Among the most traded charts is the Japanese Candlestick. This is for the reason that it is easy to interpret and provides a visible view of the market movement – whether it is ranging or trending. With the Japanese candlestick, each candle will be telling a story. Having to interpret these candles correctly greatly improves one’s trading skills. In this article, we’ll share with you the frequently traded candlestick patterns on Pocket Option. We’ll also share with you some techniques and strategies on how to trade these patterns for better chances of success.
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What are Candlestick patterns?
For us to understand how to use these candlestick patterns, we must understand the basics. So, what are candlestick patterns? First of all, candlesticks are price charts that are used in technical analysis. It shows the highs and lows, as well as the opens and closes of a market at a particular time frame. The history of its use dates back to the old Japanese era when rice merchants along with traders used candlesticks to track prices and the daily momentum of their goods.
The wide or thick part of a candle is the body often called the ‘real body’, while the thin part on its ends is called the ‘wick’ or sometimes called ‘tail’. There are two types of candles – the bullish candle, and the bearish candle. The bullish candle is represented by a green candle and is a signal for a ‘bullish’ or uptrend market. On the other hand, a bearish candle is represented by a red candle and is a signal for a ‘bearish’ or downtrend market. For a bullish candle, the opening price would be located at the lower end of the body, while its closing price would be located at the upper end of the body. The bearish candle on the other hand has an opening price located at the top end of the body, while the closing price is located at the lower end of the body.
Candlestick patterns can be comprised of a single candlestick or a collection of candlesticks in a particular time frame. It represents the movement of a price range within a chart in a time frame. Traders refer to candlestick patterns in order to forecast the possible next movement of a price. While there is no solid proof that candlestick patterns can determine the future of the market with 100% accuracy, they can provide good estimates as to the next price movement when interpreted and evaluated correctly.
Now that we understand what a candlestick and candlestick pattern is, let’s have a look at some of the frequently used candlestick patterns on Pocket Option and how to use them on actual charts for better chances of winning a trade.
Frequently Traded Candlestick Patterns
Here are some of the most frequently traded candlestick patterns on Pocket Options.
The Marubozu Candlestick Pattern
One single candlestick pattern that is easy to spot on a chart is the Marubozu candlestick pattern. This pattern is easy to find because the candle has a solid body with little or no wicks at all. This candlestick pattern usually appears on a chart that has high volatility and can be located at the middle of a trend or at its end. Also, this pattern may be a result of strong fundamentals or news about the particular asset.
To trade the Marubozu candlestick pattern, you’ll have to consider the trend of the market and the location of the pattern on the chart. When a bullish Marubozu pattern shows up during a strong uptrend, it signals a possible trend continuation where buyers are dominating the trade. The ideal entry point in this situation would be at the close of the bullish candle. On the other hand, if you’re dealing with a bearish Marubozu pattern on an uptrend, it could signal a trend reversal. The ideal exit point for this situation would be at the close of the bearish candle. The same goes with the pattern showing up on a downtrend. Ideal entry and exit points would be at the close of a bullish candle, and the close of a bearish candle respectively. For other traders, they wait for a confirmation candle after the pattern to make certain the trend direction.
Spinning tops
As its name suggests, the pattern of the spinning top shows an image of a top – with small bodies and small tails or wicks. This is a common single candlestick pattern that shows indecision within a market. This signals that one side is getting stronger than the other. The Spinning tops pattern is commonly a sign of trend reversal.
To implement the spinning top on the actual chart, consider the trend as well as the dimensions of the candles before the pattern formation. Thinning candles are usually signs of trend reversals. For a bullish trend, the formation of a spinning top at the end of the trend signals a possible trend reversal. Verify the reversal through the series of thinning candles. The ideal exit for long trades would be at the tip of the top’s body. The same goes with a spinning top that appears on a bearish trend. Ideal entry for long positions would be at a price that’s the same as the top’s body.
Doji
Another candle that signals indecision among traders in the market is the Doji candle. Although this pattern involves only one candle, it’s a significant signal for many traders. Its form looks like the letter ‘T’ for a bearish Doji and an inverted ‘T’ for the bullish Doji. Now to implement the Doji candle on a chart, let’s have a look at some of its variations.
Neutral Doji
The Neutral Doji as its name suggests shows neutrality in the chart where both buyers and sellers are at a stalemate. Its form looks like the plus sign with almost equal lengths of tails on both ends. Ideal entry or exit points for the Neutral Doji would be at the end of the tail.
Long-legged Doji
Another form of Doji candle is the Long-legged Doji which also signals indecision in the market. Its form shows a cross with one tail longer than the neutral Doji. And just like the Neutral Doji, the opening and closing price meet at the same level – showing indecision. Although this signal can have the same interpretation as the neutral candle, the longer lengths of tails show the higher volume of buyers and sellers involved. To trade the Long-legged Doji, enter or exit a trade at the ends of the tails. As a safety measure, you can simply wait for a confirmation candle after the pattern.
Dragonfly Doji
The next type of Doji is the Dragonfly Doji which forms a capital letter ‘T’. It is not very common to see this type of Doji candle on a chart but when it appears, it signals trend continuation. At the formation of this pattern, bears have a good start however bulls pour in to push the price further up. This pattern usually shows up at the end of a strong uptrend. The ideal entry point for this pattern would be at a price level above the closing price. The ideal stop loss level would be below the tail.
Gravestone Doji
The counterpart of the Dragonfly Doji is the Gravestone Doji with an inverted capital letter ‘T’. At the formation of this pattern, bulls were at the advantage at the beginning however the bears took over the market at the end. This pattern usually shows up at the end of a bullish market or uptrend. To trade this pattern, sell or go short at the close of the candle.
Hammer
There are two types of hammer candles, the first is the bullish hammer and the bearish hammer. The bearish hammer shows a candle with a small body found on top with a long-tail hanging below. This signals trend reversal from a bullish trend and the ideal exit for long trades would be a level below the opening price.
The bullish hammer on the other hand is found on a downtrend market. This candle formation signals a trend reversal from bearish to bullish. Ideal entry for long trades would be at the closing price of the body.
Our final thoughts
Candle formations are a trader’s best friend. It gives them advice and shows them the possible future of the market. Of course, the accuracy of the forecasts from candlestick formations depends on how the trader interprets them. The best way to improve your accuracy for interpreting candlestick formations is through experience. A good way to gain experience trading in real-time markets is to make use of a demo account. A Pocket Option demo account will provide you with more than enough funds for you to practice your skills with candlestick patterns. As soon as you gain enough confidence trading candlestick patterns, you can then move on to trade real-time with live funds.
Enjoy and Good luck!