Decoding Candlestick Charts

How to Develop Spatial Pattern Recognition Skills for Fast & Easy Reading of Stock Charts

When Candlestick Charts were first introduced to the western markets, everyone using Stock Charts and Technical Analysis relied on indicators more than Bar Charts, which were the most popular charts back then. Bar Charts are much harder to read, give less visual data, and take longer to interpret. Candlestick Charts were instantly popular because they made reading price fast and simple. 

In the beginning Candlesticks were assumed to be the confirming indicator, which made pure price subordinate to indicators such as MACD and Stochastic both very popular indicators. Find a link to the TechniTrader MACD Webinar at end of this article.

However decoding Candlestick Charts and using Candlesticks as the entry signal rather than just confirming a continuation of the trend or a reversal of the trend, enables traders to use pure price as their entry and exit signal.

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Spatial Pattern Recognition Skills™ SPRS are something most traders do not have, and need to develop. It takes a while to learn how to read Candlesticks as quickly and as easily as you are reading this text, but when you can do so it opens up a world of information about why price is moving as it is and how it will move next. 

During Trading Range Market Conditions as we have now, keen SPRS are imperative. Otherwise the markets seem merely volatile, unpredictable, and confusing. By learning SPRS you can speed up the entire analysis process, and find strong picks to trade. 

Everyone who uses Candlesticks knows what a Doji Candlestick is, however where it forms can reveal a great deal. As an example using the Doji for decoding Candlestick Charts, the Doji can be a resting day candle and the stock will continue moving down, OR the Doji can be an exhaustion pattern in which the stock will reverse, OR the Doji can expose Dark Pools controlling price. 

The reason Dark Pool Quiet Accumulation is easy to recognize in a candlestick formation, once it is understood how giant Institutions using Dark Pools buy and sell, the patterns become obvious and are instantly easily recognized. In the chart example below the tight formation of Doji first being white, then black, and then white again is a Dark Pool Quiet Accumulation Candlestick Chart pattern.

very tightly compacted dojis help traders see patterns for early entries - technitrader

Since this is also a compression consolidation of Doji, it is also indicating a likely Breakout pattern. The stock may either run with High Frequency Trading HFT triggers or gap. Entering early in this tight consolidation of Doji, ensures that the trade is executed before a potential run or gap. The more compression there is then the more velocity behind the Breakout, with the pattern definitely favoring an Upside Breakout. The way the Doji have formed in the Candlestick Chart tell the Technical Trader with strong SPRS, that this is an Upside Breakout about to occur soon.

Summary

The chart example also gives other information regarding decoding Candlestick Charts. The stock has bottomed decisively and recently. It has no strong resistance above price. The tight consolidation of Doji was preceded by speculative trading triggered first by Professional Traders, then HFTs, and then Smaller Funds. The stock went sideways as Professionals took profits while Smaller Funds bought. Now it is in a very tight formation. The control of price requires a very specific type of order that only Dark Pools use regularly.

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Trade Wisely,
Martha Stokes CMT
TechniTrader technical analysis using a TC2000 chart, courtesy of Worden Bros.

Chartered Market Technician
Instructor & Developer of TechniTrader Stock and Option Courses
TechniTrader DVDS with every course.

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