Candlestick Patterns: The Problem
The problem is that there are so many patterns out there!
you have the:
- Three white soldiers
- Bullish engulfing
- Shooting star
- Hammer
- Harami
- Doji
And if you memorize all this, you know it’s a matter of time before you get overwhelmed!
But really…
Memorizing patterns is not the way to trade the markets.
So, what’s the solution?
Candlestick Patterns: The Solution
Every time you look at Candlestick patterns and you are not sure what it means…
Ask yourself these two questions:
- Where did the price close relative to the range?
- What’s the size of the candlestick pattern relative to the previous ones?
Let me explain…
1. Where did the price close relative to the range
The power of this question will tell you who’s in control.
Is it the buyers who are in control? The sellers? Or nobody is in control?
Here’s how this question works:
If you look at this green candlestick pattern, it tells you that the price has closed higher.
However…
Do you notice that there is no low wick?
Well, that’s because the opening price is also the low of the day!
Now, notice that there is an upper wick over here:
What does it mean?
It means that this green candle closed near the highs of the range.
But you might be thinking:
“Wait a minute, what exactly do you mean by a range, Rayner?”
Ah, of course.
Let me quickly explain.
The range simply is the distance between the highs and the lows:
That’s it!
But again, notice that the price closed near the highs of the range.
This tells you who’s in control!
And who’s in control?
The buyers!
Why?
Because they can close the price near the highs of the range!
Alright, let me give you another important example to make more sense of this question:
Yes, it’s still a green candle and the price still closed above the opening price.
But let me ask you:
Are the buyers still in control?
Again, just use this question: Where did the price close relative to the range?
As you can see, the price closed over here:
Now, we are seeing a different picture than the previous example!
Why is that?
Because now you realize that the price only closed marginally higher relative to the range.
What does it tell you?
It tells you that at one point in time the buyers are trading near the highs just like the example I showed you a while ago:
But before the candle closes, the sellers came in and pushed the price all the way down until the candle closes:
This tells you that there is selling pressure lurking around; it is a sign of weakness.
So, to answer the question…
It should tell you that the sellers are in control.
Makes sense?
So, here’s the second question…
2. What’s the size of the pattern relative to the earlier ones?
This question tells you whether there’s a real strength behind the move.
Let me explain.
If you look at this chart:
Notice that it is currently on a retracement and it has made a bullish close.
It tells you that the buyers are in control!
But if you look at the most recent candle over here:
Relative to the earlier candles, you notice that the range of this candle doesn’t signify much.
It’s not large compared to the earlier candles!
This should tell you that there isn’t any strong buying conviction behind this candlestick move.
However, if you look at this chart over here, look at the size of the candlestick relative to the earlier ones…
This tells you now that not only on the buyers in control but there is also strong conviction behind the move!
Can you see where I’m coming from?
So, once you understand these two questions, then you pretty much can read any candlestick patterns you come across.
Now, before we end today’s training guide he’s a bonus lesson for you…
