Technical Trading Basics: Candlesticks (Part 1)

In this Smart Money Club Technical Trading Basics lesson, we’ll build your technical trading knowledge, introducing you to the first part of technical trading, Candlestick patterns.  Candlesticks and their patterns are a way to quickly identify how an asset is performing, and when one or more candles are combined, their patterns will hint at where the price will potentially go.  Many technical traders rely on several candlestick patterns to help them make trading decisions, so let’s get right in it, taking you to the Power of X and learning the basics of Candlesticks.

What is a Candlestick?

A candlestick is used in nearly all technical trading, crypto, stocks, forex, futures, etc. to indicate price movements over a time period.  Candlesticks are essential for technical analysts, allowing them to interpret price data with only a few sticks.  

Multiple candlesticks will form patterns, and technical traders can use the patterns to identify significant support and resistance levels.  There are MANY candlestick patterns that indicate market opportunities.  Some will be for determining the relationship between buyers and sellers; others will indicate continuation or indecision. 

Candlestick Features 

Every candlestick has three general features:

Body– this is the open and close prices for the candlestick

Wick(s)– these will indicate the high and the low for the candlestick

Color– shows the direction of price movement; 

  • green or white means the price closed up; the bottom of the candlestick body was the open
  • red or black- means the price closed down; the top of the body was the open

All candlesticks have the same features; however, each stick will represent a defined period of time, and you can choose that time yourself.  It can be from seconds to months.  Every trader has their preferred time period, and it will usually depend on your trading style.  If you are making multiple trades a day, you will not be looking at the one-day per candlestick chart but maybe the 30-second candlesticks.  Many will use more than one period to see overall trends and shorter-term trends.  

Get Used to Identifying Patterns With a “Demo Account”

Before beginning any technical trading, it is vital to familiarize yourself with the basic candlestick patterns and how they are used to inform your trading decisions.  The best way to learn to identify candlestick patterns is through practice.  Before we introduce you to the basic patterns, feel free to sign up for an online trading site like Thinkorswim or another service that will allow you to set up a “Demo Account.” A demo account will provide you with risk-free practice trading using their fake money.  

Take it seriously, try different techniques and see how you do.  Demo accounts allow you to test your skills before putting your own real money at risk.  If you are successful consistently and can see the candles and identify trends, then you can start trading with your real funds.  

Candlesticks Are Just an Indicator

As a word of warning, when using any candlestick pattern, it is critical to remember that they are only one part of a combined strategy.  Candlestick patterns are fantastic for quickly predicting trends, but they don’t mean that it is sure to happen.  Think of candlesticks as predicting the weather.  If wind is blowing from the south, usually it means warm weather is coming, but that warm weather may be a tropical storm; you need to look at all of your tools to make an accurate prediction.  

Your First Candlestick Pattern (The Hammer)

The first candlestick pattern that every technical analyst learns is “The Hammer.”  It is the easiest to identify because it looks like Thor’s hammer.

The hammer is a single candlestick bullish pattern that is found at the bottom of a downward trend.  

For our teaching, we are going just to assume that each candle represents one day.  However, you can use any time period that you find comfortable; the patterns provide the same indication no matter what period you are using.  

A hammer shows that even though there were significant selling pressures throughout the day(this makes the long lower wick), there was ultimately strong buying which drove the price back up.

There can be red or green hammers; however, green hammers indicate a more substantial bull market, and a hammer may have a slight upper wick but without one indicates a green hammer’s close was the day’s high and is another robust indicator.  

In our next Smart Money Club Technical Trading Basics Lesson, you can learn about more candlestick patterns.

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