One way that traders will look at charts is similar to a book. Essentially, the way a market moves tells a story of how the traders feel about a particular financial instrument. This is one thing that many technical traders tend to overlook: Charts simply quantify the emotion of all market participants.
While there are certain candlestick patterns and shapes that traders will use to identify trading opportunities, the truth is that almost any candle can tell you a bit of the overall story. In a way, this is much like a book in the sense that while some parts are more important than others, it is the sum of all information that makes the story come together. Financial markets are the same as they are simply a collection of reactions to financial headlines, economic numbers, and simple “feeling” towards a currency or economy.
It is under this prism that we should look at candles on a chart. Also, we should always marry the idea of importance in the overall story based upon where these candles appear. As your trading career continues, you will learn over time just how important support and resistance really is. In other words, a great looking candle at a massive support level will always trump one that is placed in the middle of two support and resistance levels. We always want to look for support or resistance first, and candles second.
Before we get too involved in the patterns, we need to think about the simplest of all forms of analysis: Color and length. In other words, is the candle short or long? Obviously, a red or black (negative) candle that is long means much more than a short one, all things being equal. This is simply because it represents more trades in a negative direction. Also, we should always keep in mind that as with all things technical analysis related, the higher the time frame, the more reliable it is. This is because in order to make a weekly candle it takes much more time and trading (and therefore information) in order to make the candle.
So before you get too involved in the patterns, please always remember to ask the following questions before taking a trade:
Is this candlestick at a support or resistance area?
What exactly does this candle (or candles) say as to the emotional response of traders?
Is this candle going with the overall trend, or is it countertrend?
Remember, there are various traders around the world trading based on different timeframes, and with different underlying needs. Because of this, before you look at candlestick shapes, you should take a moment to think about what a particular candle is trying to tell you. Sometimes the market whispers, other times it screams. It is up to you to listen.
