I often get asked, "Where do I start when learning candlestick patterns and what candlestick patterns do I really need to know?"
That’s a very logical question, and there are some patterns that you must know. I am a firm believer in knowing and understanding all the common 28 candlestick patterns that are reviewed in our advanced training material, but of course that takes time and you need a starting point. I would not consider using candlesticks to trade without a clear understanding of at least ten candlestick patterns.
I think it works well to start with the basic single candlestick patterns.
There are two neutral patterns:
- The Doji
- The spinning top.
There are also two candlestick reversal patterns:
- The hammer
- The shooting star.
These are usually the first candlestick patterns people learn because they are so easy to identify on a candlestick chart. The big mistake that people make when they are first learning these patterns is not taking into consideration the context of the total candlestick chart. A Doji in a downtrend is much less important than a northern Doji. A hammer shaped candle that is not in a downtrend is not a hammer, it could even be a hanging man depending on the chart. Where these candlestick turning points develop is as important as the patterns themselves. The goal of using the candlestick patterns is to increase the odds of a trade, and an improper reading does just the opposite.
There are six two candlestick patterns that must also be understood to see many of the turning points in the markets.
- The Bullish and Bearish Engulfing pattern
- Piercing and Dark Cloud cover
- The Bull and Bear Sash patterns
Understanding the context in which they are identified is also critically important in all candlestick patterns. The engulfing patterns are a strong reversal with a candle totally engulfing the prior candle, although doesn’t give these patterns greater odds of success. The odds for success depend on the totality of the candlestick chart and the other western indicators, as well.
You must also be aware that all of the multiple candlestick patterns have a slight nuance in the Forex charts. The other four patterns are very common and identify market turning points extremely well.
There is a Candle Glossary located in the bonus section of candlecharts.com, and many of our tools such as the Chart of the Day can help you with a proper understanding of all of these candlestick patterns.
The level of success you reach using these candlestick patterns is also determined by your trade management. The use of proper stop losses and identifying a good time to take your profit on each of your trades is extremely important. The stop loss is very easy when you are entering positions by way of a candlestick reversal patterns because they all have support and resistance levels. Taking profit on a successful position is one of the more difficult parts of trading.
I have briefly talked about 10 of the 28 common candlestick patterns. If this is all that you know, it’s like playing golf with half your clubs and you may not do too well considering that you are really playing against other very good and well educated traders who have a full bag of clubs.
But you have to start somewhere and these 10 candlestick patterns are a good starting point. Start with these; understand the patterns, the psychology and the proper context, but always keep learning.
New to candlestick charts? Check out Steve’s FREE video introduction on Candlestick Charting here.