My 5 favourite candles

Looking for scented candles? Sorry, wrong site. All these green and red blocks? Also known as candles and used as an illustration method to summarize the price action of any listed instrument that are listed on the financial markets. Clever yes?

The Candlestick technique has been used since the 18th century and is one of the earliest known forms of technical analysis. Munehisa Homma from Sakata Japan was a rice trader who was credited with laying the foundation for the development of this charting technique.  One of the greatest innovations that Homma developed was the communication network comprised of men standing on roof tops every 4km from Osaka (rice exchange) to Sakata (port for rice market), a distance of some 644km. These men would send signals to each other up and down by using flags. This was an early method of sending real-time data. He recognized the effect of the price movements on the psychology of the traders.

Today we don’t use flags anymore to signal a specific move in the price. Candles on graphs are used to do that. If you are looking for my 5 favourite candles in financial markets then you are at the right place.

My first one is the:

Tweezer top

This is a 2-candle pattern. When two or more candles reach the same high price in an uptrend, but the second candle does not manage to advance further than the previous candle’s high. In other words, two consecutive candles that found resistance at almost the same level in an uptrend. Tweezer tops are seen as a trend reversal pattern and confirmation thereof will be in place when the candle followed by the tweezer top is a bearish candle and closes below an important support line. Tweezer tops appears usually at the end of a rally.

Tweezer bottom:

This is another 2-candle pattern. A tweezer bottom formation appears when two candles reach the same low price in a downtrend, but the second candle does not manage to fall further than the previous candle’s low. Tweezer bottoms are seen as a trend reversal pattern and confirmation thereof will be in place when the candle followed by the tweezer bottom is a bullish candle and closes above an important support line. Tweezer bottoms are when two consecutive candles found support at almost the same levels. Tweezer bottoms appear at the end of a selloff.

Hammer candle:

A hammer candle has a long lower shadow with a small real body at the top. Usually, the shadow should be at least two or three times the length of the real body. The color of the body is not important. The smaller the real body, the more meaningful the hammer will be. This candle should have no or a minuscule upper shadow. A hammer usually appears at the end of a sell-off in other words at the bottom of the downtrend. The lower shadow can be interpreted that the downside of the price was rejected. One should wait for a confirmation candle after the hammer before making a final decision.

Hanging man candle:

The hanging man is the friend of the hammer candle. The difference between the two is the hanging man appears at the end of a rally, in other words at the top of an uptrend and a hammer appears at the bottom of a downtrend. Both candles look very similar. The hanging man is also a trend reversal candle (red or green). However, the long shadow at the bottom confirms that the price fell during the session but that buyers came back to push the price higher to close near the opening of the session or even higher.

Shooting star:

A shooting star usually appears at the top of a rally. The candle implies that the buyers tried throughout the session to push the price higher but that the session closed very close to the opening price meaning they haven’t succeeded. In other words, the market was rejecting the higher prices. The same principle applies as with the other reversal candles where the candle following the shooting star should be a bearish candle to act as confirmation that the sellers lost the battle.

Feel free to let me know what your favourite candles are.

See you soon.

Christelle