Here Are 7 Things to Know About Candlestick Patterns:
- Different markets create different candlestick patterns due to the various market participant groups who trade or invest in that market. FOREX candlesticks will be different than stock candlesticks, or commodities, or bond candlesticks. Index and ETF candlesticks will be very different from what forms on individual stocks. This is because indexes are a value, not true price. The value is based upon a formulation and averaging of the securities that are the components for that index or ETF.
- The original Japanese candlestick patterns were developed from the 1600's for the Rice Commodity Exchange of that era. Trading commodities is different than trading stocks or any other financial market. In addition the type of persons trading the rice commodity market of old Japan, were not the same type of market participants we have in our modern automated marketplace. That means that many candlestick patterns that form now did not form back then.
- Candlestick Patterns are evolving and changing as our market structure continues to evolve and change. Identifying the new patterns that are reliable and consistent is important.
- It is not just today's candle that matters, it is also understanding the relationship between what candles have formed recently and what has formed in the past few weeks or months. Without a relational analysis the patterns become less reliable and less effective as entry signals.
- Candlestick Patterns are more than just a confirmation of a trend or run, they are also defining the type of support and resistance, where to place stop losses, the correct entry pattern for a particular stock, the run or target gain potential of the trade, and the risk versus profit potential of the trade. All of this information makes the difference between a highly profitable trade and chronic losses using candlestick analysis.
- Each market participant group creates a different pattern and trend when they are in control of price. This is one of the most valuable pieces of information proper, modern candlestick analysis can provide a trader or investor. When you know who is in control of price, you can anticipate what type of price action will occur next.
- Market Condition Analysis is based partially on what types of sideways, uptrend, or downtrend candlestick formations are developing in a large percentage of charts. This information is vital in choosing the right buy signals, the correct trading style to use, and to prepare for the next price action.
