5 Actionable Inshigts to Improve Your Candlestick Analysis

Candlesticks are the most popular charts used in the financial market because they provide more data compared to other types like line, bar charts, and renko.

When used well, these charts can help you identify trade opportunities. We can safely say that if you master this type of chart, and the tools we will look at later, you should have no problem making profits.

In this article, we will explain what candlestick charts are and some of the best ways to improve your candlestick analysis.

What are candlesticks?

Candlesticks are types of charts that are common in the financial market. They originated in Japan many decades ago. Candlesticks are useful because they provide all details that a trader needs to make a decision on whether to buy or sell an assets.

These features are known as OHLC. O is for open, H for high, L for low, and C for close. O is the price where the asset opens at while H is the highest point. L is the lowest point during the specified period. Finally, C is the closing price.

Therefore, looking at a candlestick can provide you with all these information. A line chart, on the other hand, looks at the closing price of the asset.

The chart below shows OHLC of Apple shares on the daily chart.

What are candlestic patterns?

It is impossible to talk about candlesticks without mentioning candlestick patterns. These are patterns that are used widely by traders to make decisions about whether to buy or sell a financial asset.

Some candlestick patterns signal that a new bullish move is about to happen. Examples of the most popular bullish candlestic patterns are bullish engulfing, hammer, doji, and the morning star.

Other patterns, on the other hand, are usually signs that a new trade is about to happen. Some of the most popular bearish candlestick patterns are evening star, bearish engulfing, and three dark crows among others.

When these patterns happen, they increase the possibility that the asset will start a new bearish trend.

What are chart patterns?

Candlestick patterns are often confused with chart patterns. On the one hand, candlestick patterns are often formed by two or three candles (sometime, one single candle is enough).

Chart patterns, on the other hand, are formed over time. At times, some patterns can take a few months to form.

Chart patterns can be bullish or bearish. Examples of the most popular bullish candlestick patterns are:

among others.

On the other hand, some of the most popular bearish candlestick patterns are:

among others.

How to improve your candlestick analysis

There are several things that will help you improve your candlestick and chart analysis. Let's dive into some of the most popular ones.

Read and understand these patterns

The first thing that you need to do is to read and understand how these patterns work and how they are formed. You can use our content at DTTW™ to learn more about how these patterns form and how to interpret them.

Related » Which Chart Patterns Are Good for Scalping?

Another way is to use a candlestick cheat sheet such as the one shown below. As you become more experienced, your use for the cheat sheet will be minimal.

Bullish Candlestick Patterns Cheat Sheet

Conduct multi-timeframe analysis

A common mistake that people make is to open a chart, see a candlestick pattern, and then make a decision using it.

In most periods, doing this is wrong and could send mixed signals. Instead, you can solve the challenge by using a concept known as a multi-timeframe analysis.

This is a type of analysis where you look at several chart timeframes before you make a decision. For example, if you are a day trader who focuses on the 5-minute chart, you should first look at the 30-minute chart followed by the 15-minute one.

Doing this will help you understand the overall outlook of the financial asset before you execute a trade.

Always have a catalyst

The next key thing to consider when looking at candlestick analysis is a catalyst. You should always have a catalyst when you are doing this type of analysis.

There are many types of catalysts when you are trading stocks and other financial assets like currencies and commodities. Some of the most popular catalysts are:

  • Corporate earnings - Quarterly earnings are useful catalysts because stocks tend to rise or fall sharply after they publish their financial results. You should always look at these catalysts.
  • Mergers and acquisitions - Stocks tend to react differently when a M&A deal is announced. In most cases, the companies being acquired tend to rise and vice versa. But these gains tend to be limited.
  • Geopolitical risks - Some stocks tend to rise or fall when there are geopolitical risks. For example, oil and gas stocks like Shell and BP rose sharply after Russia invaded Ukraine in 2022.
  • Management change - At times, stocks trade differently when there is a new management or when a beloved CEO steps down.
  • Analysts call - Stocks tend to react to analysts calls such as upgrades and downgrades.

Relative volume

You should always look at the relative volume when making a decision of whether to buy or sell an asset. Most websites provide the current volume of an asset and the average in a certain period.

For example, if a stock is rising sharply on low volume, it means that the gains will likely be not sustainable. It could be a dead cat bounce. Therefore, you should always look at volume flows when entering and exiting trades.

Wait for confirmation

Another important tip to use is to always wait for a confirmation. As such, when you see a pattern like a hammer, you should wait for it to confirm that a bullish breakout is about to happen. One way of doing this is to set pending orders like buy stop and sell stop.

Summary

In this article, we have looked at some of the most important things to consider when looking at candlestick patterns.

As a trader, you will always encounter these patterns. Using these tips will help you make better decisions and avoid popular mistakes that people make.

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