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Use Candlestick Analysis
to Improve Your
Investing and Trading

Candlestick analysis will be a very important tool for us. In fact, you could do away with other indicators and still profit from the market. The reason is because price is the most important thing. And candles show us the price.

Why use candlesticks

  • It gives a quick visual representation of what is happening in a stock.
  • It shows us possible entry and exit points
  • It shows us what market participants are thinking
  • There is actually a lot to study on this area alone. Entire books can be written just on candlesticks. If you want an in depth coverage, try the books by Steve Nison. Steve Nison is known as the 'Father of candlesticks'.

    Learning all about candlestick can seem like a huge task. However, you do not need to learn everything to start profiting from the market.

    Here, I will give you a solid foundation on how to use candlesticks. For more in depth knowledge, read the additional articles below.

    japanese candlestick 1

    How candles are formed

    The green bar represents an up day while the red bar represents a down day. On an up day, the open is at the bottom left and the close is at the upper right. On a down day, the open is at the top left and the close is at the lower right.

    The open to close is called the body. The lines on both sides of the body is the high and low of the day.

    How to use candlestick analysis to your advantage

    Candles show us whether the Bulls or Bears are in control

    Knowing who is in control is important to us. Remember the phrase 'The trend is your friend'? You want to be with the stronger side as long as they are strong. Many people do not realise this and make the mistake of buying stocks when the bears are in full control.

    When you see that the color of the candle is green, it is an up day. The stock went up that day and the bulls were in control of that session.

    When you see that the color of the candle is red, it is a down day. The stock went down that day and the bears were in control of that session.

    Candles can show us a stock's momentum

    A candle bar can be wide range or narrow range. Wide range means that the high is far from the low. A narrow range means that the high is near the low.

    japanese candlestick 2

    A wide range bar signifies that momentum is strong. It means that momentum has increased. A narrow range bar signifies that momentum is weak. The stock's momentum may be slowing down.

    What we are really interested to know is whether momentum is increasing or decreasing. If you have bought a stock, you would want to see that the uptrend momentum is strong.

    Therefore, many wide range bars in the uptrend direction will be good for you. Once you see narrow range bars forming, it shows that momentum has slowed down. A possible reversal may follow.

    The additional articles below will help you in determing continuation and reversals. Remember, if you are in a stock, always be aware of this two. Continuation is good for us. Reversals means that we should start to be more careful. Perhaps you might want to take some profits or tighten your stop loss.

    Here are the additional articles on candlestick analysis.

    Bullish Patterns
    Bearish Patterns

    Having read the above articles, you now have an understanding of some of the candlestick patterns. The Bullish and Bearish patterns can also be categorised as continuation or reversal patterns.

    Putting the patterns in such a way makes candlestick analysis easier for us. That way, we won't be confused on how to read it. For example, if you are long a stock, you want to see bullish continuation patterns and not bearish reversal patterns. If you like bottom fishing(buying stocks at low price) you want to see bullish reversal patterns.

    Bullish Continuation Patterns
    Bullish Reversal Patterns
    Bearish Continuation Patterns
    Bearish Reversal Patterns

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