Hammers in Hindsight Work!

[james_gsx 16]

Please pardon the joke of the title. What I want to discuss here is how to really read the candles. Some things have been discussed lately that I feel display a lack of true understanding of candles.

 

1 - The name of the candle is irrelevant.

2 - Candles are not some fancy indicator, they are just another visualization of price action

3 - If you disagree with the top two, go eat a cookie and come back in two hours.

 

 

As you can see in this simple 15 minute chart a similar characteristic comes up before a major move. This is important, so put on your reading glasses and take out your pen and notepad (you better have one you newbie traders you).

 

Ready?

 

The body of the candle gets smaller, this indicates a lack of pressure in the current trend

 

To make it simple, when price is going up and you see a spinning top/doji all it simply means is bulls are losing steam. There isn't a lot of demand to push price higher, thus the smaller body. The wick simply means someone came in, and pushed price in the other direction. It does not mean go short or long, it simply means price may have hit a point and needs to slow down or reverse.

 

Look closely at the candles I outlined in the sample. The hammer that I know you all know I'm talking about, is a great example. The wick indicates price kept selling but buyers came in, that's all that matters. There were more buyers at that level than sellers, and price went up. We can now call this the, "James is brilliant" candle, since it really doesn't matter. Now a lot of newbies including myself would say, "but price didn't immediately go up". But that's where you, and myself, would be incorrect. It simply means there are more buyers, and the probability of price going up is higher. Remember, this is a business of probabilities.

 

A few candles later price did reverse and go up, then at 1340 a "spinning something" finally came. But notice how it was now on support? That's a good thing, it means buyers are keeping the price stable and allowing for more buyers to come in.

 

Then we get the inverted hammer after our 12pt run. There is something meaningful about this inverted hammer, it's up against resistance. Notice how we hit that price point earlier and it made that super small doji? Well, that means there aren't anymore buyers. That wick tells us more sellers came in and pushed price down. A few candles later, down we went... to a doji and hammer!

 

I think you know where I'm going with this... And for grins, I threw in the same chart using bars and line. Similarities come up, guess what they are.

 

Have a nice trading day.

 

 

 

[habi 10]

Hi James

 

Whatever analysis you do, most important thing is the trend and probably the most difficult thing to identify it. Is there a trend and how strong is it? Have a look on the 15min chart. Since the top at ~1360 we are in a downtrend, but with overlapping waves, which means, the trend is not very strong. In surch circumstances candles work very well as turningpoints.

 

Let's now look on the upmove in the middle in a five minute chart. The 'reversal candles' (inverted hammer, shooting star ...) didn't change the trend, they produced just a small retracement. As with all indicators, in different environments we have to apply them in a different way.

 

Helpful in determinig the trend are the wide range body candles, in this case the long green upbars.

 

[Blu-Ray 10]

James

 

Good thread, would you mind going in depth about the saying " Not all hammers are equal"

 

Cheers

 

Blu-Ray

[trader273 10]

I think you should also show what time frame your charts are showing. A hammer on a one minute chart is not usually as strong as a hammer on a 10 or 15 min chart.

[brownsfan019 17]

Here's an important concept that James did not mention (yet) and 273 alluded to it:

 

CANDLES IN AND OF THEMSELVES BECOME LESS RELIABLE LOWER THE TIMEFRAME.

As I've said many, many times on this very forum, you need to have some sort of additional confirmation when you use candlestick analysis on lower timeframes. And by low, I mean under 1 day. You have to find what works for you.

[james_gsx 16]

Brownsfan - I actually was telling myself that while writing the thread, but for some reason I never typed it out But you are absolutely correct, a higher time frame will give you better signals. I think that may be one reason why I'm much better swing trading than day trading.

 

Trader273 - That was a 15 minute chart. Overall, I was just trying to show the basics of candles and how the body tends to get smaller at the end of trends.

 

Habi - you bring up a very good point. These "reversal" signals don't necessarily mean reversal, in the case of a trend on a 5 minute chart they could simply mean the trend will take a break. It should tell you to either take some profits if you are already in the trend, or wait for the pullback to get back on the train.

[MrGimp 10]

Yeah I agree Habi, you make a good point about reading the candles differently depending on the trend youre in.

 

Although, Im no day trader. Not long term either though. I guess Id be labelled a swing trader? Although sometimes I feel like Im trading flat lines. lol

 

But Im getting better, especially the last couple weeks, I feel like something has clicked with my understanding of what Im doing.

[btrader2 10]

Overall, I was just trying to show the basics of candles and how the body tends to get smaller at the end of trends.

 

James, I agree with time based charts but with VBC candles, isn't it true that a series of smaller candles (volume increase) can indicate a different type move may be under way?

[brownsfan019 17]

James, I agree with time based charts but with VBC candles, isn't it true that a series of smaller candles (volume increase) can indicate a different type move may be under way?

 

Using VBC's with candlestick analysis is another animal. I used VBC's for a very long time and while they can be profitable, I just got tired of trading so much in one day. I literally had days over 50 trades in a day with VBC's. Just too much strain by the time 4pm rolled around.

 

VBC's with candlestick analysis can be very profitable but it does take time to find your niche with them.

[btrader2 10]

Using VBC's with candlestick analysis is another animal. I used VBC's for a very long time and while they can be profitable, I just got tired of trading so much in one day. I literally had days over 50 trades in a day with VBC's. Just too much strain by the time 4pm rolled around.

 

VBC's with candlestick analysis can be very profitable but it does take time to find your niche with them.

 

I agree and thanks for the input. Used with a proper filter like Higher TF S/R.

[james_gsx 16]

The advantage of VBCs and candlesticks is you bring volume into the equation. There are definitely pros and cons like brownsfan said, and you really do have to find your niche with them. Ultimately I have gone through plenty of time frames, and I consistently see the clear candlestick setups on the 15, then broken down into the 5 and 3.

[brownsfan019 17]

The advantage of VBCs and candlesticks is you bring volume into the equation. There are definitely pros and cons like brownsfan said, and you really do have to find your niche with them. Ultimately I have gone through plenty of time frames, and I consistently see the clear candlestick setups on the 15, then broken down into the 5 and 3.

 

I agree 100%.

 

I really like the 15 minute by itself for daytrading. Keeps the amount of trades reasonable and able to go for larger profits.

[btrader2 10]

Thanks James and Brownsfan for your observations. I wanted to know how you guys from the Candlestick Corner felt about these. Candle "type" identification is not yet a written part of my strategy but I may set up a 15 min as another HTF and see how it goes. My LTF (e.g. 1500V for NQ) stays a VBC as I feel I have a niche.

[james_gsx 16]

Well setting up a 15min chart is worth at least looking at. Whether or not you trade it from it is your own decision, but I wouldn't put down the opportunity to look at it. You never know, it could be way too boring for you, or you could love it.