How to use MACD indicator effectively? (with pictures)
MACD (Moving Average Convergence/Divergence Oscillator) is one of the most widely used technical indicators. One can use MACD indicator for forex trading, commodity trading, stock market trading or any other price movement chart. Generally, MACD indicator is used along with other indicators like Doda Donchian or RSI to confirm signals.


MACD Indicator


In this tutorial, we'll discuss MACD indicator in depth from basics to MACD formula, MACD strategy, analysis, settings for day trading, different examples and common questions generally asked.


Who created a MACD?


MACD indicator was created by Gerald Appel in the late 1970s. Later on, Thomas Aspray improved it by adding a signal line in 1986.


MACD Components


There are 3 main components of MACD indicator.



  • MACD Line

  • Signal Line

  • Histogram

The below chart explains the components of MACD clearly.


How is MACD calculated?


The MACD is calculated as follows:

MACD Line = 12 day EMA – 26day EMA
Signal Line = 9 day EMA of MACD Line
The MACD Histogram is the MACD Line – Signal Line


Points to remember:



  • This histogram is plotted either above (for positive readings) or below (for negative readings) a zero-line.

  • The MACD line is also called the Fast line and Signal line is also called the Slow line.

  • EMA stands for Exponential Moving Average.

MACD Trading Interpretation


Moving Average Crossovers


Whenever the MACD crosses above the signal line it is a buy signal. It is called bullish crossover. This indicates that the trend is taking its momentum in the upward direction.

Whenever the MACD crosses below the signal line it is a sell signal. It is called bearish crossover. This indicates that the trend is taking its momentum in the downward direction.

If the MACD crosses above zero line, it shows the strength of the stock. If it crosses below zero line, it shows the weakness of the stock.


MACD Histogram


If the value of the MACD is larger than the value of its 9-day EMA, then the value on the MACD-Histogram will be positive. Conversely, if the value of the MACD is less than its 9-day EMA, then the value on the MACD-Histogram will be negative.

Further increases or decreases in the gap between MACD and its 9-day EMA will be reflected in the MACD-Histogram. Sharp increases in the MACD-Histogram indicate that MACD is rising faster than its 9-day EMA and bullish momentum is strengthening. Sharp declines in the MACD-Histogram indicate that the MACD is falling faster than its 9-day EMA and bearish momentum is increasing.


MACD Divergences


MACD Divergence is one of the most famous and strongest trading signals that MACD generates. MACD Divergence forms when the price goes up and makes higher highs and at the same time, MACD bars go down and make lower highs. The rule says, the price will finally follow the MACD direction and will go down.


How do I read MACD?


We've taken theory part of MACD above. Now, we'll take few examples to understand.

Buy Signal


Let us start with Fugure 1.

MACD Example Chart
 Fig. 1 Bullish signal above zero line in MACD


The above figure is the daily technical chart of NZYJPY currency pair, using MACD indicator. I've used MetaTrader software to get above customized MACD indicator and chart.

It is clearly visible from the chart that as soon as MACD crossed above the signal line, the currency pair started moving upward. The crossover was above zero line; thus makes uptrend very strong.

This is also called Bullish MACD.

Sell Signal


The below chart is of EURNZD currency pair in H4 time frame with MACD indicator on MetaTrader software.

MACD example on EURNZD forex chart
Fig 2: MACD example on EURNZD forex chart


In the above chart (Fig. 2), MACD indicator buy signal above zero line, making uptrend in the currency pair movement. After that, it gave Sell signal and currency pair obeys MACD and started downtrend. Finally, MACD again gave buy signal and price started moving downward.


MACD Histogram


The next chart is of GBPJPY currency pair daily chart using MACD indicator.

MACD Histogram



In the above chart, I've removed MACD and signal line. Thus, it just shows Histogram clearly.

Note when the histogram is above zero (in green color), the currency pair moves upward. And when the histogram is below zero line (coral color), the currency pair moves downward.

MACD Divergence


This is a very important concept of MACD. That means if MACD gives Sell signal and in spite of that the price moves upwards, then sooner or later, the price will obey MACD and will come down.

It can happen vice-versa also.

This is very common in almost every chart.

But practically, I've seen that in spite of divergence, the price does NOT obey MACD and it moves in other direction.

So, I suggest you to use other indicators like RSI, Stochastic, Doda Donchian indicator to confirm your move.

Download MACD indicator for MetaTrader 4


I've used 2 variants of MACD indicator in the above charts. You may download the zip file containing both the indicators from here.

Just extract the zip file and copy them into MQL4\Indicators folder. If confused, click on File -> Open Data Folder menu in your MetaTrader software. It will open the exact folder, where you need to copy the indicators.

External Links


You may read another good tutorial on MACD on DodaCharts.com.
Hope you like the above article useful for trading. If you've got any doubts about it, just mention in the comments section below.

How does Technical Analysis work?
Once, between the adherent of technical analysis and the fundamental investor, a dispute arose over the operability of technical analysis. The fundamental investor sent his opponent a line chart and asked to predict the movement of the market. He did not provide any more information. Was it an action , an index, a raw material or some other asset ? Was it a tick chart, minute, hour, day, week or month? Perhaps it was a randomly generated line on the chart? A trader practicing the use of technical analysis replied that the market, probably, will continue to do, what does (and he at that moment grew up), but may fall. How did he know what would happen the next day with the line on the chart? Perhaps in this way the investor wanted to prove to himself that technical analysis does not make sense. But this he did not prove anything. He just asked the wrong question and got nothing meaningful answer.

As Edward Denning said, "If you do not know how to ask the right question, you will not find out anything." What should be the correct question? Albert Enstein, who once wrote: "If I had one hour to solve the problem, and my life depended on it, I would have spent the first 55 minutes on the correct formulation of the question. Because, as soon as I correctly formulate the question, I can solve the problem in less than five minutes. "

It is very important to know what the technical analysis suggests in one or another. Before a trader can confirm or disprove his hypothesis, he must first understand whether his underlying assumptions are true or false.


What is technical analysis?


Technical analysis is based on information about price and volume, correct interpretation of this information can predict the changes in the direction of price movement with high probability. Specialists in technical analysis use graphs as a visual representation of price movement. Before computers were widely distributed, traders had to look at the print ribbon to draw the same information, and draw the charts themselves. However, do not forget that the fundamental factors are often reflected in the graph. Sometimes the price movement lags behind the fundamental factors, so in this situation, the price will continue to move even after the fundamental factors change. In other cases, fundamental factors can exert a leading influence,

Each bar on the chart is the culmination of the opinion of millions of market participants and, accordingly, the formed demand and supply. Participants entering the market express their opinion about the direction of the asset in the future, and the price of the asset moves in one direction or another. They buy, if they believe that the price will rise, and sell, when they believe that the price will fall. If they do not have a definite opinion, the price, most likely, will not move or will be in lateral movement. The technical analyst is not interested in why the market participants came to this opinion. He's just trying to figure this out by looking at the chart. Therefore, technical analysis studies the behavior of the market, which is reflected in price and volume.

Studies show that people act reasonably predictably when they find themselves in similar circumstances. The market is growing and falling due to certain psychological prejudices and reactions of market participants. History can be repeated, but not with 100% accuracy. Therefore, the technical analyst should be judicious, trying to form an opinion on the future direction of the price movement. With that said, technical analysis is more of an art than a science. The price chart, most likely will not tell the trader anything, if there is no context and additional information about the intentions of market participants. Technical analysis is a tool. But no instrument, fundamental or technical, can accurately model and predict what will happen in the market, it can only help increase the chances of opening a successful transaction. Trading is a game of probabilities, so when opening a deal, you need to use all available methods and means to get the odds on your side.


How to use technical analysis?


Having dealt with what is a technical analysis, you need to decide how to use it. Do not look at the chart, try to predict what the market will do the next minute, the next day, a week or the next month. This is silly. The correct question that a trader should ask when looking at a chart is simple enough: "What is the market doing at the moment?". We need to forget about the predictions, look at the chart and try to see what he says about the behavior of the market directly at this moment. Looking at the history you need to evaluate what the market has already made to date. Is it in an upward or downward trend, or in a lateral movement? It is necessary to study the graphs, trying to find the key to the market movement. For example, is there a series of highs on the chart, each of which is higher than the previous one? Are there any previous highs on history that can serve as resistance? How strong is the trend? Were there significant retracements? And so on.



technical analysis



Reading a schedule is skill. As in any other case, in order to learn to read graphics, you need time and practice, otherwise you will not be able to apply this skill correctly. When a trader has read what the market says, and not what he should say, then an opinion is formed about what is happening, and an appropriate decision is made whether to open a deal for purchase, for sale or for the time being to refrain from trading. From the opening of transactions should always be abstained, when there is no understanding of what the market is doing at the moment. Before taking any action, you need to wait until the market tells you what it does.

In order not to commit ill-considered actions and not waste money before entering the position, it is necessary to answer to yourself not three questions:

- When did the market signal?

- When did the market confirm this signal?

- What should happen to misunderstand me?

For example, if the stock retreated from the resistance level, it could serve as a signal. You can wait until the price comes back and the second time bounce off this level of resistance. This price behavior will confirm that the level is held and its penetration is unlikely. When confirmation appears, you can open the deal in short. The market will report that the decision is wrong if the price goes back up and pits the resistance level. When opening such a transaction, you can set a stop order above the resistance level, so that the loss was small and controlled.



Does the technical analysis work?


The answer depends on who uses it. Any tool will be useless if it is in the hands of someone who does not know how to use it. Jesse Livermore , the legendary investor who used his technical analysis skills in trading when reading the tape, said: "If you have a minute, I'll tell you how to make money on stocks." Buy at a minimum and sell at a maximum. "If you have 5 or 10 years, I will tell you how to understand when the stock is at a minimum, and when at the maximum. "

The truth is that trading is a difficult activity, but not in the sense that many people understand it. Recently I read an article on the Internet criticizing technical analysis. One of the arguments was that the largest institutionalists employ the most intelligent people in the world with academic degrees to trade using the best quantitative strategies. In the light of such a statement, it would be foolish to consider that a private investor can win in the fight against such intellectual power. Perhaps the first statement is true, but the second is not very. Starting trading, the trader slowly begins to understand that it is necessary to watch, fear and control not so-called geniuses of quantitative analysis, but a much more insidious opponent, and this opponent is the trader himself. The trader constantly has to fight with himself. He is a market, he is predictable, he succumbs to two enemies - fear and greed - at the most inopportune time. It is he - the reason that well-trained specialists of technical analysis can read on the chart the behavior of market participants. It is because of this predictable behavior, which is inherent in human nature, that certain patterns are formed on the graphs.





technical analysis



Therefore, the greatest difficulty for each trader is his natural essence, and victory over it will be his greatest achievement. That's why the way to becoming a trader is through mastering oneself. which is inherent in human nature, certain patterns are formed on the graphs. Therefore, the greatest difficulty for each trader is his natural essence, and victory over it will be his greatest achievement. That's why the way to becoming a trader is through mastering oneself. which is inherent in human nature, certain patterns are formed on the graphs. Therefore, the greatest difficulty for each trader is his natural essence, and victory over it will be his greatest achievement. That's why the way to becoming a trader is through mastering oneself.


Happy ignorance


Many trading systems that promise quick wealth are based on certain technical principles. The only thing they can really do in just three days or a few weeks, or even a few months, is to give an understanding of some of the basics, such as graphic models. Possessing such knowledge, a trader becomes a more dangerous rival for himself and his portfolio than someone who does not know anything, because now he is armed with a false sense of competence. He thinks he has the knowledge, so he throws himself into the market with his head, but his money flows into the pockets of those players who really know what they are doing.

Therefore, the correct answer to the question "Does technical analysis work?" - it depends on who was asked the question. If the question is addressed to an experienced trader (professional or private) using technical analysis as a tool, the answer can be positive. And if the question is answered by someone who has just learned the word "trading", then it can be negative.

30 rules of Successful Trading
This article explains 30 simple but effective rules of successful trading in Forex market, stock market, commodity market, bond market or any other.



  • Trader, know yourself. Successful trading is 97% understanding and using its own strengths and weaknesses. If you constantly enter into transactions that do not use your strengths, then you will lose money.

  • Invest your money, not your "ego". Even the most carefully constructed system can unexpectedly lead you in the wrong direction. Conditions change. The markets are changing. And even a system that works fine can fail because of such changes. Always be prepared for adaptation. If you are not ready to change your settings, it can cost you very much. Never let your transaction become an "investment" simply because you are unable to understand the changes in the market.

  • Maintain a trade magazine.It is very difficult to learn from mistakes if you do not remember them. Always keep a record of your past mistakes and successes at hand. Watch for market movements and reactions and record your observations. Write down how the market moves at certain times. Such a detailed journal is no less valuable than any ever written textbook on successful trading.

  • Open the position as if it had the potential to become the "largest deal of the year". In other words, plan your deals. Do not enter the market until everything is thought through and analyzed in detail. Think about how you will add to the open position (building a pyramid). Make an action plan in unforeseen situations to exit the transaction. Otherwise, you will have to lose money.

  • Practice discipline and patience: Wait for the right moment. According to Bill Lipschitz, out of 250 deals - on three you will lose money, two will be very profitable, and all the others depend directly on you. Expect and track compound trends: a strong share, a strong group / sector, a strong market. Wait for the moment when the composite levels of support / resistance will be in your favor. Successful trading is a business where a lot of time is spent in doing nothing.

  • Open small starting positions. Use the pyramid principle to add to the original good position. Once it turned out that you were right in your decision, add to your position strategically. As Davy Crockett said, "Make sure you're right, and - go ahead!"

  • Be prepared to make mistakes and take small losses. Trade is trade, markets are markets, and losses are inevitable. However, they are manageable. Put feet, mentally or really, and execute at the planned level without hesitation. So you can manage your risks. And this is the only way to protect your capital and stay in the game.
Successful Trading





  • The news is already on the schedule, both yesterday's and tomorrow's.Proponents of fundamental analysis predictably react to news. Proponents of technical analysis predictably react to figures on the charts and indicators. If you can correctly read the schedule, then you do not need to follow the news, and even worry about what's in the news. Base your decisions on what is happening on the chart, and not on what, in your opinion, will happen after the news. Forget the news, remember the schedule. He already took into account the future news.

  • Always going to the crowd missed the first boat. For example, the first sharp drop in price (sell-off) will always find buyers, and the first rapid rise in price (rally) will always find sellers. These "reactions" are almost always temporary. Plan the purchase on the first rebound from the new high and sell on the first rebound from the new low.

  • Large volumes kill the prevailing trend. Always remember that there may be a culmination (too high) new rise or too much collapse. Such climaxes and falls are thrown out from the market by both buyers and sellers. After such breakthroughs, the market usually enters lateral movement.

  • Use moving stops if the market goes in your direction. In order not to close a position too early or too late, mentally put a stop at 10-15% of the current market price or slightly beyond the last highs or lows, or, even better, at current support / resistance levels. Then just fix the target level.

  • Always, always protect your capital. Cut off small losses.The most important principle is to be intolerant with losses. As always, small losses and quick losses are the best losses. These are not the losses that must be paid attention. It is much worse to experience psychological pressure from maintaining a loss-making position. Practice full risk management.

  • Never, never add to a loss-making position. If you are building a pyramid of long positions, then the price of each new purchase should be higher than the previous one. If you add to a short position, then the price of each new sale must be lower than the previous one. This is a mandatory rule.

  • Do not try to "catch a falling knife." On the contrary, wait a few days - a strong rise, bounce back and return to the previous minimum. If the price does not go below the previous minimum, then plan to open the position. If the price does not go up again, it does not matter, there will always be other opportunities. Expect the best time to open.

  • Buy from the support level. Set close stops when approaching the resistance level. Your price can slip through the resistance level, stop or fall. If the price falls, the position should be quickly closed.

  • Buy at the support level, sell at the resistance level. You must do so even if it is difficult. If you see this on the chart, then others see it. They are just waiting for the moment to join.

  • Never lose sight of support (or resistance, if you sold). The further you from support or resistance (if you have sold), the more naked and lonely you will be. If you want to challenge the price, then imagine a quick turn to the resistance level, imagine a big loss.

  • Every day is a new day, and every open position should be reviewed. This is especially true for your exit strategy. The price you paid and the amount of your profit or loss - things not related. If the stock has to be sold, it must be sold. It is not the amount of profit or loss from each position that is important, but your ability to stick to the chosen strategy and implement it.

  • Be patient. When the position is open, give it time to develop. Give it time to create the profit that you expected. The saying "You will never go broke, closing profits" is probably the most senseless advice ever given. Closure of small profits is the surest way to increase the probable loss, because small profits are not allowed to grow into big and huge profits. Really big money in trading is done on one, two, three big deals every year. You must develop the ability to patiently hold a profitable position.

  • Avoid this haste, which forces you to jump into the market, just to be "in the game." Do not hurry. Watch, build strategies and be the first at the right time.

  • Whatever the proverb is erased, but the trend is really your friend. Do not try to be smart and fight it. Do not try to be a hero. If it seems to you that going back in a one-way street is silly, then you are right. Bring this understanding to the market. In the bull market you need to buy or stand aside. In a bear market, you need to sell or stand aside. And always remember - do not have positions - this is also a position. And in many cases - the best position.

  • Avoid unverified "known" strategies. There are many of them. A few examples:
    "All gaps get filled" - "All breaks are filled". The ruptures of exhaustion are filled. Breakthroughs and continuations are not filled.
    "No one ever went broke taking a profit" - "No one went bankrupt closing profits." Closure of fast profits and holding of unprofitable positions can ruin faster than one can imagine.
    "It's not a loss until the stock is sold." Try to tell your banker. Cut your losses and let profits grow. It is simply impossible to be successful for a long time if you do not cut your losing positions quickly. Unfortunately, this and the previous rule is especially difficult for beginners, because the pain from loss is felt much more intensely than the joy of profit. In no other activity, the conflict between emotions and objective reality is so strong and so obvious as in the exchange trade.
    "Always buy at a new high" - "Always buy at a new high". Trends do not start at new highs, much more often they end there. Whenever possible, buy as close as possible to the beginning of the trend.

  • If you need to look for something - it's not there. As said by Elder: "Technical analysis provides enough opportunities to deceive yourself and see what you really want." The harder it is to find something, the more likely it is that you see something that does not exist in reality.

  • Trends do not unfold quickly. Trends of the trend require time for development. They are built slowly. The first few sharp falls always find buyers, and the first few sharp ups always find sellers. In both cases, buyers (on the uphill) and sellers (on the landslides) should be gradually "washed out" from the market.

  • Do more than what works for you and less than what is going against you. Every day, look through your open positions. Plan to add to the position giving the greatest profit. Consider closing positions that do not make a profit or with very little profit. This is the basis of the thesis: "Let the profits grow."

  • When you suffer sharp losses - move away from the market. Close all positions and stop trading for a few days. After a few sharp losses, do not try to recoup and return the money. In such cases, the ability to really perceive the market and its solutions is lost.

  • Think like a hired fighter. Fight on the side of the market that wins. Do not waste time and capital in vain attempts to earn, buying at the lows and selling at highs or on some market movements. Your duty is to profit by fighting on the side of the conquering forces. If neither side wins, then do not beat at all.

  • Beat the market crowd. Other traders in the game in order to take your money. You must take away their money before they get to your ...

  • About analysts: look at the analyst and the bill he has exposed. Everyone lies. In general, they do it to collect your money. Analytical services belong to financial organizations. They are not in business to help you. They are engaged in promoting the interests of the firm and collecting commissions.

  • Be ready to seriously study. Those traders who do not want to spend time studying and observing markets, training, and training, mastering technical analysis, new trading systems and methods, etc., will almost always lose.
Japanese Candlestick Pattern Evening Star
In the previous article, we've learned Japanese Candlestick Pattern Morning Star. Now, we'll see another type of same pattern, known as Japanese Candlestick Pattern Evening Star.

Japanese Candlestick Pattern Evening Star

The Evening Star is the bearish counterpart of the Morning Star pattern. The Evening Star is a reversal pattern that is emerging at the end of an uptrend. The following chart shows an example of an Evening Star pattern:

Japanese Candlestick Pattern Evening Star
Japanese Candlestick Pattern Evening Star

  1. The first candlestick has a strong bullish body.

  2. The second candlestick has a small body. He can be bullish or bearish. It is also possible that the second candlestick has no body at all (a Doji).

  3. The third candlestick has a strongly bearish body and closes at least within the first candlestick or even below the middle of the first candlestick of the formation.


There is another type of Japanese Candlestick - Morning Star which also shows the reversal of direction.

Summary


  • Morning Star and Evening Star are reversal formations.

  • The first candlestick follows the direction of the trend.

  • The second candlestick can be bullish or bearish and has a small body that reflects the indecision in the market.

  • The third candlestick follows the direction of the reversal and preferably closes over (morning star) or below (evening star) the middle of the first candlestick.

Japanese Candlestick Pattern Morning Star
In this lesson, you will learn how to interpret more Japanese complex candlestick formations and we'll start with Morning Star Candlestick Pattern.


Japanese Candlestick Pattern Morning Star


The Morning Star is an upside-down reversal pattern that develops at the end of a downtrend. The following chart shows a morning star pattern:



Japanese Candlestick Pattern Morning Star
Japanese Candlestick Pattern Morning Star


  • The first candlestick is bearish.

  • The second candlestick has a small body. It does not matter if it is bullish or bearish (though a bullish body with or without a small top wick indicates more bullish power). The second candlestick serves as an indicator that bear traders are no longer able to push the market down. In some cases, the second candlestick has no body (a so-called Doji).

  • The third candlestick is bullish and closes at least within the first candle or even above the middle of the first candlestick. This indicates that the cops gain the upper hand.

There is another type of Japanese Candlestick - Evening Star which also shows the reversal of direction.

Summary


  • Morning Star and Evening Star are reversal formations.

  • The first candlestick follows the direction of the trend.

  • The second candlestick can be bullish or bearish and has a small body that reflects the indecision in the market.

  • The third candlestick follows the direction of the reversal and preferably closes over (morning star) or below (evening star) the middle of the first candlestick.
Japanese Candlestick Hammer Pattern
The hammer is a formation in the so-called "candlestick chart technique". The hammer predicts a turnaround after a falling price. The formation consists of a single candle, which has a long lower shadow, a small candle body and a very small, ideally no upper shadow.


Japanese Candlestick Hammer Pattern


The characteristic features of the Hammer are that this candle has a long lower shadow and a short body, i.e. graphically resembles a hammer, so it's very easy to see on the chart.

The hammer is formed on the descending trend (otherwise, the candle with the same characteristics will have the name Hanged ). The hammer marks local minima and heralds further growth. Therefore, the Hammer is a bullish figure.


Japanese Candlestick Hammer Pattern Characteristics


The color of the Hammer does not matter. What matters most is the length of the shadows and the body. In order for the Japanese candle to meet the criteria to be called the Hammer, it must have the following simple features:



  • small body (approximate in shape to square)

  • long lower shadow (minimum 2 times longer than the body)

  • there is no upper shadow (or very small)

  • a large daily spread of prices (ie minus a maximum)

  • is formed on a downtrend (otherwise, has a different name)

How to identify Japanese Candlestick Hammer Pattern


Japanese Candlestick Hammer Pattern
Japanese Candlestick Hammer Pattern

The opening price is very low, usually below the closing price of the previous trading period. Over the course of the market, prices continue to fall sharply, setting a new low, causing the bottom shadows. In order to form a hammer, the prices must then record a constant plus; Ideally, prices will rise until the end of the market period, then it is likely that they will continue to rise. In this case, the candle has no wick. If she has a small wick, this means that prices have fallen again at the end of the market period, which in turn reduces the significance of the hammer as a buy signal. In principle, it is only possible to speak of a hammer when the lower shadow is more than twice the size of the candle body. Only then can a change in trend be expected with sufficient probability. In addition, the significance of this signal increases with decreasing size of the plug body.


This results in three important criteria for detecting a hammer:


1: The candle body is at the upper end of the trading period.

2: The lower shade is at least twice the size of the candle body.

3: The upper shadow is not at best in the best case, in the worst case only very small.


Hammer as a reversal figure


A single hammer candle technical analysts use to identify the moments of oversold tools. The hammer is used to confirm support and determine the moments of the trend reversal.

The psychology of the market during the formation of the figure is simply explained: a long minimum during the candle period indicates that the bears pulled the price down with a relatively large force. But as the candles formed, the bulls still pulled the price higher than the short body and the long lower candle.

hammer
hammer
When you see a combination of a "hammer" during a downtrend, this may mean that the trend will slow and change direction, moving in lateral motion or changing to an upward trend. But remember: the hammer needs to be confirmed. Whether it means a true reversal signal will become clear from the following combination of candles.

The hammer can be either a bull or a bearish candle - Hanged. If the "hanged man" appears during the uptrend, the subtext is immediately understandable. However, you will have to wait until the next candle is formed before interpreting this signal. When / if the next candle confirms the rightness of the "hanged man", fix all or part of the profit as the price will probably go down.


Example of Japanese Candlestick Hammer Pattern


As an actual example, looking at the day-to-day foot chart of the US dollar versus the Japanese yen in the past, it can be seen that the market is changing after the hammer comes out.

Since it suggests "ceiling" if it comes out in the high price area, it can be said that it is a sign that goes downward, that is when it is sold.

Japanese Candlestick Hammer Pattern
Japanese Candlestick Hammer Pattern


On the contrary, if it comes out in the bottom price zone, it suggests "bottom", so it can be said that it is a sign that goes upward, that is, at the time of purchase.

Japanese Candlestick Hammer Pattern
Japanese Candlestick Hammer Pattern

Why is the hammer a reversal model?


Professional traders who are well acquainted with the analysis of candles and the psychology of the market explain this by the fact that sellers have made an attempt to significantly lower the price (this is evidenced by a long shadow down). However, buyers were able to reverse the course of events. Therefore, at the end of the hammer a small body form.

Inverted Hammer


It's amazing that the hammer turned upside down does not change its properties for the analyst. Inverted hammer, as well as a normal hammer, is a bullish sign on the chart, while on a downtrend (otherwise, it is also called otherwise).


Inverted Hammer
Inverted Hammer

No matter how you divide the market periods, whether, in weeks, days or hours, the hammer is always a signal for a turnaround. Of course, the informative value increases with the height of the selected time level.

3 types of Chart Styles
In this article, we'll explain 3 types of Chart styles used in all kinds of trading market - forex market, stock market, commodity market, bond market etc.

3 types of Chart Styles


  • Candlestick Chart

  • Bar Chart

  • Line Chart
Now, let us see above-mentioned charts in detail. As an example, the same chart is used in 3 different ways. The chart is USDJPY forex currency pair on daily time frame.

Candlestick Chart


Candlestick is a chart style born in Japan, but now it is widely used in the West as a candle chart (or candlestick chart) in the West. It is characterized by 4 values (open price, high price, low price, close price) visually easy to grasp. Methods for analyzing individual candle shapes and contexts are also widely used.

Candlestick Chart
Candlestick Chart


The interesting thing is that the sense of color is different between Japan and the West. Normally, in Japan, when the closing price ends higher than the opening price, it draws in red (this is called positive line), when it finishes cheaply it draws in blue (hidden line). In Europe and the US use green or blue when rising and red when going down. Red is a color that is congratulatory in Japan, but in Europe and America, it is a color that represents caution and danger. In addition, when monochrome is used, the rise will be white and the descent will be black for the world.


Advantages and disadvantages of the candlestick charts


The advantage lies in the fast visual capture and the simultaneous comprehensive statements of a candle. There are traders who no longer look at any other representation.

Compared to traditional bar charts, many retailers see candlestick charts as more visually appealing and easier to interpret. Each candlestick offers an easy to interpret the image of a price action. The trader can immediately compare the relationship between opening and closing and high and low. The relationship between opening and closing is seen as important information and forms the essence of candlesticks.

The exciting thing about candlelight charts is that the candles themselves can serve as an indicator of future upward or downward movements and are therefore often part of their own trading strategy.
Unfortunately, some traders find the not so clear identification of opening and closing prices compared to the bar charts with entry and exit, although the candle actually represents these courses clearly by their body. Another drawback could result from the variety of over- and misinterpretations of the candlesticks that their fans set into the world.


Bar Chart


In contrast to the line chart, the bar chart (also called bar chart OHLC ) gives you at a glance four important pieces of information for the considered time period:

  • Opening price ( O pen)

  • Highest price ( H igh)

  • Low price ( L ow)

  • Closing price ( C loose)


The bar chart is a chart style that is common in Europe and the United States. Like the candlestick, it is devised so that 4 values are known. Individual feet (vertical lines) represent high and low values as shown in the image, protrusions on the left side represent opening values, and protrusions on the right side represent closing prices. There is also a pattern of three values whose initial value is omitted. It is almost impossible to distinguish between positive and negative lines, but you may also see color-coded bar charts.

Bar Chart
Bar Chart


Whether you use candlestick or bar chart is a matter of taste, candlesticks require a certain horizontal width to draw a single leg, so bar charts have a lot more in the limited screen There are merits to draw. Also, the candlestick emphasizes the opening and closing prices, so if you want to pay attention to the value range you just moved, a bar chart would be a good idea.

Due to the variable length of the bars, even strong fluctuations in the price trend are immediately visible.

In terms of information provision, the bar chart thus has its nose clearly ahead of the line chart due to its graphical representation.


Line Chart


Line Chart
Line Chart

A line chart is a line graph showing the closing price (which may take the opening price or the medium price). Although information volume is inferior to candlestick feet and bar charts, it is simple and easy to see style.


Advantages and Disadvantages of Line Chart


The line chart is often the first choice for newcomers and stockbrokers because it shows at a glance whether the underlying asset is currently falling or rising.

The disadvantage of this chart representation is quickly clear: For more than the information on the closing prices this chart type does not provide. He completely ignores statements regarding strong supply or demand fluctuations. The informative value of the line charts is therefore very limited.

For investors whose strategy is based solely on trading of closing prices, the line chart is certainly very useful. Investors who are looking for further information from their chart picture will not be happy with the chart.


Which Chart Style should you use?


Just consider pros and cons of each chart style.

Line chart just shows line in a chart, whereas bar chart shows value range.
And above all, Japanese Candlestick chart shows tons of information on a single chart. Each candle represents the trend. So, combining candlestick chart with technical indicators like MACD, Doda Donchian, ADX, RSI, Stochastic etc. means, you can forecast future of trend. Almost every professional & successful traders use candlestick charts and pay attention to different patterns they formed.

Now, if we assume that technical analysts are what they see in a chart, it becomes clear that the highly complex presentation of the price history in the form of candlelight charts provides you with the highest quality information both quantitatively and qualitatively at a glance!

Therefore, it is not surprising that candle charts probably represent the most popular method of analysis worldwide. And even I hardly know a professional who does not rely on the validity of the candles.

It may require some time to learn and to gain experience, but you'll surely learn.

We'll use Candlestick charts on this website - almost everywhere.

You can find lots of tutorials and guide to learn the art of forex trading on this website and on DodaCharts.com
Japanese Candlestick Complex Patterns
This article explains all Japanese Candlestick Complex Patterns. There are about 22 Japanese Candlestick Complex Patterns, formed by the combination of 2 or more candles on the technical chart.

Japanese Candlestick Complex Patterns

Japanese Candlestick Complex Patterns



S.No.Candle Pattern ImageCandle Pattern NameCandle Pattern Description
1. Bearish HaramiBearish HaramiBearish Harami Consists of an unusually large white body followed by a small black body (contained within large white body). It is considered as a bearish pattern when preceded by an uptrend.
2. Bearish Harami CrossBearish Harami CrossBearish Harami Cross A large white body followed by a Doji. Considered as a reversal signal when it appears at the top.
3. Bearish 3-Method FormationBearish 3-Method FormationBearish 3-Method Formation A long black body followed by three small bodies (normally white) and a long black body. The three white bodies are contained within the range of first black body. This is considered as a bearish continuation pattern. Bearish 3-Method Formation A long black body followed by three small bodies (normally white) and a long black body. The three white bodies are contained within the range of first black body. This is considered as a bearish continuation pattern.
4. Bullish 3-Method FormationBullish 3-Method FormationBullish 3-Method Formation Consists of a long white body followed by three small bodies (normally black) and a long white body. The three black bodies are contained within the range of first white body. This is considered as a bullish continuation pattern.
5. Bullish HaramiBullish HaramiBullish Harami Consists of an unusually large black body followed by a small white body (contained within large black body). It is considered as a bullish pattern when preceded by a downtrend.
6.Bullish Harami CrossBullish Harami CrossBullish Harami Cross A large black body followed by a Doji. It is considered as a reversal signal when it appears at the bottom.
7. Dark Cloud CoverDark Cloud CoverDark Cloud Cover Consists of a long white candlestick followed by a black candlestick that opens above the high of the white candlestick and closes well into the body of the white candlestick. It is considered as a bearish reversal signal during an uptrend.
8. Engulfing Bearish LineEngulfing Bearish LineEngulfing Bearish Line Consists of a small white body that is contained within the followed large black candlestick. When it appears at top it is considered as a major reversal signal.
 9. Engulfing BullishEngulfing BullishEngulfing Bullish Consists of a small black body that is contained within the followed large white candlestick. When it appears at bottom it is interpreted as a major reversal signal.
10. Evening Doji StaEvening Doji StarEvening Doji Star Consists of three candlesticks. First is a large white body candlestick followed by a Doji that gap above the white body. The third candlestick is a black body that closes well into the white body. When it appears at the top it is considered as a reversal signal. It signals more bearish trend than the evening star pattern because of the doji that has appeared between the two bodies.
11. Evening StarEvening StarEvening Star Consists of a large white body candlestick followed by a small body candlestick (black or white) that gaps above the previous. The third is a black body candlestick that closes well within the large white body. It is considered as a reversal signal when it appears at top level.
12. Falling WindowFalling WindowFalling Window A window (gap) is created when the high of the second candlestick is below the low of the preceding candlestick. It is considered that the window should be filled with a probable resistance.
13. Morning Doji StarMorning Doji StarMorning Doji Star Consists of a large black body candlestick followed by a Doji that occurred below the preceding candlestick. On the following day, a third white body candlestick is formed that closed well into the black body candlestick which appeared before the Doji. It is considered as a major reversal signal that is more bullish than the regular morning star pattern because of the existence of the Doji.
14. Morning StarMorning StarMorning Star Consists of a large black body candlestick followed by a small body (black or white) that occurred below the large black body candlestick. On the following day, a third white body candlestick is formed that closed well into the black body candlestick. It is considered as a major reversal signal when it appears at the bottom.
15. On NecklineOn NecklineOn Neckline In a downtrend, Consists of a black candlestick followed by a small body white candlestick with its close near the low of the preceding black candlestick. It is considered as a bearish pattern when the low of the white candlestick is penetrated.
16. Three Black CrowsThree Black CrowsThree Black Crows Consists of three long black candlesticks with consecutively lower closes. The closing prices are near to or at their lows. When it appears at the top it is considered as a top reversal signal.
17.Three White SoldiersThree White SoldiersThree White Soldiers Consists of three long white candlesticks with consecutively higher closes. The closing prices are near to or at their highs. When it appears at the bottom it is interpreted as a bottom reversal signal.
18.Tweezer BottomsTweezer BottomsTweezer Bottoms Consists of two or more candlesticks with matching bottoms. The candlesticks may or may not be consecutive and the sizes or the colours can vary. It is considered as a minor reversal signal that becomes more important when the candlesticks form another pattern.
19. Tweezer TopsTweezer TopsTweezer Tops Consists of two or more candlesticks with matching tops. The candlesticks may or may not be consecutive and the sizes or the colours can vary. It is considered as a minor reversal signal that becomes more important when the candlesticks form another pattern.
20. Doji StarDoji StarDoji Star Consists of a black or a white candlestick followed by a Doji that gap above or below these. It is considered as a reversal signal with confirmation during the next trading day.
21. Piercing LinePiercing LinePiercing Line Consists of a black candlestick followed by a white candlestick that opens lower than the low of preceding but closes more than halfway into black body candlestick. It is considered as reversal signal when it appears at bottom.
22. Rising WindowRising WindowRising Window A window (gap) is created when the low of the second candlestick is above the high of the preceding candlestick. It is considered that the window should provide support to the selling pressure.

The detailed description of above mentioned Japanese Candlestick Complex Patterns will be explained in subsequent articles with examples.
Japanese Candlestick Simple Pattern
This article explains different types of Japanese Candlestick Simple Pattern.

Japanese Candlestick Simple Pattern


Japanese Candlestick Simple Pattern
Candlestick charts come from Japan and were developed in the 18th century by the legendary Muneshia Homma, one of the first and probably the most famous of all Japanese, who used the candle formations for price forecasts. Originally, candlestick charts (or candle charts) were used in the analysis of the price development of rice. With these Japanese candles, course patterns can be recognized and also serve the construction of trend lines. Steve Nison introduced these Japanese candle patterns to the Western public.

For a candle, the opening, high, low and closing price of a time unit, such as an hour, day or even week, is necessary. This course presentation approach is similar to bar charts. Bar charts are displayed as vertical lines with left and right bars representing the opening and closing price, respectively. Japanese candles, on the other hand, are represented as vertical rectangles connecting the opening and closing prices, and thin lines above and below the body, the so-called upper or lower shadow or wick (shadows or wicks).

Below are different Japanese Candlestick Simple patterns:



S.No.Candle Pattern ImageCandle Pattern NameCandle Pattern Description
 1. Big Black CandleBig Black CandleBig Black Candle Has an unusually long black body with a wide range between high and low. Prices open near the high and close near the low. Considered a bearish pattern.
2.Big White CandleBig White CandleBig White Candle Has an unusually long white body with a wide range between high and low of the day. Prices open near the low and close near the high. Considered a bullish pattern.
3. Black BodyBlack BodyBlack Body Formed when the opening price is higher than the closing price. Considered to be a bearish signal.
4. DojiDojiDoji Formed when opening and closing prices are virtually the same. The lengths of shadows can vary.
5. Dragonfly DojiDragonfly DojiDragonfly Doji Formed when the opening and the closing prices are at the highest of the day. If it has a longer lower shadow it signals a more bullish trend. When appearing at market bottoms it is considered to be a reversal signal.
6. Gravestone DojiGravestone DojiGravestone Doji Formed when the opening and closing prices are at the lowest of the day. If it has a longer upper shadow it signals a bearish trend. When it appears at market top it is considered a reversal signal.
7. Long-Legged DojiLong-Legged DojiLong-Legged Doji Consists of a Doji with very long upper and lower shadows. Indicates strong forces balanced in opposition.
8. Hanging ManHanging ManHanging Man A black or a white candlestick that consists of a small body near the high with a little or no upper shadow and a long lower tail. The lower tail should be two or three times the height of the body. Considered a bearish pattern during an uptrend.
9. HammerHammerHammer A black or a white candlestick that consists of a small body near the high with a little or no upper shadow and a long lower tail. Considered a bullish pattern during a downtrend.
10. Inverted Black HammerInverted Black HammerInverted Black Hammer A black body in an upside-down hammer position. Usually considered a bottom reversal signal.
11. Inverted HammerInverted HammerInverted Hammer A black or a white candlestick in an upside-down hammer position.
12. Long Lower ShadowLong Lower ShadowLong Lower Shadow A black or a white candlestick is formed with a lower tail that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bullish signal when it appears around price support levels.
13. Long Upper ShadowLong Upper ShadowLong Upper Shadow A black or a white candlestick with an upper shadow that has a length of 2/3 or more of the total range of the candlestick. Normally considered a bearish signal when it appears around price resistance levels.
14. MarubozuMarubozuMarubozu A long or a normal candlestick (black or white) with no shadow or tail. The high and the lows represent the opening and the closing prices. Considered a continuation pattern.
15. Shooting StarShooting StarShooting Star A black or a white candlestick that has a small body, a long upper shadow and a little or no lower tail. Considered a bearish pattern in an uptrend.
16. Spinning TopSpinning TopSpinning Top A black or a white candlestick with a small body. The size of shadows can vary. Interpreted as a neutral pattern but gains importance when it is part of other formations.
17. White BodyWhite BodyWhite Body Formed when the closing price is higher than the opening price and considered a bullish signal.
18. Shaven BottomShaven BottomShaven Bottom A black or a white candlestick with no lower tail. [Compare with Inverted Hammer.]
19. Shaven HeadShaven HeadShaven Head A black or a white candlestick with no upper shadow. [Compared with hammer.]