Transcription
Understanding Japanese candlesticks is crucial to your success as a Trader. Candlesticks show us the real, raw price action of a market, and they're a thousand times more effective at forecasting market directions than any indicator out there.
So, in this full course on Japanese candlesticks, I'm going to show you how to use candles to forecast market directions, view the battle between buyers and sellers, and take great trades so that you can start making some money from trading. And don't worry if you've got no experience on this topic just yet. I'm going to take you all the way from beginner to pro, so you don't need to know anything to watch this video.
So, what exactly is a Japanese Candlestick? Well, a Japanese Candlestick is this, and it's one part of a larger picture that is a Candlestick chart. Now, we'll come to Candlestick charts in one moment, but first, we're going to focus in on individual candles to explain how they work.
So, what a Candlestick shows is price movement within a specified time frame. So, if we selected an hourly Candlestick chart, one of these candles would show us how much price has moved within 1 hour.
Candlesticks are made up of two parts. We have a candle body, which is this part here, and we have candle wicks, which are the small sticks that come off the candles. The candle body shows confirmed price movement within the given time frame, whereas wicks show rejected price movement within the same time frame.
So, if we were looking at an hourly candle, this candle would show us that at the start of 1 hour, the market opened here, and at the end of the hour, the market closed up here. So, this is a price increase, or a bullish candle. Now, the wicks show us that within this hour, the market did actually go a little bit lower, but it actually didn't close that low. And it also shows us the market tried to go a little bit higher, but it came back down before the hour closed.
So, a Candlestick body shows us confirmed price, and Candlestick wicks show us rejected prices. Prices of which the market reached to but failed to close up.
Now, as you can see, we have two candlesticks here on the screen. One is green, and one is red. The green candle is a bullish candle, and that means within this time frame, the market went up. The red candle is a bearish candle, and that means that within this time frame, the market went down. So, the market opened here, and at the end of the given time frame, let's call it an hour, the market was actually all the way down here.
Now, on your chart, as default, these candles will be green and red, but you can put a custom color theme on it. It really doesn't matter. All you need to know is that there are bullish candles, which show a price increase, and there are bearish candles, which show a price decrease.
So, we know that candles show us price increases or price decreases. But why do we use candles over basic line charts? Well, that's because they give us extra information that we can't really get from any other type of chart. So, because candles give us an insight into the confirmed and rejected prices, we get a look into the buying and selling pressure that's in a market. And this is incredibly important for gauging who's in control of the market.
So, the markets move because of a battle between buyers and sellers. That simply means if there's more buying than selling, markets are bullish. If there's more selling than buying, the markets are bearish. Now, more than anything else in trading, candlesticks allow us to see this battle and see the pressure of the buyers and the sellers in real time.
Now, depending on the strength of buying or selling pressure in a market, the candlesticks will look different. So, sometimes a Candlestick will look like this, with a large body and very small wicks. Other times, a candle may look like this, with a small body and large wicks.
Now, these candles both tell us about the battle between buyers and sellers in different ways. This first candle, let's say it's a bullish candle, shows us that there is uninterrupted buying taking place. How do we know that? Because there's a big difference between the open and the close price of this market, which shows within this given time frame, the market was able to rally a lot. Now, the small wicks, these here, show us that there was very little resistance from sellers.
Now, if sellers had come into the market and pushed back against the buyers, we would actually see a big wick like this one, because that would show a rejection of prices, meaning when the market got up here, the sellers actually brought it back down. But with the market we're looking at first, that didn't happen. So, this shows us that the buyers are quite clearly in control.
Now, how would we use that information to our advantage? Well, we would obviously then just be looking to buy in this market. I'm going to show you some examples in just one moment as to how we can use the information I'm giving you now to take great trades and also to avoid taking bad trades. But first of all, let's take a look at this second candle.
So, this candle has a small candle body with an open and a close price close to each other, and then we have some huge wicks. So, these huge wicks indicate that there was a lot of selling pressure coming in from the top and a lot of buying pressure coming in from the bottom. So, whereas this candle here shows us a clear control from the buyers, this candle shows us indecision. Okay? Because we're seeing pretty much an equal level of selling coming in from the top here and an equal level of buying coming in from the bottom there. With the open and close price of the candle body very close to each other, it shows us that no ground was really made in either direction. We failed to go up, we failed to go down, we just fought and then closed at the same price as we opened at.
Now, wicks don't only show us indecision. Wicks can also show us a reversal. So, whereas we saw this here showed us a strong amount of buying pressure in the market because we have a clear, uninterrupted up move, wicks can also show us strong buying pressure, and that would look like this. So, we have a candle body with a large wick below and then a closure near the open.
So, what this wick down here shows us is that the market attempted to go lower into the hour, but somewhere down here, a huge amount of buying pressure has come in and pushed the market all the way back up, causing it to close around the price that it opened at. Now, this, as well, is also showing us strong buying pressure. But this is showing us strong buying pressure in the form of a reversal. Because we know at the start of this candle, the sellers were most certainly in control, but it was the buyers who were then able to bring the market back up and cause that buying pressure to kick in.
So, both the candle bodies and the wicks can show us buying and selling pressure and tell us whether the buyers are in control, the sellers are in control, or no one's in control and the market is in a phase of indecision.
So, I'll show you some live examples in a minute, but first, let's do a little quiz. What would this candle show? So, this is a bearish candle, meaning the open price is up here, here, and the close price is down here. What is that candle showing you? Well, that candle is showing you uninterrupted selling, which means the sellers are in control of the market. We have only small wicks, showing there's no resistance from buyers, and for the most part, the market has cleanly moved down with an uninterrupted price move, showing the sellers dominate in this market.
Next, what would this candle show you? If this was a bearish candle and the open was here and the close was here, and we had this large wick, what does that show us? Well, that shows us a shift in control from the buyers to the sellers. So, we had an open just here, the market tried to push up, and then it was brought all the way back down before closing lower than the open. Now, as we can see, the wick down here is small. So, this shows there wasn't really much resistance from buyers, and actually, the sellers were in control pretty much all the way from this top point here.
And now, what would this candle show? Well, this candle would show us indecision. We have an open price and a close price that is very close, close together. We have large wicks above, showing selling pressure, and we have large wicks below, showing buying pressure. So, we know at this point in time, no one is in control of the market. The sellers are kind of having a stab, and the buyers are having a stab, but no one is actually in control right now.
Okay, so that's the basics of how we use candlesticks to read momentum in a market. Big uninterrupted moves show clear control from buyers or sellers. Small candle bodies with wicks either side show us a phase of indecision where no one is in control, and very large wicks show us a reversal in control from either buying into selling or from selling into buying.
So, how do we use this information to win? Well, there's two ways we can use it. As I believe I mentioned before, first of all, we can use candle momentum to avoid getting into bad trades. This is one of the best ways that candles will save you from taking a whole bunch of avoidable losses. The second way is that we can actually use candles to add confidence or confirmation to our good trades.
All right, so we're going to look at two examples: a trade that I took and a trade that I managed to avoid losing on because of the Candlestick momentum. For these positions, I'm not going to look at any trade context except for candlesticks because it's important that you focus your attention on candles alone.
For the first example, which was a trade that I took and won, and here's the trade on MetaTrader, just so you know, I did. I was looking for a short from a supply zone, which was just here. That's all the context I'm going to give you for this one. Now, let's focus on the candles.
So, as we can see on the run-up into the supply zone, we had this phase here of strong, uninterrupted candles. Now, what does this show us? Well, leading back to what we just said, these candles show uninterrupted buying. Okay? So, we have a lot of candles with small wicks and large bodies. Now, because these candles are following on from each other, so we have one here, we've got one starting here, one starting here, this shows even stronger buying pressure because it's not just one candle that's strong with the momentum, it's multiple candles. Okay? So, obviously, at this point, with the market pushing with this much speed, I'm not going to want to sell here because we can see the buyers are clearly in control. So, if I have an idea to sell, I don't want to sell until control changes hands from the buyers into the sellers.
When we reached this high here, you can see the market actually stalled out, and instead of having those strong up candles, we shifted into a phase of indecision. So, when we discussed the indecision candles, what do we have? Small candle bodies, wicks either side. You can see pretty much in this range, we've got a lot of smaller candle bodies, and a lot of them have got wicks either side. There's no clear direction happening in this market at this point. We've totally stalled out, and all of this buying pressure has essentially left.
Then, following on from that phase of indecision, what happened next? Well, the market pushed up into the area that I wanted to sell, and then we started to see this very clear selling pressure coming into the market, indicated by these wicks. So, these wicks are showing us that sellers have came in here. The market's attempted to go higher and then being pushed lower by the selling pressure. The market once again attempted to go higher and got pushed lower by the selling pressure. This happened for a third time, and then we shifted from this phase of bullish, uninterrupted candles into a phase of bearish, uninterrupted candles. So, these two candles show a control by the sellers. The sellers have now taken control of this market, and we've seen the full reversal happen underway here. We started with strong buying, then we moved into a phase of indecision, then we attempted to go higher, and we saw the selling pressure kick in with these three large wicks, and then we've actually started to close lower with large bearish, uninterrupted candles, showing us the sellers are now in control of this market.
So, by reading just the pure price action and what the candlesticks are telling us, I was able to nail a good trade on this, and I sold from within this range, targeting the lows down here. As you saw from the screenshot I just showed you, and here it is again, it was a winning position.
Okay, so after I filled this first trade for a profit, which was from this area down to this area, I was looking once again for a second trade. I thought, okay, the market is now looking pretty bearish. We have this strong bearish momentum. We can probably look for a continuation lower, and I was looking for that continuation from a zone just in the high. So, what I was looking for in this example was a push up to this level, a trade into this level, and then for the market to push lower. That was the game plan, and that is how I wanted to trade it. However, what you're going to see in one moment put me off the trade, and this is how we use Candlestick momentum to avoid taking bad trades.
So, after ranging around a little bit at the bottom, we saw a nice selling candle, which looked good at the time. But following that selling candle, we had a huge bullish candle just here. So, what does this bullish candle tell us? Well, we can see that there was absolutely no attempt to go lower at the start of this bullish candle. So, we know immediately from the open of this hour, the buyers were in control. Then we had at the top, a reasonably sized wick, but the size of the body is obviously considerably larger. So, this shows total domination at this point from the buyers, from down here all the way to up here within the space of 1 hour.
Now, another interesting thing about this is we actually engulfed a whole bunch of price action here. Now, I'm going to explain to you the engulfing Candlestick pattern, as well as a few others, in a little bit. But basically, what this shows is the buying here, all the way to here, within 1 hour, was stronger than all of the previous price action that had been happening for around 15 to 20 hours. So, we know this buying is nothing to be ignored.
So, after seeing the strength of this bullish candle, I decided that my idea to sell from here was definitely written off, and that was not something that I was going to be looking to do anymore. And as you will see, this buying pressure foreshadowed what was to come next, because rather than selling off, the market pushed all the way up through that zone, and had I taken the position, it would have resulted in a loss. So, by simply reading this individual Candlestick, this one Candlestick here, saved me over $1,000 on positions that I would have executed, because it indicated a change in the momentum, and it showed me that the buyers had taken control of the market. If the buyers are in control of a market, do I want to sell? No. I should only be looking for buy trades in a market where buyers are dominating.
Now, I'm going to introduce you to the only three Candlestick patterns that you need to know. So, what is a Candlestick pattern? Well, a Candlestick pattern is something that looks like these on the screen. These are essentially patterns that are supposed to tell you when to buy or when to sell. There's probably 20 or 30 different candle patterns out there that some people subscribe to and try to use, but I find there's some big problems with candlestick patterns. The first being that these signals are going to come up everywhere. If you use an indicator that identifies Candlestick patterns and you run through price action, you're going to see many, many times that they show up and don't work. Another thing is memorizing 20 or 30 different patterns just gets so confusing. It's easy to mess up, and it will probably cost you money in the long run.
So, we're just going to focus in on three Candlestick patterns. That's all you need. And the candle patterns that we're going to be looking at are: number one, the pin bar. Now, a pin bar looks like this. It's a small candle body with an open and close price very near to each other. Then, on one side of the candle, we have a large wick. On the other side, we have a small wick. So, judging from what I showed you before, this basically shows us that selling pressure commenced at this level. So, you already know by this point, this is going to indicate a reversal. But we can actually use pin bars directly to get into trades. And when you add a couple of more things, this becomes a very strong way to trade.
So, with pin bars, we get both bullish and bearish pin bars. A bullish pin bar shows us a reversal from selling to buying, and a bearish pin bar shows a reversal from buying to selling. Here's a breakdown of a bullish pin bar, real quick. So, when we are seeing a bullish pin bar, we are seeing a market that opened at this level, just here. Then we attempted lower prices with a push down, but the market rejected the lower prices due to an influx of buying, which is why we have this large wick. Shows buying came in down here, pushed the market all the way back up. Then we have a strong closure, which is generally going to be around or above, or slightly below, it doesn't really matter, the open. And that shows us that although we tried to move considerably lower, we failed to do that. So, this wick at the bottom shows a reversal from selling pressure to buying pressure.
Now, a bearish pin bar is exactly the same. We open and attempt to push considerably higher, but then a huge influx of selling kicks in and ends up closing the market back down near the open, with that wick indicating the area where the selling pressure took control of the market.
Now, a big important thing about every Candlestick pattern you trade is that they have to be in context. Remember earlier when I said that Candlestick patterns will show up pretty much everywhere in the market, and most of them are not good to trade? In order to trade a Candlestick pattern successfully, it has to be in good context. So, for pin bars, the reversal, which is the pin bar candle, needs to come from a meaningful area. That can be wherever you usually look for reversals in your strategy, whether that's at a support or resistance level, a supply or demand zone, or an area of liquidity, or anything else. Wherever you usually look for reversals is where you should be looking for these candles.
Now, for me, that is supply and demand zones. If you want to learn more about supply and demand zones, there's a card somewhere in the top which will take you to a class about that. But for this lesson, we are going to be focusing on candle reversals in supply and demand zones because that's what I use personally.
All right, so the supply zone is this zone here. When, when I see the market come into a supply zone, I am looking for a bearish reversal. So, I'm expecting to see the market move down. The pin bar is this candle here. As you can see, we had a push up into the supply zone, followed by a large push of selling pressure, forming that big wick at the top, and then the body closed close to the open. Now, this pin bar alone is not enough to sell the market. We need to see something extra in order to take high probability trades with pin bars. And the way that we're going to successfully trade pin bars is to wait for confirmation.
Now, a pinbar Candlestick acts as an indication, not confirmation. It's not going to tell you that the market is 100% reversing. It just indicates that this could be the first sign of reversal. So, do not blindly buy or sell into pin bars. Instead, you should wait for a standard confirmation. So, what this is, is a structural pattern that we can use a lot in our trading, and it's very, very useful in many different contexts. For pin bars, we will be using this standard confirmation.
Here's how it works. The standard confirmation follows market structure, and it's where we are looking for a shift from higher highs, higher lows, higher highs into lower lows and lower highs. So, when the market breaks at this level, that confirms that the trend has shifted from bullish to bearish, and it's this lower high point where we want to be looking to sell the market. Now, standard confirmation works exactly the same for a buy trade, but we are looking for a shift from lower lows and lower highs into higher highs and higher lows.
Now, if you're having a hard time understanding that, there is a card for a market structure video somewhere at the top of the video, but this will start to make more sense just now as we go back to the chart. So, by looking at this chart, we can see within the candle formation, we've got this higher high, higher low, higher high formation. So, we have a push-up to the top of this indecision candle, that's the higher high. The pull back down forms the higher low, and then the push up to the point where right now forms a new higher high. So, we have the first phase of the standard confirmation. And in order to confirm this pin bar trade, we would want to see the structure break at this level. If the market breaks beneath this higher low, that indicates we've made a lower low, and that would confirm what we thought when we saw the first indication of reversal with this pin bar.
So, we don't sell directly at the pin bar. Instead, we wait for this move to happen. Now, if you see this move taking place, now we can use the pin bar for a trade. And the way that we do that is very simple. We would place an entry order at the bottom of the pin bar, and our stop-loss would go above the pin bar. So, our setup would look like this: target to the downside, stop loss above the pin bar, entry on the pin bar low, and then we wait for the market to retest the pin bar, which would form our lower high, and then we can sell down and move with the trend.
Here's that movement played out. As you can see, we come back, we retest the pin bar, then we get the sell trade, and we would be in that and out of that for a profitable trade. So, remember, pin bars give us the first signs of reversal. It's the standard confirmation that I just showed you that tells you whether it's safe to get in or not. And this pattern is incredibly useful in many different contexts. So, get to know that standard confirmation.
Okay, so now we're going to move on to pattern number two. This is the second pattern that I recommend you learn and work with. This is one of my favorites. We have the engulfing, the bullish engulfing and the bearish engulfing. They both work the same way, but of course, one is for buy trades, one is for sell trades. So, a bullish engulfing, which is what we're going to focus on for this example, looks like this. It's where we have a bearish candle, and it is totally engulfed or absorbed by a bullish candle. Okay? This tells us that the buying at this price area is stronger than the selling. And once again, we do have to use engulfing patterns in context. So, we're going to use the exact same context of a demand zone for a buy trade. So, here we have the demand zone, and here we have the retest with the engulfing candle following it.
So, now taking a look at the engulfing pattern, we can see we have this large bullish candle, which has absorbed the entire previous candle, which tells us that buying has just taken control in this market. Now, this engulfing is particularly strong because not only did we engulf the previous candle, but we also engulfed these other candles before it. So, we've actually swallowed an entire range essentially with this one individual bullish candle.
Now, the great thing about engulfing is that it doesn't show indication, it actually shows confirmation. So, the engulfing pattern is pretty much showing us the standard confirmation pattern we like to see, but in a concise, zoomed-out way. So, going to the chart, then we can see this downward phase of bearish indecision candles shows us the structural lower lows and lower highs. Then we have a push down for a final lower low. Then we get a big push up, and that when we break structure just there, actually confirms the change from bearish to bullish. So, whereas pin bars only indicate reversals, engulfing patterns confirm them. And there's an example of that standard confirmation in action alongside the engulfing pattern.
So, how exactly do we trade engulfing patterns then? Well, once we've seen a bullish engulfing from an area of interest, we have two options. Number one, we can just enter on the close of the engulfing candle with our stop loss under the low of the candle. This is the most simple and easy and direct way to get into an engulfing trade. But there's another way as well. And the second way would be to wait for a pullback to the engulfed candle and enter from there. Stop loss goes in the same place, below the candle. But this is going to get you a more refined entry.
So, if you opt for the first style of getting into engulfing trades, you'll enter at the top, stop loss below the low. You are going to miss less trades because you're going to get into pretty much every single trade that confirms. However, you will also get smaller reward for the trades that you do take, meaning you make less money when a trade does win because you're missing out on that refined entry.
If you opt for entry style two, where you enter on a retest of the engulfed candle, you'll get bigger reward trades. So, by refining the entry and the stop loss, you'll actually be able to make more money on the trades you do catch. However, you will miss more trades because sometimes that pullback won't happen.
Here's the outcome of the trade we've just looked at with the first entry style, entering directly from the close of the engulfing candle. So, if we entered there with $100 risk and our stop loss below the low, on our way to targets, we would make 3.15% or $315 for the $100 we risked. Pretty awesome trade. But if we go for the refined entry and wait for a pullback to the engulfed candle, we actually managed to squeeze out another $100 in profit from exactly the same trade. So, by risking $100, we return 4.14% or $414. So, as I say, by doing this and waiting for the retest, you'll make more money on the trades you take, but you are going to miss some trades because it's not always going to pull back.
So, an engulfing is awesome because it confirms a reversal immediately and sets you up with a trading opportunity. But you have to remember that context matters, and the engulfing must come from a meaningful area, otherwise you're going to get chewed up by false signals.
Now, moving on to Candlestick pattern number three. This is the third that I recommend you learn, and it's an incredibly useful pattern. So, this is the doji or indecision candle. Now, rather than showing an indication of reversal or confirmation of reversal like the pin bar and engulfing does, doji and indecision candles actually just show us a phase of consolidation, which basically means when we see a doji, if we were to zoom in on the doji, we would just see that the market is going sideways and failing to make any meaningful moves.
So, doji and indecision candles don't confirm setups, but they do provide first insights into what might happen next. From doji or indecision candles, we have two potential outcomes: reversals and continuations. A reversal is where an indecision candle will lead to the market changing direction, and the continuation opportunity is just a phase where the market has slowed down within an existing trend.
So, how do we trade these? Well, to trade the indecision reversal, we pretty much do this in exactly the same way as the pin bar reversal. So, what we want to do is see a doji candle or indecision candle taking place within a supply or demand zone. Following on from that, we wait for our standard confirmation. So, we want to see a change in the structure from higher highs to lower lows. Then we wait for a pull back to the doji or indecision candle, and we would then be expecting to see the market move to the downside. So, we could sell from the indecision candle with a stop loss above, and then just ride the trade down to the targets. So, as you can see, it works very much in the same way as the pin bar reversal.
Okay, so now onto the indecision continuation setup. This takes place when the market slows down in an existing trend. So, in this example, we are looking at a downtrend. We have a down move, and then we have this indecision candle, which is a doji, that has formed inside of the downward move. So, what we're looking for in this instance is to see if the market will break below the doji and continue the downtrend. If we get that, what we can do is use the doji range for an entry and a stop loss. So, we can enter from the doji, we can put a stop loss above, and then when the market pulls back to this point, we can sell into the market and continue moving to the downside.
And there you have it. Those are the only three Candlestick patterns that you need to know to make money trading: the pin bar, the engulfing, and the doji or indecision. You can use these for entries, but more importantly, you can use them to identify who's in control of the market. That's always the key when we're trading with candlesticks. So, don't marry patterns and instead work more dynamically to look into what the wicks and the bodies are showing you, who's in control of the market, are there reversals taking place, and ultimately, are you trading on the right side of the market?
Now, I have made a Candlestick cheat sheet for you. You can download it by using the link in the description. You can print it out, stick it on your wall, and then you're going to be constantly reminded of the different patterns and the different ways to read candlesticks when you're doing your technical analysis. So, make sure you download that.
And that's going to be it for today, guys. I've showed you how to use candlesticks to read the momentum in the market and work out which side of the market you should be trading on to take better trades, avoid losses, and also I presented those Candlestick patterns to you so you can start making money with those. Get that cheat sheet. And if you want to learn more about my price action trading strategy, how I use it to get results like this, and how students have used it to get results like this, this, and this, then use the 10K link in the description. That's going to take you to a video explaining how you can leverage my systems. So, thank you for watching all the way through to the end. Drop a like and subscribe if you've enjoyed it, and I'll see you in the next video. Yeah.