Lesson 4 | Don’t Use Candlestick Patterns! Do this Instead – Trading coach (2024)

FAQs

Is candlestick pattern enough for trading? ›

Candlestick charts are useful for technical day traders to identify patterns and make trading decisions. Bullish candlesticks indicate entry points for long trades, and can help predict when a downtrend is about to turn around to the upside.

INTERPRETING A CANDLE ON A CANDLESTICK CHART

the price declines the candle will turn red. upper wick/shadow it means that the open price or the close price was the highest price traded. bullish candle. price is above the open price the candle will be green/blue (also depends on the chart settings).

If the upper wick on a red candle is short, then it indicates that the stock opened near the high of the day. On the other hand, if the upper wick on a green candle is short, then it indicates that the stock closed near the high of the day.

The "5 candle rule" is a trading strategy where traders wait for five consecutive candles to confirm a trend or pattern before making a trading decision.

Candlesticks are great forward-looking indicators, but confirmation by subsequent candles is often essential to identifying a specific pattern and making a trade based on it. In particular, candlestick patterns frequently give off signals of indecision, alerting traders of a potential change in direction.

Traders use candlestick charts to determine possible price movement based on past patterns. Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period the trader specifies. Many algorithms are based on the same price information shown in candlestick charts.

A hammer is formed at the end of the downtrend. This candlestick indicates that the sellers have had selling pressure, but buyers won the game by pushing the price upwards. After the formation of the hammer, the next candlestick could be a green candle.

A short upper wick on a red candle suggests the stock opened near its daily high. Conversely, a short upper wick on a green candle suggests the stock closed near its daily high. In summary, a candlestick graph presents the relationship between a stock's high, low, opening, and closing prices.

A good rule of thumb is to let your candle burn at least one hour per inch of container diameter. For instance, if you were burning a brand new luxury candle from the Harlem Candle Co., you should let it burn for at least 3 hours during the first time because the container diameter is around 3 inches.

Time frame suitable for novice traders is between 10.15 am and 2:30 pm. But due to the subsiding of the morning stock volatility time frame between 10:00 am to 10:15 am can be ideal to grab any opportunity.

What is 3 candle rule? ›

The three candle rule is when three consecutive bullish candlesticks form the three white soldiers pattern.

While candlestick patterns offer insights into market psychology and can indicate potential price movements, they are not foolproof predictors of future trends. Market conditions can change rapidly, rendering previously reliable patterns less effective.

The success rate of candlestick patterns can vary depending on the pattern but generally hover around 54-60%. The most successful is the Inverted Hammer, which has a 60% success rate. It also has an average profit potential of 1.12% per trade.

Candlestick patterns focus on individual price bars, typically representing short-term price movements within specific timeframes (e.g., minutes, hours, or days). Chart patterns analyze a series of price bars or candlesticks over a more extended period, often focusing on daily, weekly, or even monthly data.

For day trading, the most reliable candlestick pattern is the Doji pattern, as it indicates indecision in the market and could potentially signal a reversal or continuation of the existing trend.