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Practice makes perfect....... One of the best ways to master the art of candlestick pattern reading is to look at candlestick charts on a frequent basis. The trader or investor who is looking at charts on a day to day basis will quickly improve his or her ability to recognize all types of candlestick patterns and isolate the good patterns from the bad. By looking at daily candlestick patterns daily, you will also keep a pulse on the market by observing the overall trends among the group of stocks that you are tracking. For example, if you scan a hundred stocks, and 20 of the stocks have formed excellent short setups, and only 5 or 6 have formed long setups, then you may conclude that the market is over bought, and may need time to pull back and rest before another rally. This information may help you decide whether to stay on the short side or the long side of the market in the ensuing days. Are all charts the same? There are two main types of chart displays commonly found in most charting software packages, 1) the Western OHLC (Open-High-Low-Close, Fig. 1), and the Japanese candlestick line (Fig. 2)
FIG. 1
FIG. 2. The OHLC has been the traditional charting line used in Western trading circles for many years. Only recently has the highly effective and visual Japanese candlestick line obtained greater popularity in Western trading circles. Although the OHLC line contains the exact same information of price movement of a stock during the day, it does not contain the same powerful visual information that is enclosed in the candlestick line. To illustrate this point, compare two daily charts of the same stock, one displaying a OHLC line (Fig. 3) and the other displaying a candlestick line (Fig. 4). The OHLC chart shows that the general trend is upward, and that the stock has just pulled back to the 10 MA as well as minor price support, as does the candlestick chart. The candlestick chart; however, provides a clearer visual picture of how the stock rallied sharply during the previous week, with each candlestick opening near its low and closing near its high resulting in long white (or green depending on your charting software) candlesticks. The last candlestick in the pattern closes with a small body, indicating a reversal is near, and also is white (green) in color indicating slight bullishness in the day's trading session. So you be the judge....which chart do you find easier to read? When visually scanning the market for key reversal setups based on reversal candlesticks and key support and resistance points, it is helpful to utilize charts that provide clear and concise information. The candlestick chart is the most effective type of chart for providing these visual signals.
Western Line (OHLC) Daily Chart FIG. 3
Candlestick Line Daily Chart Fig. 4 How can I practice viewing candlestick charts? Most good charting software packages will provide the option to display candlestick patterns. Since candlestick charts are relatively new in Western circles; however, it may be possible that your charting software does not provide candlestick display capability. Fortunately, there are free charting services on the internet that provide excellent candlestick charts. One of the services that we recommend to our subscribers is www.bigcharts.com.
To use BigCharts to display a candlestick chart, follow procedure below: 1. Click on www.bigcharts.com 2. Enter the symbol and then click on 'INTERACTIVE CHARTING'. 3. Click on 'time frame'' and enter '3 months' under 'Time' and 'Daily' under Frequency. 4. Click on 'Indicators'. 5. Enter 'SMA (2-line)' with 10, under 'Moving Averages'. 6. Enter 'Volume' under 'Lower Indicator 1'. 7. Click on 'chart style' and change 'Price Display' to 'Candlestick'. 8. Change 'Chart Size' to 'Big'. 9. Scroll up and click on 'Draw Chart'. 10. Click on 'Store Chart Settings' to save settings for future use. You should now see a daily candlestick chart for 3 months with the 10 MA and the 20 MA. Ideally you will want to track the 50 MA and the 200 MA also, but the 10 and 20 should be sufficient for identifying most good candlestick pattern setups.
Alan Williams
If you have any questions regarding this report or the CANDLESTICKSHOP.COM website in general, please do not hesitate to contact the author at candlestickshop@earthlink.net
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