Candlestick analysis. Part 1: basic concepts, reversal and trend continuation candles
- VFX Blog
- For beginners
High-frequency trading (HFT) is gaining a larger segment of stock operations. It seems that there is no place in the market for man and standard algorithms. This is not the case - even the most advanced binary option strategy is not without time tested methods, such as candlestick analysis.
The methodology was developed by the Japanese trade in rice Munehisa Homma in 1755 and has not changed significantly to date. He also found the basic candlestick patterns by which the reversal or continuation of the current price movement is determined.
In terms of the technical analysis, candlesticks confirm two basic principles:
- Price (candle) includes all factors affecting it; no additional analysis is required (one of the principles of Dow theory).
- History repeats itself and with the help of graphical patterns it is possible to predict the actions of most stock players (Eder's Chaos Theory, Elliott's wave model).
The volume of the article will not allow us to describe in detail all the candle patterns; we well only on the simplest and at the same time strong figures. They can be used immediately even in binary option for newbie’s.
- Current strong uptrend or downtrend;
- Body of the second candle is larger than the first and it’s “engulfing” (without shadows);
- The second candle is inverse color. An exception is for very small first bodies similar to «Doji».
- A big difference between the bodies of the first and second candles - the end of trend;
- The reliability of reversal candle increases on long-term or very fast trends. If the trend lasts a long time, big players increase the pending opposite positions and reverse the price. In the case of sharp impulses, as on fundamental events, a quick fixation of profit begins and an engulfing candle appears.
- Engulfing several bodies at once.