Hello guys today we're going to do a video about one of the most simple and 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 exactly does it mean, a candlestick going up, going down, I am going to talk about basic
candlestick formations and patterns and I am going to give you some principles to be
using when trading through Candlestikcs.
So let's go to cTrader.
We have three types of Candlesticks, like I said before.
There are the candlesticks that are going up, the 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 whith a white fill.
A candlestick is made out of two 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 20 minute period - we are on the 20 minute chart, The price opened here.
The top of the body signifies the closing price.
The two edges of the line signify the lowest and the highest prict.
So in this 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 heppened.
We know that because it's a positive candlestick the close was after the high, but we don't
know when the high and the low 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 are 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, 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 hole day, it gives us what
happened the hole 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 you cannot just identify, try to identify various patterns randomly
in the chart and randomly try to trade them.
The hole 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 am going to show you what I mean by that later.
The next principle about Japanese candlesticks and the main reason they are so famous is
that because they can give you the ability to put 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 are great entry signals, they
signify reversals and retracements in a trend, but they do not provide and exit for exiting
your specific trade so, you should be exiting with other rules other technical tools not
the japanese candlesticks.
Another important pricniple is usually you cannot be trading isolated Japanese candlesticks
even tho I am going to show you some isolated candlesticks and what they mean, you should
wait for another canldestick 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 that 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 usefull 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 tho Iam 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 price is behaving.
I am going to show you that in a bit and you're going to understand what I am talking about.
So now we're going to go to cTrader and I am going to show you the most popular signel
candlesticks formations.
So we see here a chart that I have, I have drawn a trendline, the reason why I have drawn
this trend line even tho we are talking about candlesticks is, like I said before, the hole
point of candlesticks is that they should always be looked in context, in combination
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 the time that we are trading and we only
have this part of the chart, we don't know what's going to happend next.
We have drawn our trendline here which is not confirmed yet, trendlines are usually
confirmed in three spots and we continue here.
The first important candlestick that I want to talk about is, the hammer.
The hammer, the reason that it's called a hammer is because it looks like a hammer.
Very small body and a very small shadow.
What the hammer signifies is very simple to understand.
It says that the market tries 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 immediately it
went long again.
We see that the important thing is that this hammer is right on the trendline that I have
drawn, so it might be the third point confirming my trendline, so that's the hole point of
the context that's what I mean "in context".
So we learned what a hammer is, so you are not supposed to randomly trade all the hammers
that you see in the chart even tho you can see them all together, they signify something
I mean if you see a lot of wicks, a lot of hammers like we see here, it is a kind of
a singal that the price is going to usually go down.
Becuase the market is trying to go up but 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 compaired
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 just went long and that's it.
It 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 candlesticks we would be entering long.
I talked about before about 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 trendline was the point of refference
that we start, 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 hole 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 where wrong so we know exactly
where we are wrong.
We can put our take profit, like we said put 2:1 risk to reward 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 the 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 signle formation it's usually traded in multiple candlestick
formations like a morning star that we are going to talk about next.
Doji however usually talks about indecision in the market so you see here the volatility
has stopped and the market is going sideways, you see three 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 am going to show you again how important
context is in candlesticks, I am also going to show you how great risk to reward ratios
you get, 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 fomration of three 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 Idid, I have drawn an oscillator.
The hole 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 Iam 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 singal here which is the mornign 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 to be exactly perfect, it's understanding how
the price moves.
This morning star is made 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, it'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 canldestick,
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.
If I enter long here again I am going to put my stop loss very conservative to the lowest
part of my hammer candlestick and I am going to put my take profit twice as much as my
stop loss, which is 26 pips, this trade is 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 a strong upwards movement we have
a hammer, but the next candlestick as you see 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 going, we reach again a point where we are at the 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 we have a small candlestick so the market is not going very
hard up, so I don't know if I would have traded this one to be honest.
So the hole point of this formation is that you find areas which are important relative
to the other techncial analysis that you are doing, in this case we have an oscillator
and you get very good risk to rewad ratios, because you are entering in a setup that has
high possibility, higher probablity 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 oppoisite
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 on
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 to 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 succed but matter is all of our trades.
So I have intentionally not shown you all the patterns or 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 candlesticks that have a very low probability
of happening because it's very hard to find the exact pattern, are a lot less important
than actually doing very simple formation, 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 tought you something about candlestikcs, the next video is going
to be about support and resistance line trading, which is a very typical way that proffessional
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.