Swing Trade Setups Part 4: Candlesticks

 [ This is the 4th article in a series, describing how I trade.  You can start with Part 1 here ]

When I added candlesticks to my toolbox, my accuracy of guessing when to buy and when to sell went way up!  It’s easy to get intimidated by all of the weird names and terminology.  Believe me though, it is worth it to learn the basics.  You don’t need to be able to recall every darn pattern there is on command.  What is helpful though, is to use candlesticks to get a feel for the underlying trading dynamics and psychology that is happening between buyers and sellers.

I wrote a very detailed post about how I use candlesticks for swing trading here, if you want to get started.

They occur all the time.  Each candlestick represents a time-frame.  It could be a day (which is what I am going to show you for AAPL and ON) or a week.  They could be 1 minute…or 15 minute candlesticks.

To quickly paraphrase a part of my detailed write-up on candlesticks…

A single candlestick had 4 data points:

  • Open
  • Close
  • High
  • Low

 

The key to candlesticks is understanding what they are telling you.  Tall candlesticks (big bodies) show powerful buying and selling.  Small candlesticks with narrow bodies show quiet trading action, where buyers and sellers are pretty close to agreement on the price.  The long “wicks” show a powerful force pushing the price back up or down.

There are over 80 different named candlestick patterns.  They are classified into two categories:

  • Continuation patterns, where the pattern is signalling that the trend might continue
  • Reversal patterns, where the pattern is signalling that the trend might reverse

These patterns occur all over a chart.  You can find them everywhere.

The key though, is when you find a candlestick pattern that is telling you something at a key point within the chart.  For our purposes, we would really pay attention if we see a reversal pattern occur at a point where support and trend-lines converge!  As they say in the real estate business, it’s all about location, location, location.

Candlesticks at Pivot Points

So let’s look at AAPL again:

Here we have a closeup of the point where entered the trade.  Look at the candlestick that I pointed to with the blue arrow.  It has a long tail and the short body that one can call a “Bullish Harami”

A Bullish Harami occurs in a downtrend (remember, that is defined by the current price being below the 10 day moving average in Part 3).  The pattern is setup by the previous day, which should have a very large bearish (red) candlestick.  The body should be completely within the vertical range of the previous day’s larger body.

It is telling us that the downtrend might be over.  Why is that?  The prior day, we had a huge selloff (the big red candle).  The next day, buyers stepped in and the price opened higher than the previous day’s close.  The price traded up and down, but at the end of the day, it closed within the prior day’s open/close.  Buyers have stepped in and stopped the sellers in their tracks.

This particular Bullish Harami has a long tail.  Sellers tried to push it lower during the course of the day, but buyers stepped in and bid the prices right back up again.  In this case, they pushed the close very close to the open!  That is significant.

It is also more significant, since we know that this has occurred at an area that we know has horizontal and trend-line support!

What do we have with trusty old ON?  Here is a closeup of the pricing action right at the pivot point:

 

Nuff said right?  Same Bullish Harami pattern!

Just like with AAPL, this occurred right at an area of significant support, giving us confidence that ON has a decent chance of heading higher from here.  You can see the next day, that it opened higher.  This is confirmation that the signal was right.  If you wanted to be conservative, you can wait until the next day.  If it moves higher like this, jump on it!  Notice how it traded slightly lower than the open, but not by much.  It was a strong buying day, signified by the white candle.

Summing this up, I want to emphasize that you don’t need to get lost in the dizzying array of candlestick patterns and names.  What is important though, is to look at the candlesticks when you are thinking of entering a trade and see what they are telling you.  If you saw a big red candle at the potential entry point, stay away.  It is likely that the trend will continue and the support lines we had drawn are going to be broken.

Up Next: Using indicators

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Swing Trade Setups Part 5: Using Indicators

The Greedy Goblin

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