibly aggressive and indicates major trend changes in
price charts. Like many, kicker patterns see bullish and bearish
variations. The latter occurs after a downtrend, while the former occurs
after an uptrend. All in all, a two bar pattern is seen, with a long
down candle followed by a long up. Its rarity scales higher from daily
charts to monthly, with day charts seeing the most action.
2)
Engulfing Pattern: Contrary to the kicker, engulfing patterns are seen
frequently and are another example of a strong reversal. Comprised of a
dual pattern approach, these are said to be one of the most effective in
Forex. The name is derived from the occurrence when the second candle
(latest at that instance of time) engulfs the candle coming before it.
This indicates that the market is seeing more buyers than sellers, or
even the opposite.
3) Morning Star: This is a three-candle pattern
formed on a down move. Initially, a big bearish candle is formed which
defines the down trend. Following this a small candle births, and this
pattern is closed by a large bullish candle. Two extremes of a trend are
covered, with a bearish initiation and bullish termination.
4)
Evening Star: A mirroring of the morning star pattern gives the evening
star! This trend is spotted near rallies and is also a three-candle
formation. Much like defined, being a mirror image, its first candle is a
large bullish one. This is followed by a smaller candle, and the
sequence completes with a large bearish candle.
5) Doji: The Doji is
incredibly easy to spot and has its opening, closing price very close to
each other. Typically this representation can be perceived as the end
of a buying uptrend and a selling downtrend. Though they are neutral
patterns, after a long buy/sell period, these prove to be significantly
more important. The Doji typically appears in "V" patterns like the star
patterns.
6) Abandoned Baby: A candlestick used to signal reversals,
the abandoned baby is rare but extremely reliable. Pairing this up with
other indicators like RSI and MACD, you can get sharp results. Like
star patterns, the abandoned baby is also a three-candle formation. It
starts with a large downtrend-indicating candlestick, followed by a
Doji. At the end lies a large white candle that indicates a change in
trader sentiment.
7) Three Black Crows: Known to have an accuracy of
over 75%, this pattern is used to predict a long decline in price
movements. Three consecutive black candles form, indicating the birthing
of a long-scale downtrend. When bears take over the bulls, the black
crows form and this means traders have to brace for a downtrend.
Why You Should Trade Candlestick Charts:
1)
Precision in Detail: Conventional charts carry no magnitude in their
depiction of a trade. Candlestick patterns, on the other hand, display
trends with more accuracy. A glance of a candlestick chart can give you a
clear idea of future price movement and the reason behind it.
2)
Coverage of Investor Sentiment: Markets like stock exchange are governed
by investor sentiment. Emotions like greed and fear have a huge impact
on stock prices. With candlestick charts, you can gauge the value of a
particular commodity by reading the buyer-seller interactions.
3)
Easily Understandable: From novice to professionals, everyone can employ
these patterns with ease. Pair this up with a good analytic Forex
trading strategy, and you have yourself a reliable indicator. Learning
candlesticks take a maximum of a few weeks. The time and effort put in,
is undoubtedly worth it.
4) Year-old Testimonial to its Correctness:
Rice traders from over 200 years ago used this tactic to affirm price
action in markets. Hence, for people believing this to be coincidental,
or a tactic based on luck, it has been in use for centuries and proves
to be one of the most reliable strategies.
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