In the previous article I talked about the candlesticks basics. About the most important things that a new trader should know about candlesticks.As I said candlesticks for me it’s not a stand alone strategy to make money but every trader should know how to read them and use them as confirmation to his trades. Personally, I use canlesticks in my charts because they give you a good picture of how the price moves. Where is the open, the close, the high,the low. A good question for the new traders and the next step is why the candlesticks have the shape they have. This is the most important part for me.
As I said in my previous article the most important candlestick patterns for me are the engulfing (bullish or bearish), the shooting star and the hammer. I will expain you why these patterns are so important.
This chart is from EURUSD currency pair and in the blue rectangle we have a bullish engulfing candlestick pattern. It’s also a support level. The price hit the support and there is a big green candle that engulfs the previous red candle. Now look at the volume. In the green candle there is more volume the the previous red candle. The difference is big. What does this mean?It’s all about people psycology because people are trading.So, there is a previous support. The price is moving down and coming closer to this support. Some of the sellers are afraid of this level and they start buying or closing their positions.So,the volume is decreasing while the price is getting closer to the support. Possible buyers are preparing for their enter and finally BAM!Sellers dissapeared or they start taking buy positions and the new buyers are in the game. The new candle engulfs the previous with more volume. New possible buyers see this situation and they want to get in early. You can see that the volume is increasing and the price is moving to higher levels. This is the area you should enter with a call.
Now look at this chart. It’s again from EURUSD currency pair.Inside the blue rectangle there is a hammer bullish candlestick pattern. Small body,big wick hit the red horizontal line which is our support.What does this mean?There is a support here. The sellers who are driving the price now want to break this support. So, they are selling heavily and they are driving the price to the support. The buyers in this case are stronger because after the hit in the support they are driving the price up now and that’s the reason we have the big wick.This means that the sellers with all their strength hit the support but they didn’t break it because the buyers were stronger and won this battle. Now, the sellers are really exhausted and it’s possible that the buyers will drive the price from now on. So, it’s a good opportunity for calls.