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Trade Less, But Wisely; Get Rich Step by Step
Advanced Chart Patterns
Candlesticks does not show only the open, high, low and close prices, but also tell us a lot of about what the buyers and sellers are doing, the strength of buyers and sellers, strength of the trend and momentum etc. when analyzed with volume.
For detailed analyses of candlestics, a trader should understand the concept of "Path of Price". A path of price is nothing but the way in which price moves and a candle is formed. Suppose the price of a security opened at Rs. 100 and went below Rs. 75 and then made a high at Rs. 125, but eventually its closed at Rs. 115. When such movement of price is represented by a candlestick formation, it becomes a bullish candlestick.
In short, a path of price guides regarding the psychology of the traders by forming bullish or bearish candlesticks.
A trader need to pay more attention to the following four points with regard to the observation of candlestick formation.
1. Size of candlestick body
2. Length of shadows
3. Body to shadow ratio
4. Position of candlestick body
Anchor 1
It is to be noted that a trader should not look only at one or more of the above mentioned aspects of candlestick in isolation, he should use them altogether to get a complete interpretation of what is happening.
Size of Candlestick Body :
Size of the candlestick indicates strength of bullish or bearish environment. A long candlestick body indicates heavy trading in one direction and there is strong buying or selling pressure. It is a good sign of strength. A short candlestick body indicates light trading in one direction and there is weak buying or selling pressure. It is a good sign of weakness.
While taking a trade (either long or short), if body of the candlestick is long, then the probability of trade going to in favor will become more and vice versa.
If the size of candlestick bodies goes on increasing over a period of time consecutively (preferably for a few candlesticks), then it indicates that the momentum of the prevailing trend is increasing. During such a phase, a trader should avoid trading against the prevailing trend.
If the size of candlestick bodies goes on decreasing over a period of time consecutively (preferable for a few candlesticks), then it indicates that the momentum of the prevailing trend is decreasing, and it may come to an end. During such a phase, a trader should watch out for a reversal signal.
If the size of candlestick bodies remains more or less constant, it is the indication of a steady trend. A trader should stay away from trading when momentum is steady to avoid frequent hitting of stop loss.
Anchor 2
Length of Shadows in Candlestick
Long shadows in a candlestick indicates a sign of uncertainty while short shadows signifies a stable market with less uncertainty.
Upper shadow indicates the selling pressure, and it is the rejection of higher price. While lower shadow indicates the buying pressure, and it is the rejection of lower price.
Anchor 3
Body to shadow Ratio
During the strong trend, either bullish or bearish, the body of candlestick is longer than shadows. When the trend is weak, the shadows of candlestick start becoming longer than the body of the candlestick. In case of sideways movement or in consolidation phase, the trend is about to take reversal candlestick has more or less equal upper and lower shadows.
Anchor 4
Position of Candlestick Body
If the body of the candlestick is at the top end, it indicates that the buying pressure is more than the selling pressure.
If the body of the candlestick is at the bottom, it indicates that the selling pressure is more than the buying presure.
As said earlier, a chart pattern is a visual representation of price movement of a security. It guides the trader about collective behavior of human nature on price of a security and also about the next move of the price. In general, a chart pattern helps in finding out who is going to win the battle of price between bulls and bears.
Traders who have good chart reading skills and who can apply them in their trading activities are mostly on the right side of the trend. Hence for beginners, it is important to learn to spot and interpret chart pattern in a right way. A trader is required to train his eyes to spot the chart pattern by observing price movements closely and regularly. He should develop a habit of looking and studying chart patterns every day.
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