3.26 A Candlestick Chart on the Operating Table

 

 Practicing candlestick chart analysis.

 

Now when you have gone through various candlestick patterns either you are ready to go to the trading battle field with this newly acquired knowledge or you wanna shout “STOP IT, I am too confused with all these funny names and shapes – can’t remember any of these”. Well, well, well, it was all not that difficult… was it?

And believe us that there may be many more but we covered only the important ones. However, as we had mentioned in the lesson “Interpreting Sentiments by Individual Candlesticks of a Chart”, each candle of a candlestick chart is a reflection to the market sentiment. It is not just the standard patterns but with a keen observation, you can master the art of trading by looking at the charts, without even remembering the names of the patterns.

 

Let's take a candlestick chart to the operating table and do a complete dissection.

 

How to master candlestick trading?


Following are the points which you need to observe to master the art of candlestick trading.

  1. What is the current trend?
  2.  

  3. In case the current market is running sideways then what was the previous trend?
  4.  

  5. Are the highs getting lower or higher?
  6.  

  7. Are the lows getting higher or lower?
  8.  

  9. Lower and upper wick sizes – Is there any sudden change?
  10.  

  11. Candle body sizes – is there any sudden and remarkable change?
  12.  

Let’s not get into the theory and get into the lab. Let’s pick up couple of charts and take those to the operating table for thorough dissection:

 

 

candlestick - sideways after bearish trend - chart 1

 

The above snapshot is of EUR/USD 4-hourly candlestick chart. Some of the basic observations from this chart are as follows:

 

  1. The market is not trending currently and is moving sideways.
  2.  

  3. The previous trend was a bearish one.
  4.  

  5. The circle numbered as 1 show a zone where even during the downtrend there were 4 consecutive green candles. However, even with 4 consecutive candles, the trend failed to reverse. The conclusion drawn is that the bearish sentiments are outweighing the bullish ones.
  6.  

  7. Just like the short body/Long wicks candle in the zone marked as 1, there was another such candle, marked as 2. We call it a confusion candle, a candle which shows uncertainty. Market was uncertain about either direction. However, soon after we had two red candles, indicating more pull of bears.
  8.  

  9. Zone 3 had 6 green candles and no red ones though there were 2 doji candles in between. This zone clearly shows that the bulls started having an upper hand. However, the crucial observation here is that despite 6 green candles, one after the other, the peak of this zone, or of the red candle soon after, failed to retest the high of candle 2. The drawn conclusion is that bullish sentiments did not have what it takes to reverse the trend.
  10.  

  11. All the subsequent highs are getting lower in the sideways zone.
  12.  

  13. All the subsequent lows are also getting lower.
  14.  

  15. The candle # 8 was a long green candle but even then it’s high failed to retest the previous high

Overall conclusion – The possibilities of downtrend continuation far overweigh the possibilities of reversal. You may like to take a short position with a stop-loss order a couple of pips above the high of candle #2.

 

Let’s see what happened once the sideways break out took place:

 

Bearish trend continuation - Chart 2.

The above chart is the continuation of the first one. As per the drawn conclusions based on the first chart, the trend failed to reverse and the bearish trend continued. If you would have short-sold, your position would have turned in some handsome profits.

 

What would happen next?

 

The price fell and again entered into a sideways mode. Well, what would happen next – any guesses? If you ask us we will say the trend is gonna reverse this time.

 

Key Observations

 

  1. Though the high of candle #12 was slightly lower than that of candle #10 but the high of candle #14 shot up strongly. However, at least 3 price points should be in place to confirm a pattern. We do not have that here. The conclusion is that though an upward move can be expected but there is no guarantee for that. 
  2.  

  3. Even though the candle number 14 indicated a fear for upside because of a very long upper wick but the subsequent high of candle #16 was again higher than the high of candle #10. However, the candle #16 failed to close above that high and that again indicate uncertainty. More importantly this candle turned out to be red and not a green one. Please note that if number 14 would have been a green one with a larger body then it could have been a game changer for a possible reversal.
  4.  

  5. The low of #13 and the zone 15 never even tried to test the low of candlestick #11. This fact tends to give us a feeling of bullishness but the facts are that candle #11 and net next one had a strong closing below the support line, which we could draw now and that should keep you in check from going long.
  6.  

  7. If you check the resistance line joining points 10 to 16 and the candle bodies below that, you will observe that the average gap is bigger than the gap between the support line and the bottom of the candle bodies in that region. This fact indicates that the price-action is staying closer to the support zone than the resistance zone. In other words the resistance is stronger that the support.
  8.  

Conclusion: Even though the possibilities of an upward breakout cannot be ignored but the bearish side is equally strong, especially considering the fact that this sideways movement is taking place during a downtrend. It is better to avoid taking any position.

 

Let's take a look as to what happened next:

 

Candlestick analysis practice - chart 3. 

 

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