How To Use Candlestick Charts?

Candlestick charts are considered to be one of the most important tools in trading no matter what market you trade whether it is forex, stocks, futures, commodities, options, ETFs or whatever. Now, this is the most common mistake that new traders make with candlestick charts. They ignore the higher time frame candlestick charts and look at the intraday charts to get their signals.

Now by making this mistake, new traders are ignoring the big picture for the sake of the short term picture. Always look at the long view first to get the big picture. So, start with the monthly charts. Look at what is happening on the monthly candlestick charts. Then drop lower to the weekly charts. After that to the daily charts and later to the lower timeframes. So always try to understand what the candles are saying in the short term within the context of the longer term picture.

Now, when a candle has a long body, it means that the move has a certain conviction. On the other hand, a small candle body tells that the move lacks conviction and is reactive in nature. The candle body is going to tell you a lot whether the market is trending or counter trending. So, when the candle bodies are long, it means the market has got conviction or strong momentum and it is trending. On the other hand, when the candle bodies are short, it means the market is moving sideways and lacks conviction. In other words, the market is counter trending.

Watch The Clock When You Identify The Candlestick Pattern

Now, this is very important. Always wait for the individual candle to close before you make your trading decision. Now, in forex intraday candle charts, the time of the day is important. All time periods are not important even when the market is open 24 hours a day. For example, between the close of the US market and the Asian market open, the trading volume easily trails off after the US market closes around noon EST and stays like this until the Tokyo open. So, the candlestick patterns that you see during this time period may not be relevant or important.

Always interpret the candlestick patterns or formation in terms of the overall trend in place. Taken by themselves candlestick patterns like the dojis or the hammers or the morning stars maynot reveal a lot. However, when viewed in the context of the current trend and relative to the support and resistance, these candlestick patterns can help identify trade setup and signals.