01st Oct 2020

5 Candlestick Charts Every Trader Should Know How to Read

Candlestick chart patterns were first developed in the 18th century, by a wealthy Japanese businessman, Munehisa Homma, to analyse rice contract prices. But these patterns were so efficient, they soon became the basis of trading in Japan. Today, they are one of the most versatile technical indicators for predicting market movements. 

In total, there are 42 recognized candlestick chart patterns. But not all of them are equally reliable. Here are 5 candlestick patterns that perform well for traders of all levels. 
The evening star is a pattern that signals the reversal of a trend. It consists of a bearish pattern and is generally used for trading forex. For an evening star pattern, there should be 3 candles. The first, a large white (or green) candle that signifies high buying pressure and continued uptrend. The second is a smaller candle which is also bullish but has a smaller body. This shows that there is fatigue in the uptrend. The last one is a large black (or red) candle. Here, the asset opens at a price lower than the previous day. It generally closes near the middle of the first candle.
The evening star is a reliable indicator for identifying the start of a downward trend. However, finding it can be difficult at times between all the price data. Therefore, trendline and price oscillators can be used to confirm the pattern.
The abandoned baby is a bullish pattern that indicates the reversal of a downtrend. It is also composed of 3 candles. In this pattern, the first is a large black (or red) candle, along the downtrend. The second is a narrow Doji candle, which gaps below the closing of the first candle. This indicates fresh sellers failing to appear. The last is a bullish white (or green) candle that opens higher than the second candle. 
“Doji” in Japanese means mistake. This points to the rarity of such patterns. Doji candlestick patterns occur when the opening and closing price of an asset are almost equal. These look like a cross or plus sign, with almost no body. The Doji pattern is formed when bullish traders are trying to push the price upwards but bearish traders reject this price rise, pushing it back. Similarly, it can also occur if bearish traders are trying to lower the price but face almost equal resistance from bullish traders. This causes the formation of a wick like pattern.
Doji patterns point towards a period of indecisiveness from both the bullish and bearish sides. This causes the price to just hover in between. Many traders interpret it as a sign of a reversal. But that is not always the case. There can be times when the buyers or sellers may be gaining momentum, continuing the trend. 
In a bearish pattern, there are 3 candle sticks, each closing on a progressively lower level. The opening level of the fourth bar is even lower. But it reverses and closes above the high point of the first candle. There can also be a bullish three-line strike, in which the candles close on a progressively higher level, followed by a strike candle that is bearish.
This is a bearish pattern that indicates an uptrend reversal. It starts near the top of an uptrend. In this pattern, the first candlestick opens at a point slightly higher than the closing point of the previous bar. But the price is pushed lower throughout the session. If such behaviour continues over 3 sessions, a black crow pattern is formed. Traders interpret it as the start of a sustained bearish trend.
For making the most of the Japanese candlestick patterns, it is best to have a definitive strategy with stop-loss levels and pre-determined entry and exit levels.  

How to Use Moving Averages in Forex Trading

The forex market has been marked by high volatility during 2020, with the Covid-19 pandemic, trade wars, change in inflation rates and the US election, all coming together in a single year. These are the conditions where a moving average strategy can be a great tool for traders.

Moving averages is a popular technical indicator, used to smoothen out price movements. It achieves this by creating a price point that is constantly updated. This makes it easier to spot trends, allowing traders to see beyond the impact of short-term fluctuations within a specified timeframe. 

There are several types of moving average strategies. Here’s a look at the most popular ones for forex trading.
Exponential moving averages is a highly popular strategy for forex trading. It is also known as exponentially weighted moving averages because higher significance and weight is placed on the more recent data points. This results in the EMA reacting more strongly to price changes that are the most recent.
Here’s how you can use the EMA strategy:
  • On a 15-minute chart, plot a 5-period, 20-period and 50-period EMA.
  • When the price of the 5 and 20 period EMAs is greater than the 50-period EMA and the 5-period EMA cuts the 20-period EMA, while rising, it is considered a buy signal.
  • It is considered a favourable time for selling when the 5 and 20 period EMAs are below the 50-period EMA. Plus, the 5-period EMA crosses the 20-period EMA, while declining.
  • The stop-loss order can be placed below the 20-period EMA.
The moving averages convergence divergence line is calculated from the difference between a 12-period EMA and a 26-period EMA. On top of the MACD line, a 9-day EMA, known as the signal line, is also plotted. This line often acts as a trigger for selling and buying signals. 
Here’s how you may trade using MACD trading:
  • In case the market is on an uptrend, buying when the MACD line cuts the signal line while rising may be a good option. The MACD line should not be below the zero line for this. During a downtrend, when the MACD line cuts the trend line while falling, short selling may be a good option. The MACD line should not be above zero.
  • If you are going long, the stop loss may be placed beneath the last swing low. If going short, the stop loss may be placed over the last swing high.
In this strategy, a set of 8 to 15 moving averages of different lengths are plotted on a single chart. This creates a ribbon pattern.
Here’s how you may trade using ribbon patterns:
  • When the price moves above the ribbon or over most of the moving averages, it signals an uptrend. This may be a good time to buy. Upward angled MAs also help in confirming an uptrend. 
  • When the MAs are downward angled and the price drops below most of them, it signals a downtrend. 
  • If the ribbon is widening, it signifies that the trend is becoming stronger. Conversely, a narrowing ribbon signifies a weakening trend. 
  • Moving averages can be immensely helpful. But to get the most out of them, it is best to use them along with other indicators, such as price action, to confirm the signal.
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