Candlestick patterns have been used by the trading community for decades. In fact, the first record of it being used was around 1700s when a rice merchant named Munehisa Homma used it to trade the futures market for rice. Today, candlestick patterns are alive and well, having undergone a variety of transformations and taking on newer forms to fit the ever-changing landscape of the financial markets, particularly Forex. So, what is candlestick pattern? More importantly, how does one use it to consistently profit from Forex?
Candlestick Patterns Explained
In a nutshell, candlestick patterns are a specific type of technical analysis wherein the participant tries to foresee future price action through naked chart analysis or looking simply at the candlesticks that are forming per the chosen time interval, whether it’s the 5-minute, 1-hour, or Daily time interval. Candlesticks are relatively nascent over bar and line charts, but are championed to carry more information including price highs and lows and bullish/bearish strength. Although it’s used independent of any other technical indicators, candlestick trading can be supplemented with other tools like Relative Strength Index and Average True Range to add accuracy to the trade signals produced and filter out low-probability setups as much as possible.
Importance of Candlesticks
As mentioned above, candlesticks carry more information than what lines and bars are able to provide. If you look at line or bar charts, information is limited to the price’s fluctuation to different levels without actually telling you where the bears or bulls were winning and what transpired throughout that particular time frame. On a candlestick chart, you’ll see how powerful the bulls or bears were able to push the currency pair forward to their respective biases. Candlestick trading is also a fairly simple strategy compared to Iron Condors and algorithmic trading. A novice trader can easily grasp the basic patterns and then support it with proper risk management measures.
How Candlestick Trading Works
It varies from person to person. Candlestick trading is not a rigid approach like other specifically tailored systems. This is perhaps another reason why it’s so popular with the trading community. People don’t necessarily have to obsess over minuscule details that in the stretch of 100+ trades won’t really matter. Instead, candlestick traders focus on high-probability patterns that have been proven time and time again. For instance, Bullish Engulfing, which is a two-piece pattern wherein a small bearish candlestick is being engulfed by the following bullish candlestick, is a simple but very accurate turning point for bearish markets.
Improving Your Odds With Candlesticks
It’s important to look at the market context in which the candlestick patterns appear in. If a Bullish Engulfing pattern appears in an overextended bullish market, it might not be the best time to get into the trade when bulls are exhausted and a reversal is imminent. Furthermore, you should look for a good brokerage firm, like AlfaTrade, that provides a good trading platform with access to candlestick charts. MetaTrader 4 is a good platform for trading foreign exchange with candlestick charts as the software provides an extensive palette of chart customization features. Make sure your chosen broker enables account management via MT4 software.
Analyzing charts and trading with candlestick patterns should always be conducted with capital safety in mind. Like any other trading system and tool available today, candlestick patterns are not immune to the unforgiving and unpredictable nature of the Forex market. Acknowledging the presence of risk is a crucial factor that determines the success or failure of a trader. In the end, candlestick patterns will and should only constitute a portion of your overall approach to trading the market.