Tom Hougaard introduces Candle Stick charts and teaches you how to interpret Candle chart patterns in order to place more profitable trades in Forex, CFDs and Stocks.

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Introduction
There is so much information available to you as a private trader, and one of the aspects that made a profound impact on my own trading was the introduction to candlestick analysis.
During this chapter i am going to give you what i consider the most important aspects of candlestick trading.
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I am going to light up your trading life now, and I am going to teach you about the most popular way in the trading world to analyze the markets. It doesn’t matter what you trade - If you don’t know about Candle Charts, you are missing out.

There are 3 common ways of displaying the data from the financial markets.
1. Line Charts
2. Bar Charts
3. Candle Charts

Although there are other ways of displaying data, these 3 are the most commonly used ways of displaying data for traders and investors.

I NEVER use anything but Candle Charts. It was my good friend Steve Nison who brought Candle Charts to the world’s attention in the 1990’s, and he did us all a huge favour by doing so. But it wasn’t his invention. Japanese traders had been using Candle Charts since the 18th Century, when they traded rice with each other.

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Let’s take a look at what line charts and bar charts have done for us so far.
Line charts only use closing prices.
These are most convenient for charts displaying many years of data. If, for example, you are looking at a price chart of the Nikkei Index from the last 20 years, you really don’t need anything but the closing prices – and here you would use a line chart.
Line charts are not particularly useful for active traders, because they fail to give an impression of important emotional highs or lows being made.

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Bar charts display 4 pieces of information
1. Open
2. High
3. Low
4. Close
Bar charts are useful for swing traders and day traders who want to display the intra-day highs and lows.
This is important to know if you want to establish if certain price levels have been “tested”.
We’ll be talking more about support and resistance as well as testing support and resistance later on.

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Candle charts also display 4 pieces of information
1. Open
2. High
3. Low
4. Close
However Candle charts employ color coding, to provide enhanced visual information concerning opening and closing, highs and lows; specifically, whether the opening price was higher or lower than the closing price.
Almost all traders used Candle charts as a standard, and we will be looking at how to interpret them next. It is an art form in its own right and the better you become at it, the better equipped you are to placing profitable trades.
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Candle chart patterns combine upticks and downticks to produces candles for a given timeframe; for example when I analyze the markets myself I will be looking at a 15 minute and a 30 minute chart.
But whether this be 5 mins, 15 mins, 60 mins or beyond. All of this is available on our trading platforms.
Candle charts are arranged in patterns which tell us which of the primary market forces is stronger; buy or sell.
The colour coding of the Candles are discretionary; some traders prefer their negative candle to be red, whilst others prefer them to be black.
Similarly, some traders prefer their positive candle to be green while others prefer it to be white.
To make it easy for you I have used RED and GREEN.
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Most people don’t know much about P/E ratios or Factory Inventory Analysis, or indeed several other elements which you experience in papers or on TV.
What people do tend to be very good at though is identifying patterns. Pattern recognition is what the technical trader relies on for trade entry and exit.
Lets take an example:
The engulfing pattern is a candle bar where the price action, measured by the BODY of the current bar, engulfs the body of the previous bar. Like most Candle Patterns, it can be used for any time frame. Whether it’s a 5 minute chart or a 15 minute chart, But what’s important to remember irrespectively of what timeframe you are trading, all of these patterns and in general patterns recognition can be used on any timeframe to suit your trading style.
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Take a look at this chart. Here you’re seeing a red candle and a green candle. What I want you to notice is that the BODY of the green candle engulfs the BODY of the red Candle.
That is often interpreted as a positive sign for the market. It means that the market opened lower than the previous candles close but it closed higher.

It means that those who wanted to sell the market are running out of power, and those who want to buy are now taking control.
This has nothing to do with Fundamental analysis and everything to do with pattern recognition. It also involves an element of understanding human nature. Pattern recognition is what the technical trader relies on for trade entry and exit.
Let’s take a practical example.

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We’re going to start off with another chart. Because the more charts I can make you look at, and the more I can make you used to looking at charts the sooner you will be up and running yourself.
On this chart you are seeing a zoomed in snap shot of one of the most traded currency pairs in the world; the British Pound against the US Dollar.

Every single candle bar represents 15 min worth of trading.

It happens to be a day where the market tops out at about 08:30 in the morning and over the next 90 minutes makes its way from 1.6540 to 1.6440.

That is a move of 100 points, also referred to as we discussed in the Forex chapter, as pips.
For a trader like you and I it is those moves that you live for.

On this chart you have TWO very strong candle signals, which provide a strong indication of what is going on in the market. It also demonstrates which side (the bulls or the bears) was in control at a given time.

Coming up is my favorite candle signal, which on many occasions has turned a good trading day into a great one.

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The engulfing pattern is a candle bar where the price action, measured by the BODY of the current bar engulfs, the body of the previous bar. I like using them on a 10, or 15 minute time frame, although this tends to be higher on certain stock indices such as the FTSE, the DAX.

They work great as a reversal signal or even as a continuation signal. They tell me exactly where to enter and they tell me how much to risk on the trade.

There are 3 potential entry criteria, which depend on how much certainty the trader wants in the set-up.

They may aggressively enter the market on the assumption that an engulfing pattern hasn’t completed. If the trader enters the market on the assumption that an engulfing bar will print, and it fails to do so, the trader consider his exit strategy.

The trader may adopt the normal entry method, which involves waiting for the engulfing pattern to complete.

Finally, there is the cautious method, whereby the trader waits for next bar to trade through the high/low of the engulfing bar.


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The exit can be done in one of several ways, but remember that the aim is not to get out of the position prematurely, the aim is to be on board as long as the market conditions fulfill your analysis, and criteria for the entry in the first place.
So taking a profit should not be because some monetary criteria has been met, on a daily of weekly target. The only reason why you should get out of a position is because the market is no longer cooperating with your strategy.
If the market immediately runs in the anticipated direction, the traders should move the stop-loss to break even.

If a trending move develops, the trader can move the stop loss progressively in the direction of the trend, just above the high or the last high.

If another candle pattern forms, such as a doji, signifying a potential trend reversal, the trader should tighten the stop close.
If volume spikes into previous support or resistance, it could be a very good idea to keep the stop loss so tight that you’re almost inevitably going to get stopped out.
Because the market has told you that a potential trend reversal is in place.
But remember a good engulfing setup on a 10-minute chart can easily last a full hour, or even more.