Highlights:
①.Gate’s “Basic Futures Contracts” course introduces various methods of technical analysis that are commonly employed in futures trading. The aim of these courses is to help traders establish a comprehensive framework for technical analysis. Covered topics include the basics of Candlestick charts, technical patterns, moving averages, trend lines, and the application of technical indicators.
②.Class II of the series “Master Technical Analysis” will cover a basic introduction to the Candlestick chart, including the origin of the concept, different Candlestick patterns as well as their technical meanings.
Ⅰ. Candlestick chart components
①.Introduction
Originating from the Tokugawa shogunate era in Japan in the 18th century, the Candlestick chart is originally used to record the price fluctuations of the rice market. It has now become the most widely used technical analysis tool for investors.
A candlestick chart for a specific time period displays the opening, high, low, and closing prices within that interval. This chart features a rectangular shape, known as the “real body,” formed between the high and low prices. Additionally, two vertical lines, called “shadows,” extend from the top and bottom of the real body. The line above the real body is the upper shadow, while the one below it is the lower shadow.
The real body is filled in green when the closing price is higher than the opening price. Conversely, if the closing price is lower than the opening price, the real body will be filled in red. Figure 2-1 below provides examples of different real bodies:
2.Time interval of a candlestick chart
Another key component of the Candlestick chart is the time span it covers, which can be 1-minute, 5-minute , 15-minute, 30-minute, 60-minute, 24 H, weekly, or monthly. At Gate, traders can set the time interval for their Candlestick charts. See below:
The time interval for the candlestick chart should be selected based on the specific trading strategy in use. For instance, short-term traders often use candlestick charts with short time intervals, such as 10-minute, 30-minute, 60-minute, or even 1-minute K-lines. In contrast, traders focused on benefiting from long-term market fluctuations are more likely to utilize weekly, monthly, or annual candlesticks. However, the daily candlestick chart serves as an indispensable tool for all types of traders, whether they focus on long-term, mid-term, or short-term strategies.
Ⅱ. Candlestick categories
Different patterns within a candlestick chart, as well as combinations of these patterns, serve as significant market signals. Candlestick analysis is a fundamental aspect of technical analysis and is vital for any trader seeking to interpret market information for profitable trading in a dynamic market.
①.Types of Candlestick Combinations
Specific combinations of candlesticks can serve as important trading signals. These usually consist of two or more candlesticks arranged in a particular pattern. These meaningful candlestick combinations can be categorized into three types based on their implications:
A. Combinations that indicate the price is either rising (having bottomed out) or falling (having peaked).
B. Combinations that signal the price has reached a bottom and will rebound.
C. Combinations that indicate the price has reached a peak and will decline.
We plan to offer specialized courses that elaborate on combinations commonly indicating bullish and bearish trends. Please stay tuned for updates.
Alternatively, some analysts categorize candlestick combinations into two types:
Type I: Combinations that suggest the current trend will continue for some time. These include signals of bullish or bearish momentum.
Type II: Combinations that indicate the price has either peaked or bottomed out, suggesting that a reversal may be imminent.
It’s important to note that even though candlestick combinations can signal a reversal, such reversals are often temporary or may persist for only a short period. It is rare for such a trend to evolve into a long-term phenomenon.
②.Technical forms of candlestick
Candlesticks can indicate reversal or consolidation signals. Specifically:
A.Reversal:
The reversal pattern indicates that the market is about to change the direction of its trend, by shifting from a bullish trend to bearish and vice versa.
B.Consolidation:
The consolidation pattern means the balance can be broken in either of two directions, upward or downward.
You can find additional courses that delve into detailed explanations of different candlestick patterns in this series.
Ⅲ. Technical meaning of a Candlestick
Some argue that the trajectory of K-lines captures the essence of human nature in market trading. Is there truth to this statement?
When discussing trends, it’s important to clarify that we’re not talking about specific orders. Each order in the market has a defined price, time, and volume, and its direction hinges on the trader’s market predictions. Buyers place orders expecting the price to rise, while sellers act in anticipation of a market decline. Over time, forces accumulate on both the bullish and bearish sides. A trend only materializes when the equilibrium between selling and buying forces is disrupted, and the dominant force dictates the market’s subsequent direction.
In essence, when the forces on one side reach a certain threshold, they can tip the market in a specific direction, creating what we call a trend. While trend analysis does not offer a 100% guarantee, it does provide a useful framework for traders to anticipate market movements based on current conditions.
Moreover, human psychology plays a significant role in shaping market trends. Markets characterized by high volatility and unpredictability present opportunities for both substantial gains and significant losses, causing shifts between states of market greed and fear. In this ever-changing landscape, it’s a challenge for traders to keep their emotions in check and act rationally.
In a way, trends outline the ebb and flow of market sentiment, oscillating between extremes like greed and fear. Candlestick charts serve as a reflective tool that records these market fluctuations faithfully. They offer insight into the collective emotional shifts that sway the market, acting as a mirror that reflects the emotional undercurrents of mass behavior.
Ⅳ.How valid is Candlestick based analysis?
Like all technical indicators, Candlestick analysis is only a prediction rather than a guarantee of anything. It can tell the possibility of the occurrence of a certain trend, but there is a chance for such a prediction to not always be exact.
Unsuccessful traders often rely solely on candlestick signals to make their moves, only to find that things don’t go as planned after executing an order. They may end up buying depreciating assets or selling assets that still have room to grow. After multiple failures, these traders may start questioning the reliability of candlestick analysis and, in the worst-case scenario, abandon it altogether.
To maximize the effectiveness of candlestick analysis in trading, it’s important to use it as a supplemental tool rather than the sole basis for decision-making. Traders should understand that the trends indicated by candlestick patterns are generally short-lived. While these patterns can sometimes evolve into medium-term trends, they are unlikely to be sustained over the long term. It’s advisable to combine candlestick analysis with other technical tools like moving averages, trend lines, and trading volume analysis for a more comprehensive view of market conditions. Relying solely on candlesticks can lead to unfavourable outcomes.
In summary, candlestick patterns and their combinations offer valuable insights into the balance of power between buyers and sellers. They serve as one of many metrics for evaluating market conditions and can be useful for traders in market analysis.
Compared to other forms of technical analysis, candlestick charts are more sensitive to market changes. This sensitivity allows traders to quickly grasp market signals, enabling them to confirm whether a current trend will continue or reverse and to respond accordingly.
However, it’s important to note that most candlestick charts focus on short-term market movements and are most useful for gauging medium and short-term trends. For a more long-term perspective, traders should incorporate other forms of trend analysis such as Dow Theory, technical chart patterns, moving averages, and trend lines.
Summary
Candlestick analysis serves as a foundational element within the broader framework of technical analysis and is essential knowledge for anyone new to futures trading. Grasping the underlying logic and technical implications of candlestick patterns is crucial for mastering other methods of technical analysis.
Start trading futures by registering on Gate Futures.
Disclaimer
This article is for informational purposes only and does not constitute investment advice. Gate is not responsible for any investment decisions you make. Content related to technical analysis, market assessments, trading skills, and traders’ insights should not be considered a basis for investment. Investing carries potential risks and uncertainties. This article offers no guarantees or assurances of returns on any type of investment.
