Content source: Wechat public account Huiclassroom
Candle charts are the core thing in foreign exchange charts, so naked K traders who focus on price action have been achieved.
However, many traders have not grasped the essence of candlestick charts, but have devoted themselves to technical indicators.
So today Hui Class would like to share how professionals look at candlestick charts and the misunderstandings in the application of candlestick charts.
How to Read Candlestick Charts
Whether you are trading with technical indicators or chart patterns, if you are good at reading candlestick charts, your trading realm will be higher. Professionals look at candlestick charts and mainly analyze these three points:
①The real part of the candle chart
The length of the real body determines the extent to which the market is being controlled, with a very long real body indicating that sellers or buyers are controlling the market with absolute dominance. For example, a long white body tells us that the buyers are strong and are controlling the market.
②The hatched part of the candle chart
The length of the shadow line indicates the size of the price fluctuation, the upper shadow line is the record of the price fluctuating upwards, and the lower shadow line is the record of the price fluctuating downwards.
③The ratio of candle chart entity and shadow line
The ratio of the real body to the shadow line determines the direction of the candlestick chart. There are three common types: The figure below shows the ratio of different white candlestick entities and shadow lines.
In the candle chart on the far left, the real body is very long, indicating that the buyer is controlling the market, while the shadow line is relatively short, and the length of the upper and lower shadow lines is similar, indicating that the price fluctuation is small and the price will not fall too much.
In the candle chart in the middle, the body is shorter, indicating that the buyer is relatively weak, and the shadow line is relatively longer, but the length ratio of the upper and lower shadow lines is similar, so the market cannot be determined.
On the right side of the candle chart, the body is medium in length, buyers control the market to a certain extent, but the shadow line is longer than the body, and there is only a lower shadow line, indicating that the market rejected the price drop and closed at a high price.
The chart above shows different black body and shadow ratios. The candlestick on the left has a long real body with a short upper wick, showing that sellers are in control of the market. The candlestick in the middle has a short entity with a relatively long shadow line, and the proportion of the upper and lower shadow lines is similar, so the price is more hesitant and the market direction is not clear. The candlestick on the right has a short body with a long upper shadow, indicating that the market price rejected the high price and closed lower.
The above is the market information that should be understood by looking at the specific candle chart. The color and size of the entity indicate the strength of sellers and buyers. The hatched line indicates the high or low point that the market price has reached. Combined with the closing price, the market direction can be seen.
Misunderstandings in Candle Chart Application
Classic candle charts have some bullish and bearish patterns, but it is easy to make mistakes when applying these patterns. For example, using candle patterns to trade alone, doing long when encountering hammer lines, and shorting when encountering shooting star lines, it is difficult to make money.
Because the candle chart pattern is not a set of trading strategies, it only provides the conditions for judging the direction, but it does not have elements such as combining market structure and analyzing entry opportunities with the help of support and resistance levels.
As shown in the figure below, in the USD/CAD chart, the marked candle patterns are all bullish, but the market trend is downward, so we cannot blindly regard the candle pattern as a trading strategy alone.
But it can be used in combination with other technical indicators, such as moving averages, Fibonacci, etc.
Validating an invalid candle pattern with the 21 SMA and Fibonacci retracement on the EUR/USD chart below. The first bearish candle pattern, but the market price is above the moving average, so it is not suitable for shorting; the second is a bullish candlestick pattern, and the market price is in an upward trend above the moving average, and the price is supported by the 61.8 support level, so it is Effective. The third candlestick pattern is also valid for the same reason.
The above is today’s sharing. Learning the most basic candlestick charts can make your trading more superb, but learning candlestick charts alone is not enough. Any technology has advantages and disadvantages. Learning to combine applications flexibly can improve trading results.
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