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Candlesticks – Forget Candlestick Patterns – This is All You Need To Know

Understanding candlestick patterns goes far beyond remembering and recognizing certain formations. Many books have been written about candlestick patterns, featuring hundreds of different formations that supposedly provide secret information about what is going to happen next. Truth be told, it will make no difference to your trading performance whether you know what the Concealing Baby Swallow, Three Black Crows or Unique Three River Bottom are. If you learn to how read candlesticks and price action, you can really take your trading to the next level and understand much better what your charts are telling you.

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Candles Tell You a Story

Candlesticks are just a different way of visualizing what is happening on your charts. But once you can read why and how candlesticks manifest on your charts, you can act and trade detached from pre-defined and arbitrary patterns, reading sentiment and momentum straight from your charts. In the following we take a look at the things that candlesticks tell you and how to read them.

 

How to Read Candlestick patterns: The 5 x 5 of Candles

One of the most important things candles tell you is whether Bulls or Bears are winning the game and, what might even be more important, by how much. But understanding the story of price goes further than checking whether a candle is black or white; to fully understand market sentiment you have to analyze the following five elements of candlesticks:

 

  1. The length of wicks/candles

The length of wicks and candles can give you direct information about volatility. Longer candles imply greater volatility.

 

  1. The ratio between bullish and bearish wicks

When price moves down and gets pushed back up, it leaves a long wick to the downside. That can signal that bearish strength is not enough to keep prices down.

 

  1. The position of the body

In addition to the previous point, it is important to analyze the position of the body. Does the candle have a long wick to downside and is the body at the very top of the candle, it can signal greater strength than a body in the middle of the candle. In contrast, does the candle have long wicks to both sides and is the body positioned in the middle of the candle, it indicates indecision and equal power between Bulls and Bears.

 

  1. The size of the body

A rule of thumb is that the larger the body, the stronger the signal it provides. A large body indicates that price moved a great distance between the open and the close of the candle.

 

  1. The ratio between body and wicks

Is the body of the candle large, whereas the wicks are small, it shows that price moved from the open to the close without much volatility to either side. Small wicks and a large body are a sign of strength. In contrast, long wicks and a small body indicate indecision and equal power between Bulls and Bears.

 

If we combine the previous five points, we find that there are five possible scenarios what candles could tell us: (1) Strong bullish power, (2) Strong bearish power, (3) Bears tried to force price down, but Bulls managed to conquer, (4)  Bulls tried to force price up, but Bears managed to conquer (5) Bears and Bulls have equal power.

 

 

bearbull
click to enlarge

 

All candlesticks formations are made up of these five scenarios, combining the five previously described elements of candlestick information. By understanding the 5 x 5 of candle elements, you are well equipped and do not need to remember any candlestick pattern since they are all a combination of them.

The actual visual formatting of candlestick charts on trading platforms such as MT4, Ninjatrader and JForex can differ, but the fundamentals of  5 x 5  will equip you with the ability to understand all scenarios on the charts.

 

Demystifying Candle Patterns

We showed you that it is not necessary to remember any candlestick formation if you understand the 5 x 5 candle elements previously discussed. To illustrate further how candlestick patterns are constructed, see the following graphic. As you see, an engulfing candlestick formation is therefore nothing but a pinbar/hammer when you add up the two engulfing candles.

 

candlescombine
click to enlarge

 

More important, this is just one example of how candles are created and when you understand how to read price and candles, you will notice that there is no need to remember any more candlestick formation whatsoever.

 

Conclusion: No Need For Candlestick Patterns

With this article we want to show you that you do not have to learn any candlestick formation. When you understand the 5 x 5 of candlesticks, you know everything you need to know about candles. The 5 x 5 enables you to read every possible scenario that you can find on your charts.

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32 comments

  1. Good stuff. I never understood the need to learn all those arbitrary patterns and names… I wish you could elaborate a bit more on the last point, how an engulfing bar is nothing but a pinbar if you put them together. I find this very interesting…

  2. I printed your graphic out and put it next to my trading computer. I find it is a great idea with the 5 elements of a candle. Makes so much more sense than remembering all the weird patterns 😀 😀

  3. I like your point of view, but many people who are trying to sell price action courses won’t be happy that you found a way to describe it so simple. Good job!

  4. You are such a good instructor !

  5. Hi Rolf, could you explain more how correctly do the candle math. I have seen a video from a different source but I did not grasp it completely. I still struggle multiply multiple candles, lets say 7 – 10 of them. Thank you.

    • Hello Serge,

      what do you mean exactly with candle math? I’m happy to help out if you let me know what you have problems with.

      Rolf

  6. Hi Rolf, This candle vs bar charts argument seems to be such a contentious issue.
    If I follow you correctly, you are telling us candles are not necessary but simple OHLC are better.
    Thanks for the great site.

    • Hi Ric,

      that’s absolutely right. Just looking at candles alone you will miss a lot of information but if you look at the environment and the candle context, you can get a much better picture.

      Rolf

  7. Hi Rof!

    I am mighty impressed!!! Something fuggy turned to be Clear as a sunshine day…
    What about the Fibonaccy trading, or the Bolinger Bands? Not needed?

  8. I think we still need those candle pattern to support why we say that..to read pattern its critical important because you need to know where was it maybe 3hours ago .to make key support.

    • Agreed! But it’s more important to understand what the candle tells you than remembering the name of a pattern. Most candles don’t come in textbook form so it’s critical to be able to read price.

      Rolf

  9. Hello Rolf,

    Have you heard of a guy called Steve Nison – “father of candlestick patterns” ? what do you think of him?

    I trade 30sec binary options using candlestick patterns & S&R and would value your tips on making this a success.

    Regards

    Kenn

    • I have never heard of him and I also dont have any experience with binary options.

      Rolf

      • Rolf well I am surprised you admit to never having heard of Steve Nison. Up until the 1980s no one in western financial circles had even heard of Japanese Candlesticks yet alone use them. They’ve been in use for 300+ years in Japan.
        It was he, who first introduced them to the west. Now every charting platform worth it’s name has candlesticks embedded de facto. His training courses are far too expensive for me, but there you go. Love this site though.

        – Going to try and get my head around your Ichimoku clouds tutorial. Makes you feel like a kid in a toy shop when you see it open your chart up into the future months.

        Absolutely loved your 5×5 candlestick graphics and text. So much so that last year ( like others) I cut and pasted as appropriate using a dtp program to print off on to two sides of one sheet and encased in a plastic see-through sleeve where it resides on my work desk permanently. I never fail to be utterly amazed on a continual basis, by the incredible spookily predictive powers of candlesticks. Never!

        • PS. Meant to add – Photos of Steve Nison can easily be mistaken for Groucho Marx 🙂

          Groucho who? Oh you young un’s!

        • Hello Velo,

          I will definitely check him out and do a search. I agree, if a trader knows how to read candlesticks (and any price formation) in that regard, it can have high predictive power. Most people just never go beyond the common articles and “tips” that you can ready everywhere.

          Rolf

    • Kenn, Rolf has some good points on how to read the candles themselves. I assume you are scalping so I would learn to recognize a few candlestick reversal patterns and add a simple BB to your 30sec chart or 1min chart. When you get a reversal pattern at the BB and its at your S&R you will have a high probability setup to scalp the option off the bounce on a reversal trade. Obviously, you need tight spread and low commission but I am sure you have that figured out.

  10. sarath udaya kumara Mahakumburegedara

    Very important details i grabbed.Excellent describing. Thank you very much.

  11. Seems like a great strategy have to try it. what about the middle of trend two bull candles side by side with slight variations or bear candles?can i follow trend, building candles out of two bull candles or bear candles

  12. How do you add up the two engulfing candles in detail.

  13. Great site and great info. Takes away all the mysteries from candlestick patterns and make it logical.
    But can you guys shade any light on how to get started with strategies testing on MT4 platform? I’m a novice and would like to figure out which indicators are good to use with the candlestick patterns, and how to choose what parameters as the input for various indicators. Any help would be most and warmly appreciated. Many thanks in advance.

  14. I asked universe to get me the best possible way to understand the candle stick concept & I found ur article thank you for your worth contribution bro.. you explained in a most convincing way.. GOD BLESS U..

  15. Hi Rolf, I fully agree with your explanations about candlestiscks. I have been saying the same in all my trading coachings. Moreover, for those who prefer to stick with all the classical patterns (more than 100, quite a lot to learn), don’t forget that for every pattern, a confirmation is needed. On the contrary, if one learns how to understand the market psychology behind the candle, the confirmation is not necessary. In my las t book on Ichimoku trading, I wrote a chapter about what I call ” market dynamic reading” which goes a little further than Rolf example : it consists of reading the construction of the candle not only the final result. I found out that it’ s useful to see how a candle is built. For example, on a H4 timeframe, one has to split a hammer by looking at H1 timeframe (4*1) to see if the wick was built at the beginning or end of the candle or was it progressive. It makes the difference to understand which from the sellers or the buyers are in control. And it’s really powerful on very short time frame.
    I never learnt the clasic candlesticks patterns when I found out that most of the time I can’t rely on it, above all on short term trading.
    To be a successful trader, the simplest is the easier and more rewarding such as Rolf’s trading. I am an ichimoku expert and the best line to watch in the system is the Kijun which is not far from the MMA 20 used by Rolf. The other lines are just to find out Support/ Resistance and equilibrium in the market such as Rolf’s BB.
    Congratulation for the quality of this website.

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