Here comes the next edition of Meta Trader 4 demonstration. Although we will be talking much about the formations of candlesticks instead for this issue.
I will base most of the candle formations on Intro to Candlestick document done by Stockcharts Candlestick Dictionary. Download a copy of the pdf here.
Do learn these and add them to your toolbox of forex knowledge. Here I have the images reproduced to continue the current MT4 tutorials.
The difference between a short and long candle
Black candles here are generally the bull/ buy candles and White candles are generally the bear/ sell candles. (We’ll teach on how to customise your MetaTrader 4 colors and settings the next issue)
The longer the black bull/ buy candles are, the stronger the buying pressure it is from the market, indicating price advances from open to close of the candle. Note when the black candle advances too aggressively, it can lead to excessive bullishness and might be a turning point since there’s potential of being overbought.
Long white candles shows strong selling pressure in the market, indicating price declining from open to close. The sellers are aggressive in this case and if it advances too aggressively, it can lead to excessive bearish, marking a potential turning point since it might be oversold.
Marubozu – Look Ma! No Shadows!
In this case, there are no shadows on both the black and white candle. The black candle indicates that the buyers controlled the price action from the start to the end of the time frame. The white marubozu candle indicates the sellers controlled the bear price action from the start to the end of time frame. In my experience, you’ll seldom see this on longer time frame charts.
Long Shadow versus Short Shadow
As explained in the previous ‘Forex Demo – Reading Candlesticks‘ tutorial, the shadows show the price action, as well as tells you the highs and the lows of the current candle.
Candles with longer upper shadow and shorter lower shadow (The first left candle on the diagram) means buyers dominated the session and price action, but was being forced down later by sellers, thus creating the higher shadow. Vice versally, candles with shorter upper shadow and longer lower shadow means the sellers dominated the session and price action, but the buyers resurfaced to push the price higher and a strong close, explaining the longer lower shadow.
Spinning Tops
These little candles are call spinning tops since they have small real bodies and long equal shadows on the top and bottom, they do look like those spinning toys don’t they? When this appears, the market is indecisive on which direction to go. The price did move significantly on the high and low but the changes on opening and closing of each session remains the same. Neither buyers or sellers can get the upper hand.
After a long decline or long white candlestick, a spinning top indicates weakness among the bears and a potential change or interruption in trend. After a long advance or long black candlestick, a spinning top indicates weakness among the bulls and a potential change or interruption in trend.
Dojis (Again?)
We talked about Dojis from the previous tutorial and the reason the odd cross shape. Dojis are neutral positions and any bullish or bearish trends are preceding future price actions and further confirmations.
It is not necessary for the shadows to be equal in this case. Since neither buyers nor sellers can take control, a turning point could be developing.
Formation Time!
I’m going to share 4 formations which happens from time to time (and common). Such formations work best with longer time frames such as 4 hours and daily charts. You can read on 8 different more from the Candlestickforum. Most explanations are taken from them for education purposes.
The Hammer & Hanging Man
The Hammer is comprised of one candle. It is easily identified by the presence of a small body with a shadow at least two times greater than the body. Found at the bottom of a downtrend, this shows evidence that the bulls started to step in. The color of the small body is not important but a black candle has slightly more bullish implications than the white body. A positive day is required the following day to confirm this signal.
Criterias of Hammer and Hanging Man
1. The lower shadow should be at least two times the length of the body.
2. The real body is at the upper end of the trading range. The color of the body is not important although a white body should have slightly more bullish implications.
3. There should be no upper shadow or a very small upper shadow.
4. The following day needs to confirm the Hammer signal with a strong bullish
day.
The Morning Star
The Morning Star is a bottom reversal signal. It is formed after an obvious downtrend. It is made by a long white body, usually one of the fear-induces days at the bottom of a long decline. The following day gaps down. However, the magnitude of the trading range remains small for the day. This is the star of the formation. The third day is a black candle day. And represents the fact that the bulls have now stepped in and seized control. The optimal Morning Star signal would have a gap before and after the star day.
The make up of the star, an indecision formation, can consist of a number of candle formations. The important factor is to witness the confirmation of the bulls taking over the next day. That candle should consist of a closing that is at least halfway up the black candle of two days prior.
Criterias of a Morning Star
1. The downtrend has been apparent.
2. The body of the first candle is white, continuing the current trend. The second candle is an indecision formation.
3. The third day shows evidence that the bulls have stepped in. That candle should close at least halfway up the white candle.
The Evening Star
The Evening Star pattern is a top reversal signal. It is exactly the opposite of the Morning Star signal. It is formed after an obvious uptrend. It is made by a long black body occurring at the end of an uptrend., usually when the confidence has finally built up. The following day gaps up, yet the trading range remains small for the day. Again, this is the star of the formation. The third day is a white candle day and represents the fact that the bears have now seized control. That candle should consist of a closing that is at least halfway down the white candle of two days prior. The optimal Evening Star signal would have a gap before and after the star day.
Criterias of an Evening Star
1. The uptrend has been apparent.
2. The body of the first candle is black, continuing the current trend. The second candle is an indecision formation.
3. The third day shows evidence that the bears have stepped in. That candle should close at least halfway down the black candle.
So we’ll win big money with Candlesticks!
As you grow as a trader, you’ll learn more and more different techniques, indicators and even other people’s systems on trading. You will fine tune and trial on your own to decide which tools are best for you. Candlesticks formation is just one of them.
Next, we will move on to Customizing your Meta Trader 4. Stay with us.
Are you one who believes that paying a fee will get you through the right direction when it comes to picking things up? Unfortunately this is not always true. There are tons of free resources out there, and it’s skeptical but true, that Google is always your best friend when it comes to sniffing them out.
