The 6 Secret Laws of Profitable Candlestick Trading

Written by Julie Brownlee on May 26th, 2017

Learn the six ways to master candlestick trading

There’s a tool the top traders use to bank themselves big profits…

It helps them to spot good trades, avoid the bad ones, and it ultimately makes them more money in the markets.

Most people have heard of this tool, and some have even tried it, but very few actually know how to use it properly.

I’m talking about candlesticks.

And if you use them properly, both your trading and profits could soar!

That’s why I want to introduce you to the six secret laws of candlestick trading.

If you’re looking to master candlesticks, and to use them to make money, these six laws are the perfect place to start.

Simply read on for more…

 

Candlesticks 101: The Only 5 Things You Need To Know

 

Before we get onto the six laws, let’s just take a quick run through of what a candlestick is.

In fact, here are the only five things you need to know:

The Only 5 Things You Need To Know

The diagram above shows you the components that make up a candlestick.

One candlestick can reveal a wealth of information about the price of a given security, namely:

  • The top wick shows you the highest price a security traded in your chosen timeframe
  • The top of the main body of the candle shows you the open or closing price
  • The colour of the candle shows you whether the security moved up or down in price. The colour will vary depending on the charting software and settings you use
  • The bottom of the main body of the candle shows you the open or closing price
  • And the bottom wick shows you the lowest traded price in your chosen timeframe

With this under your belt, here’s how to exploit candlesticks to increase your trading profits…

 

The 6 Candlestick ‘Laws’ Every Trader Should Know

 

Candlestick Law #1: Know Your Patterns

By being able to spot some key candlestick patterns, you make trading your chosen market so much easier.

It’s well worth spending the time to learn them so you can act swiftly. This increases your chance of placing a profitable trade.

Take engulfing patterns for example - Whether bullish or bearish, when you see one of these it’s time to sit up and get ready to act.

You can see an example of a bearish engulfing pattern below…

Know Your Patterns

An engulfing pattern indicates that the trend is going to move in favour of the larger candle.

For example, if you spot a bearish engulfing pattern, you can expect the price of your chosen security to move lower. This presents you with a great opportunity to put on a short trade.

With a little bit of research, you can work out which candlesticks you should be on the lookout for.

By being able to identify these easily, you’ll make your job as a trader so much easier.


Candlestick Law #2: Change Candlestick Colours To Suit You

This may sound simple, but it’s an incredibly useful candlestick ‘hack’.

Whilst this is more a comfort factor than anything else, just ask any trader worth their salt about trading psychology and how it can affect your trading account!

Depending on the charting software you use, you should be able to change the candlestick colours.

You may be able to change the background colour too.

If your software can do this, play around with the different colours to find the best ones for you.

This can be very useful as you want to make your candlesticks as easy and as obvious as possible to read.

By spending a little time on selecting the best colour combinations, you can make reading your charts and spotting patterns that much easier.

There are many elements to trading psychology, but being comfortable with your charts is an important one!


Candlestick Law #3: Use Three Candlestick Charts Instead of One

It’s easy to get stuck in a rut of looking at the same timeframe when looking at your charts.

When using candlesticks, ensure that you use three different timeframes. Ideally ones that are short-term, a medium-term and a long-term.

Instead of flicking between them, have the three on your screen to view, this makes comparisons much easier.

If you work off a small screen, consider investing in a larger screen, or multiple screens, especially if you take your trading seriously.

Perspective can be a powerful ally in your trading, and the use of different timeframes can confirm or even deny specific setups you’re looking at.

The last thing you want to do is get stuck in a losing trade when you don’t have to…


Candlestick Law #4: Keep Your Candlestick Charts Simple

With the vast number of different analysis tools at your disposal, it’s easy to think that the more you use the better your analysis is going to be.

The truth of the matter is, less is most definitely more.

The ultimate sophistication is often the simplest, and in trading it’s no different.

Try to limit yourself to a handful of different tools to use in conjunction with your charts.

This will make your charts easier to read and limit confusing signals.

The trader that wins is the one who knows how to read his charts, not the one with the most tools.


Candlestick Law #5: Look For Strength

When analysing your candlestick charts, you want to ensure that you only act when the signals are strong.

This should reduce the chance of you reacting to weak signals.

So how can you do this?

The best way is to only act when the signal from a candlestick shows commitment.

The good news for you is this is easy to spot, as you can see below…

Look For Strength

When you spot a candle like the one on the left, you can see that there is a lack of momentum behind the move.

Compare this to the candle on the right, where the body of the candle is large.

There’s momentum behind this move, which means there’s more chance that the move will continue.

This is because it’s more likely that the big money is behind these strong moves.

By concentrating on where strong momentum lies, you’re in a far better position to trade successfully.


Candlestick Law #6: Be Aware of What Candlesticks Don’t Tell You

Whilst using candlesticks as part of your trading strategy can be very informative, you can’t use them blindly.

There are things that you simply can’t see from working off candlesticks alone.

For instance, if there is extreme price volatility within the trading period you’re looking at, the candlestick won’t show you this.

To deal with this, ensure that you use a technical indicator that measures volatility.

When the market is extremely volatile, it’s sometimes best to sit on the side lines until it calms down.

Always be aware that candlesticks don’t show you all the trading activity going on.

 

The 6 Ways To Master Candlestick Trading

 

Using candlesticks as the foundation of your analysis can give you an edge.

They can tell you so much in an easy to read format, and you certainly don’t need a PhD to trade them either!

To make the most out of trading candlesticks, take the time to truly understand how they work and become proficient at spotting profitable patterns.

You just need to make sure that you know what they tell you and what they don’t.

By applying the laws that we’ve looked at, you can increase your rate of trading success!

Until then, here’s to profitable trading. 

Julie Brownlee | The Money Lab

Julie Brownlee
Editorial Contributor
The Money Lab