Home / Blog / Candlestick Chart Patterns : Why Do Candle Charts Patterns work so well?

Why Do Candle Charts Patterns work so well?

The reason is just one word- psychology. Candle chart patterns let you gauge the psychology of the market at the time the candlestick lines are formed. This gives immediate insight into who is winning the battle between the bulls and the bears. For example, look at the candlestick signal in the image below, called a hammer. We see the market sold off at some point during the session (remember – candlesticks work in all time frames and all markets that have an open high low and close), but by the end of the session, it came back strongly to close at, or near the highs. So, in this case we could see the psychology the market is turning more positive.

What do candlestick charting patterns mean for your trading and investing strategy?

John Maynard Keynes, a very famous 20th-century economist, said “it’s extremely dangerous to have a rational investment policy in an irrational world.” And truly the only way to gauge the irrational, that is the emotional aspect of market, is through technical analysis. And the most accurate, fastest way to gauge this aspect of the market is through candlestick charts. So, in the above scenario with the hammer the bulls will be getting a little bit more optimistic, and the bears will be getting little bit more nervous. After all if the market was weak once it sold off it should close near the lows, but instead bounced back. So with the hammer we can see the psychology of the market is turning more positive.

Another example of gauging market psychology with a candle signal is a bullish engulfing pattern where a green real body wraps around the prior red real body. We can see in this classic signal on this chart the bulls are wresting control the market for the bears. And as soon on this example many candle signals, such as the bullish engulfing pattern, can be used as a potential support area and thus a good area to set a protective stop if one uses this pattern to initiate a long.


All of our favorite candlestick pattern indicators have the sound psychological foundation behind what the candlestick signal is forecasting. And one particularly important aspect is that while candlesticks can be used to the Western indicators, because candlesticks are gauging what’s happening right now in the market, unlike Western indicators which are lagging, it means you will frequently get the first signs of market reversals with candlesticks before those who use only Western indicators. As such you should be able to jump on a new trend, or exit before the trend turns against you, just as a trend is changing.

Copyright © Candlecharts.com |   Top

Risk Disclosure: The risk of loss trading securities, futures, forex, and options can be substantial and is not for every investor. Individuals must consider all relevant risk factors including their own personal financial situation before trading. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results. We make no profitability nor performance claims of any kind; all information is published for educational use only. Disclaimer: All information provided herein is published for educational purposes only and should not be construed as investment advice. No profitability nor performance claims of any kind are being made. Trading is a high-risk, speculative activity. We are not an investment advisor, financial planner nor registered broker. We are a publisher of educational content. Consult with a registered investment advisor prior to making trading and/or investment decisions. By accessing this site and its products/services you agree to all terms of our Disclaimer . No offer to buy nor sell any instrument is being made on this site. You hereby grant this site a royalty-free, perpetual, worldwide license to display, modify, adapt, create derivative works from, and otherwise use any suggestions, ideas, comment posts and information that you provide to this site. None of our content on any site nor courses nor other publications is a promise or guarantee of specific results or future earnings; we do not offer any financial investment nor trading advice of any kind; we publish educational content. We do not purport to tell or suggest which securities nor currencies customers should buy or sell for themselves. Our owners, employees, subcontractors, colleagues and/or affiliates may hold positions in the stocks, currencies or industries discussed here. You understand and acknowledge that there is a very high degree of risk involved in trading. It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Testimonials may not be representative of the experience of other clients, and testimonials are no guarantee of future performance nor success. Their experiences may not be typical of what you can expect to achieve, as results may vary. Claims contained within testimonials have not been verified. Testimonials, case studies and success stories are individual experiences by persons who have used our services. Although these are accepted from site visitors and customers in good faith, we have not independently examined the trading records of any customers and therefore have not verified any specific figures or results quoted therein. For this reason you should assume that their results are not typical. No representation is being made that any account will or is likely to achieve profits of any kind. Generally-expected customer results are that all traders lose money and do not become profitable, regardless of the training they receive -- trading is a high-risk speculative activity and there is significant risk of financial loss involved. Trading involves a substantial degree of risk and may not be suitable for all investors. Past performance is not necessarily indicative of future results. Commodity Futures Trading Commission (CFTC) Rule 4.41 HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM. ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE ABILITY TO WITHSTAND LOSSES OR ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN ADVERSELY AFFECT ACTUAL TRADING RESULTS. The information, services, products, claims, and materials on our sites are provided “as is” and without warranties of any kind, either expressed or implied. We disclaim all warranties, expressed or implied, related to strategies and content provided on this site as well as those that are presented in our products and services. All courses, videos and services are licensed for individual noncommercial private use only and may not be resold nor redistributed in any manner. All sales are final and no refunds are offered. Every visitor to this site, and subscriber (or prospective subscriber or customer) acknowledges and accepts the limitations of the services provided, and agrees, as a condition precedent to his/her/its access to our sites, to release and hold harmless Candlecharts.com, Candlechartsacademy.com and Mycandlecharts.com, its officers, directors, owners, employees and agents from any and all liability of any kind (including but not limited to his/her viewing and/or implementation of this sites’ content, emails, webinars, videos, subscription to services and/or purchase of any trader training product or service herein). We encourage all traders to learn to trade in a simulated trading environment using a demo account only, where no risk may be incurred and to not risk live capital. TESTIMONIAL DISCLAIMER: Testimonials appearing on Candlecharts.com or any of our other web sites may not be representative of the experience of other clients or customers and is not a guarantee of future performance or success.