First it’s explained how Candlesticks work, then single and multiple candlestick patterns are analysed. Principles are given on how to trade Japanese Candlesticks correctly.
Japanese Candlesticks Tutorial – Learn To Trade Forex with cTrader
Hello guys, today we’re going to do a video about one of the most simple and at the same time important technical tools you have at your disposal. This tool is the price action being viewed through Japanese Candlesticks.
In this video we’re going to show you how exactly to look at a Japanese Candlestick. What is, what exactly does it mean about a candlestick going up or going down? I’m going to talk about basic candlestick formations and patterns and we’re going to give you some principles to be using when trading through Candlesticks. So let’s go to cTrader, we have three (3) types of Candlesticks like I said before. There are the candlesticks that are going up, these are Candlesticks that signify that the exchange rate is rising, they have a black fill in cTrader, and then there are the Candlesticks that are going down, they signify that the exchange rate is dropping; these are the candlesticks with a white fill.
A candlestick is made out of two (2) parts. The first part is called the body which is the square that we are looking at now, and the second part is called the shadow or the wick which is this line that extends from the top and bottom of the body. In a positive candlestick, the one with the black fill, the bottom of the body signifies the opening price. For this time twenty (20) minute period we are on the twenty (20) charts, it opened, the price opened here. The top of the body signifies the closing price and the two (2) edges of the line signify the lowest and the highest price. So in this twenty (20) minute period for this candlestick, it opened here then it went either high or low at some point, let’s say that it went high here, then it went low here and then it closed here. The candlestick doesn’t show you in which series these events happened, we know that because it’s a positive candlestick the close was after the high, but we don’t know when the close, the higher and the lower price happened.
For the candlesticks that are going down with the white fill, the top of the body is the opening price, then we have the low and the highest price same as before and the closing price is the bottom of the body. Then we have a third type of candlestick the one that opened and closed at the same price, and it looks like a cross, it’s called a doji, it opened at this price it also closed at this price, and it went high and low here.
Now I am going to give you some basic principles that you should be using when trading Japanese candlesticks. We’re going to talk about the principles before we go to the actual setups because I need you to keep in mind this information. The first principle is that Japanese candlesticks are more reliable, the higher the time frame we’re trading. The reason for that is that the higher the time frame the more volume and orders went into the market the more money changed hands so with an example if we see a doji candlestick and we want a conclusion out of that in a tick chart, a tick chart is a very very small part of the price movement and it’s not really reliable. However seeing a doji on the daily chart it means that the whole day, it gives us what happened the whole day so it’s quite reliable to use it and draw our conclusions.
The next important principle is that you should be trading Japanese candlesticks always in context. That means that we cannot just identify, try to identify various patterns randomly in the chart and try to trade them. The whole point of candlesticks is that they are supposed to be used in combination with your other technical tools, usually to signify some kind of reversal. So you should be viewing them in context with other tools, I’m going to show you what I mean by that later.
The next principle about Japanese candlesticks and the main reason why they are so famous is that because they can give you the ability to put very very tight stop loss, they signify exactly the place that you will wrong in your trading. We’re going to show that also in a bit. The next principle about Japanese candlesticks is that they’re great entry signals, they signify reversals and retracements in a trend but they do not provide an exit for exiting your specific trade so you should be exiting with other rules other technical tools, not the Japanese candlesticks.
Another important principle is usually you cannot be trading isolated Japanese candlesticks even though I am going to show you some isolated candlesticks and what they mean, you should be wait for another candlestick confirmation before you trade them. For example if you see a hammer in the top and you want to see a reversal you should be trading on the next candlestick which actually goes below the hammer. Lastly like we said before, Japanese candlesticks are most widely used for scalping, scalping means getting the top of something usually the top of the head, and that’s what scalpers do they get the top of the candlestick and they are also very useful to signify reversals, either in ranges or in trends with retracements and these are the most popular ways of trading candlesticks.
The last principle about Japanese candlesticks is that, even though I’m going to show you specific patterns and specific candlestick formations and individual candlesticks you should remember that in the market, nothing is perfect, there are no perfect patterns, no perfect formations, you should be looking at candlesticks as total and understanding how the price is behaving. I’m going to show you that in a bit and you’re going to understand what I‘m talking about. So now we’re going to go to cTrader and I’m going to show you the most popular single candlesticks formations. So we see here a chart that I have, I have drawn a trend line, the reason why I have drawn this trend line even though we are talking about candlesticks is, like I said before, the whole point of candlesticks is that they should always be looked in context, in combinations with your other tools. You don’t randomly try to find candlesticks and try to trade them. So let’s assume that we are here, that this is a time that we are trading and we only have this part of the chart, we don’t know what’s going to happened next. We have drawn our trend line here which is not confirmed yet, trend lines are usually confirmed in three (3) spots and we continue here.
The first important candlestick that I want to talk about is the hammer. The hammer is a candlestick, the reason why it’s called a hammer is because it looks like a hammer, it has a very small body and a very small shadow. What the hammer signifies is very simple to understand. It says that the market tried to go in some direction, but it completely failed because it turned to the opposite direction with great speed. In this hammer the market tried to go short, but it completely failed and it immediately it went long again and we see that the important thing is that this hammer is right on the trend line that I have drawn, so it might be the third point confirming my trend line. So that’s the whole point of the context that’s what I mean going “in context.” So we learned what a hammer is, so you’re not supposed to randomly trade all the hammers that you see in the chart even though you can see them all together and signify something.
I mean if you see a lot of wicks, a lot of hammers here, like we see here, it is a kind of a signal that the price is going to usually go down. Because the market is trying to go up and it fails. Next to the hammer we have a candlestick called a Marubozu in Japanese, the name is weird but it doesn’t matter, what matters is that it’s a candlestick with a huge body compared to the other candlesticks, big body, no shadows at all. This candlestick also is quite simple to understand. It’s a clear message that the market knows exactly the direction it’s going to go, because it opens at some price and then it closes on the highest point so there was absolutely no returning, everybody who just went long and that’s it, they went long and the price stopped.
This candlestick is usually traded in breakouts and you can expect trends after this kind of candlestick because the market is very sure about where it’s supposed to go. So in this case by looking at these two (2) candlesticks we would be entering long. I talked about before about stop loss, stop losses, so let’s make a limit order, buy limit to show you what I meant. Like I said before we don’t trade individual candlesticks we trade the confirmation after the candlestick so the individual hammer candlestick on our trend line was the point of reference that we start to think that the trend might be continuing.
This candlestick the big one is the one that it’s the confirmation so we trade this candlestick so we will enter at the end of this candlestick and the stop loss, the great thing about candlesticks is that you can just go below the candlestick and you can have a great stop loss because the whole point of the hammer is that if the price goes below the hammer, there is no reversal there is no continuation for the trend, we were wrong so we know exactly where we are wrong. And we can put our take profit, like we said go with 2:1 ratios usually so it’s 10 pips, you can put it at 20 pips so that’s a great trade which would have succeeded.
Here we see also that other hammers are forming so you see all these hammers in a row, it’s again some kind of confirmation there is a reversal happening again on the next candlestick here is our confirmation, we can trade here we can go short same thing again. When the hammer looks like a normal hammer like this or like this it’s called a hammer, it signifies end of a down trend, when a hammer looks like this it’s called an inverted hammer. Next we have a doji candlestick here, the doji candlestick for example; usually this candlestick is not the most reliable single formation it’s usually traded in multiple candlestick formations like a morning star that we are going to talk about next. Doji however usually signifies, talks about indecision in the market so you see here in the market the volatility has stopped and the market has, is going sideways, you see a lot of, you see three (3) dojis in a row, because the market is not knowing where it’s supposed to go, there is no decision going on.
Now I am going to show you some multiple candlestick formations. These formations require more than one candlestick to be confirmed and understood, again we’re going to see these formations in context and I’m going to show you again how important context is in candlesticks, I’m also going to show you how great risk to reward ratios you get with candlestick again, so these are very important. So let’s go to cTrader, the first formation that I want to talk about is called a “morning star”. The morning star is a formation of three (3) candlesticks that signifies a reversal from a down swing or a down trend, the reversal from the other side from the top trend is called an “evening star” which is on the top. What I have done here is, we have a ranging market and what I did, I’ve drawn an oscillator. The whole point of all these candlestick formations is that you don’t randomly search anywhere to find the formations and trade them. This oscillator here is telling me where the market is overbought and oversold, so what I’m doing is, when the market goes to oversold areas, or overbought areas which are my signals for entry, then I start looking for my formations.
So for example let’s take this signal here which is the morning star that I have talked about before, we see that the oscillator is in the oversold area, so I am looking for a long spot. I have intentionally found a morning star that it’s not perfect and the reason why I did that is because candlestick formations are very rarely perfect. It’s not the point of the candlesticks being exactly perfect; it’s understanding how the price moves. This morning star is made up from a strong candlestick that is going with the direction of the trend like this one, then a candlestick of indecision, usually it’s a hammer or an inverted hammer, or a doji candlestick, and then we have another candlestick which is a strong candlestick going on the other direction. This is a very possible reversal and it’s very clear why. One candlestick signifies that the market is sure it’s going down, then there is a candlestick showing that the market’s not entirely sure where it’s supposed to go next and then there is a strong upwards movement. So this happens on the already oversold area of the swing so it’s a very good way to enter long. So I can enter long here on the confirmation, on the top of the confirmation candlestick, the confirmation for an evening star or a morning star is that the candlestick that signifies the other direction should not be going lower than the previous candlestick, it should start from the body of the previous candlestick, not even going lower than the open of the previous candlestick and it should be going a lot higher than the previous candlestick.
So if I enter long here again I’m going to put my stop loss very conservative to the lowest part of my hammer candlestick and I’m going to put my take profit twice as much as my stop loss, which is 13 pips, 26 pips, this trade’s going to go well. The opposite with the evening star we go to this candlestick, this actually is not an evening star because this candlestick, we have here strong upwards movement, we have a hammer, but the next candlestick as you see didn’t, went higher than the open of the hammer candlestick, so we don’t have the confirmation that we want for an evening star. So we can continue go, we reach again a point where we are at oversold area, again we have nothing, we have here another one which is higher than the oversold area before we can choose to enter here, or we can ignore it however this is a normal evening star, actually it’s not so perfect again we have a small candlestick so the market is not going very hard up, so I don’t know if I would have entered this one to be honest.
So the whole point of this formation is that you find areas which are important relative to the other Technical Analysis that you’re doing, in this case we have an oscillator and you get very good risk to reward ratios because you are entering in a setup that has high possibility or higher probability than the rest of the candlesticks, you are putting a very conservative stop loss. So you are not going to lose a lot and you put big take profits so you are winning a lot of money.
The last pattern that we are going to talk about the last patterns with multiple candlesticks is the engulfing pattern. This patter is happening when the body of a candlestick, we have a swing going at some direction, like this one, it’s going up and we have the body of a candlestick of the opposite direction, completely engulfing the body of another candlestick which is going in the strong direction, so here we see that the oscillator is at the overbought level and we have this hammer candlestick which signifies a reversal and we also have an engulfing pattern meaning that this candlestick completely engulfs the body of that candlestick and it goes in the opposite direction. So this is a pretty strong reversal signal. Again we are going to put our stop loss high, we’re going to go to a 2:1 risk reward ratio or 1:1 risk to reward ratio, at least 1:1 and we are going to get our trade, maybe this trade is going to fail maybe it’s going to succeed but matter is all of our trades.
So I have intentionally not shown you all the patterns, candlestick formations that you are going to find on the internet. There are a lot of formations and I did it because, like I said before Technical Analysis should be simple, formations with four or five (4 or 5) candlesticks that have very low probability of happening because they’re not, they’re very hard to find the exact pattern, a lot less important than actually doing very simple formations, looking at simple candlesticks, but doing what’s important which is looking the candlesticks in context, not out of context finding them on the chart.
I hope that this video was teach something about candlesticks, the next video is going to be about Support and Resistance Line Trading, which is a very typical way that professional traders trade. If you like the video don’t forget to subscribe to our YouTube channel, you can also share it with your friends. So thanks for watching.
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