|
|
|
AIME Primer |
|
Candles |
I like Japanese candlesticks. In fact, I like them a lot. Here’s why:
Candles make it easier for us to understand what price is up to – easier than line or bar charts, that is. And this allows us to make quicker and more profitable trading decisions.
Specifically, candles offer a visual representation of the ongoing battle between the bulls and the bears. They speak volumes about the psychological and emotional state of traders… which is extremely important.
How come?
Because the market it controlled by fear and greed (emotions). Also, a major advantage of candles is, since they are made up of the same information bars and lines (i.e., Open, High, Low, Close data) we can use all of the Western* charting techniques on a candlestick chart – and I totally recommend combining western technicals with candlesticks, especially since one signal often reinforces another.
[*Western technical indicators include tools like MACD, moving averages, trendlines etc.]
Candles are excellent for detecting trend reversals and continuations, especially near S/R levels, including pivot points.
Anyway…
Learning how to read candles and their various patterns is just one more (extremely powerful) weapon you can add to your arsenal. Consider them a Bazooka.
Bullish and Bearish Candles
|
 |
Versus…
Bullish and Bearish Bars
|
 |
|
The following are some of the most common candles and candle patterns as they relate to the forex. Know that reading these patterns on live charts includes subjectivity on the part of the trader – it’s not a science as much as it is an art. Also, like the rest of the information here, this section is a very brief explanation of candles and meant only to familiarize you with the subject. I talk about specific patterns and their importance within the course.
Bullish Patterns
|
 |
Long white (empty) candle – Bullish. Occurs when prices open near the low and close significantly higher near the period's high. |
 |
Hammer - Bullish if it occurs after a significant downtrend. If it occurs after a significant up trend, it’s called a Hanging Man (see below). A Hammer is identified by a small real body (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low is significantly lower than the open, high, and close). The body can be empty or filled-in. |
 |
Piercing candle - Bullish pattern and the opposite of a dark cloud cover. The first candle is a long black candle and the second candle is a long white candle. The second candle opens lower than the first candle’s low, but it closes more than halfway above the first candle's real body. |
|
 |
Bullish engulfing candles - Strongly bullish if it occurs after a significant downtrend (i.e., it acts as a reversal pattern). It occurs when a small bearish (filled-in) candle is engulfed by a large bullish (empty) candle. |
 |
Morning star – Bullish pattern signifying a potential bottom. The "star" indicates a possible reversal and the bullish (empty) candle confirms this. The star can be empty or filled-in. |
 |
Bullish doji star - Indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the morning star, above) before trading a doji star. The first candle can be empty or filled in. |
 |
Long black (filled-in) candle - Bearish. It occurs when prices open near the high and close significantly lower near the period's low. |
 |
Hanging Man - Bearish if they occur after a significant up trend. If this pattern occurs after a significant downtrend, it is called a Hammer. They are identified by small real bodies (i.e., a small range between the open and closing prices) and a long lower shadow (i.e., the low was significantly lower than the open, high, and close). The bodies can be empty or filled-in. |
 |
Dark cloud cover - Bearish pattern. The pattern is more significant if the second candle's body is below the center of the previous candle's body (as illustrated). |
 |
Bearish engulfing candles - Strongly bearish if it occurs after a significant up-trend (i.e., it acts as a reversal pattern). It occurs when a small bullish (empty) candle is engulfed by a large bearish (filled-in) candle. |
 |
Evening star - Bearish pattern signifying a potential top. The "star" indicates a possible reversal and the bearish (filled-in) candle confirms this. The star can be empty or filled-in. |
 |
Doji star - Indicates a reversal and a doji indicates indecision. Thus, this pattern usually indicates a reversal following an indecisive period. You should wait for a confirmation (e.g., as in the evening star illustration) before trading a doji star. |
 |
Shooting star - Suggests a reversal when it appears after a rally. The star's body must appear near the low price and the candle should have a long upper shadow. |
|
Neutral Patterns
|
 |
Spinning tops - Neutral. They occur when the distance between the high and low, and the distance between the open and close, are relatively small. |
 |
Doji - Implies indecision. The pair opened and closed at the same price. These candles can appear in several different patterns.
Double doji candles (two adjacent doji candles) imply that a forceful move will follow a breakout from the current indecision. |
 |
Harami ("pregnant" in English) - Indicates a decrease in momentum. It occurs when a candle with a small body falls within the area of a larger body.
In this example, a bullish (empty) candle with a long body is followed by a weak bearish (filled-in) candle. This implies a decrease in the bullish momentum. |
 |
Harami cross - Indicates a decrease in momentum; it’s similar to a harami, except the second candle is a doji (signifying indecision). |
|
Important note: While all of the above patterns apply, in the AIME course we get into the specific candles and candle patterns that provide the best entry triggers and exit signals. When used in conjunction with the other AIME indicators, you’ll understand what the market is telling you and what to do. |
| |
|
|
