Moving Markets - Chart Patterns
When we are able to read charts, it’s now time to analyze the charts pattern so formed due to buy and sell orders. Just like humans, candlesticks have different body sizes. And when it comes to futures trading, there’s nothing naughtier than checking out the bodies of candlesticks! Long bodies indicate strong buying or selling. The longer the body is, the more intense the buying or selling pressure. Short bodies imply very little buying or selling activity. In trading language, bulls mean buyers and bears mean sellers.
The upper and lower shadows on candlesticks provide important clues about the trading session. Upper shadows signify the session high. Lower shadows signify the session low. Candlesticks with long shadows show that trading action occurred well past the open and close. Candlesticks with short shadows indicate that most of the trading action was confined near the open and close.
If a candlestick has a long upper shadow and short lower shadow, this means that buyers flexed their muscles and bid prices higher, but for one reason or another, sellers came in and drove prices back down to end the session back near its open price.
If a candlestick has a long lower shadow and short upper shadow, this means that sellers flashed their washboard abs and forced price lower, but for one reason or another, buyers came in and drove prices back up to end the session back near its open price.
Basic Candlestick Patterns
Candlesticks with a long upper shadow, long lower shadow and small real bodies are called spinning tops. The color of the real body is not very important.The pattern indicates the indecision between the buyers and sellers
Marubozu means there are no shadows from the bodies. Depending on whether the candlestick’s body is filled or hollow, the high and low are the same as it’s open or close. If you look at the picture below, there are two types of Marubozus.
A White Marubozu contains a long white body with no shadows. The open price equals the low price and the close price equals the high price. This is a very bullish candle as it shows that buyers were in control the whole entire session. It usually becomes the first part of a bullish continuation or a bullish reversal pattern.
A Black Marubozu contains a long black body with no shadows. The open equals the high and the close equals the low. This is a very bearish candle as it shows that sellers controlled the price action the whole entire session. It usually implies bearish continuation or bearish reversal.
Doji candlesticks have the same open and close price or at least their bodies are extremely short. The doji should have a very small body that appears as a thin line.Doji suggest indecision or a struggle for turf positioning between buyers and sellers. Prices move above and below the open price during the session, but close at or very near the open price.Neither buyers nor sellers were able to gain control and the result was essentially a draw.
There are four special types of Doji lines. The length of the upper and lower shadows can vary and the resulting candlestick looks like a cross, inverted cross or plus sign. The word "Doji" refers to both the singular and plural form.When a doji forms on your chart, pay special attention to the preceding candlesticks.
If a doji forms after a series of candlesticks with long hollow bodies (like white marubozus), the doji signals that the buyers are becoming exhausted and weakening. In order for price to continue rising, more buyers are needed but there aren’t anymore! Sellers are licking their chops and are looking to come in and drive the price back down.
Keep in mind that even after a doji forms, this doesn’t mean to automatically short. Confirmation is still needed. Wait for a bearish candlestick to close below the long white candlestick’s open.
If a doji forms after a series of candlesticks with long filled bodies (like black marubozus), the doji signals that sellers are becoming exhausted and weakening. In order for price to continue falling, more sellers are needed but sellers are all tapped out! Buyers are foaming in the mouth for a chance to get in cheap.
While the decline is sputtering due to lack of new sellers, further buying strength is required to confirm any reversal. Look for a white candlestick to close above the long black candlestick’s open.
The advantages of candlestick charting are:
1. Candlesticks are easy to interpret, and are a good place for a beginner to start figuring out chart analysis.
2. Candlesticks are easy to use. Your eyes adapt almost immediately to the information in the bar notation.
3. Candlesticks and candlestick patterns have cool names such as the shooting star, which helps you to remember what the pattern means.
4. Candlesticks are good at identifying marketing turning points – reversals from an uptrend to a downtrend or a downtrend to an uptrend.