How to read Candlestick patterns for algo trading?

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Traders typically conduct two types of analyses to evaluate the performance of an asset, i.e, fundamentals and technicals. The former deals with the basic qualitative and quantitative information underlying a company such as revenue, industry trends, etc, however, these factors are sometimes not reflected accurately in the market price of the asset.

Technical analysis gives traders insights necessary for navigating the gap between intrinsic and market value based on historical performance. It involves the use of statistical analysis and behavioural economics to predict price movements. An algo trading online course helps traders understand various theories behind fundamental and technical analysis, allowing them to make informed decisions.

Here, we take a detailed look into candlesticks, one of the most popular forms of technical analysis and how to read the patterns for algo trading. If you want to learn more about trading and investing, consider algorithmic trading courses to learn more about various investing styles from experienced professionals.

What are candlesticks?

Candlesticks are one type of technical chart used to describe the historical performance of an asset, i.e. currency, derivatives, securities, etc. over a certain period of time. In addition to the opening and closing prices, a candlestick for any security also contains the highest and the lowest price points in a day. The consequent build pattern can be used for predicting the price direction once completed.

When using indicators like candlesticks, it is best to use them in conjunction with other forms of analyses, which can include trend analysis, price action, price patterns, and fundamentals. This is due to the fact that candlesticks are essentially just visual data and interpretation of the information is highly subjective. A series of red candles can be bearish for one investor and an entry point for another.

Algo trading courses are beneficial for traders in every major financial market and allow them to time the trades correctly at the best price by studying various indicators.

Interpreting a candlestick chart

The appearance of the candlestick’s real body and the shadows offer a ton of information about the state of the market in the coming days. Candlesticks visualise the size of the price movement in a day and traders use this information to make trading decisions. Trading courses are the best way to learn how to read patterns to predict price point movements in the short term future.

The candlestick has a wide part, called the “real body” and one or two “wicks” protruding from either side of the candle. The real body depicts the price range between the opening and closing prices of the day. The colour of the candlestick is determined by the market forces. So, if the real body is hollow or green, it indicates an upward trend over the earlier closing position, while black or red indicates a downward trend over the earlier closing position. High frequency trading coursesteach how to study various patterns in a candlestick chart for making real-time decisions.

Anatomy of candlesticks

Similar to a bar chart, a daily candlestick chart shows four elements.

  • Open – Shows the opening price of the stock when trading opens.
  • High – Highest price set by the stock during a given time. Note that if the opening price was also the highest, the upper “wick” or shadow will be missing from a red stick.
  • Low – Lowest price set by the stock in a day. Like the above situation, if the closing price is also the lowest, the chart will display a red stick without a lower shadow.
  • Close – Shows the closing price of the day when trading ends for a day.

The size of the real body is an indicator of the trading activity in a day. A long body indicates heavy trading in either direction, while a short body is indicative of lighter trading activity. The real body can also either be hollow or solid depending on the price trend.

  • Hollow (or green) body: The candlestick is hollow when the closing price is higher than the opening price; this indicates a bullish trend and shows buying pressure. Here, the bottom of the real body indicates the opening price and the top of the real body shows the closing value of the stock.
  • Solid (red or black) body: A candlestick is red or black when the closing price is lower than the opening price, thereby indicating a bearish trend and showing selling pressure. Here, the top of the real body indicates the opening price, while the bottom of the real body shows the closing price.
  • Doji: When the opening and closing price of an asset is identical, the real body has no length and the chart depicts a plus (+) shaped symbol. Dojis appear mostly during trend reversals and form patterns that are an indicator of changing market psychology.

Encyclopaedia of Candlestick Charts, the seminal work of market expert Thomas Bulkowski published in 2008, highlights the most popular candlesticks used across the world and carries information on how to predict upward and downward trends precisely. Seasoned investors can identify over 50 candlestick patterns and use the information to identify entry and exit points for an asset. Algorithmic trading coursescan help you memorise the most important patterns and execute profit-making strategies.

Benefits of candlestick patterns

An algo trading online coursewill teach you all you need to know about various chart patterns so that you can make an informed trading decision. We have seen above that candlesticks are only a visual representation of the data and can be interpreted as needed. Here, let us take a look at some of the advantages of candlestick patterns for algo trading.

  • Candlesticks are easy to understand and patterns can be easily identified by studying the chart. The length of the real body and shadows can be used to indicate the daily trading activity accurately.
  • Compared to traditional charts, they provide a much more comprehensive description of the interaction between buyers and sellers and the overall market sentiment dictating the happenings and occurrences over a period.
  • Most seasoned traders will use candlestick charts in conjunction with other indicators like fundamentals, price patterns, etc. Candlesticks for a particular season can be tallied with global events to determine price patterns in similar future occurrences.
  • Reversal patterns are a unique feature of candlestick charts and indicate a change in trend direction. For technical analysts, price patterns can be used to study current movements and predict future movements.

Conclusion

The knowledge of candlesticks and candlestick patterns is indispensable in algo trading. With algo trading online courses, traders and investors can better understand the profit potential and apply their knowledge in real-time to make informed decisions.

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