Real Traders Use Candlesticks… or do they?

Here’s an interesting observation – over the last week I’ve received half a dozen emails asking why I don’t use candlesticks.

While that’s fairly understandable, given the current series of price bar reversal videos, it led me to thinking that there’s probably a lot more people who are thinking the same thing but hadn’t bothered to email, so perhaps I’d better expand on this in the newsletter.

Actually, I even had one person who informed me that they had unsubscribed from the newsletter because of the fact that I don’t use candlesticks. Ok…whatever!

So, here’s my thoughts on the price bars vs candlestick debate, partly copy/pasted out of the email replies…

  • I do use candlesticks, probably 95% of the time. (I’ll explain the other 5% below).
     
  • The first video of the ‘price bar reversal‘ series explains why I’m presenting price bar reversals – (a) not everyone uses or likes candles, and (b) the price bar reversals are different reversal patterns that are also applicable to candlestick traders. The patterns provide some additional tools that can be used in your analysis. Yes, you can use these same patterns with candles.
     
  • Candles are derived from the same information as price bars and in fact show exactly the same information as price bars. It’s all just open, high, low and close.
     
  • There is nothing magic about candlestick reversal patterns, just as there is nothing magic about the price bar reversal patterns. They contain no mystical, eastern secrets that will lead to market success. They are not a Holy Grail entry system. In fact, if you attempt to use them as a standalone system you won’t be trading for much longer at all. They’re just a tool that indicates potential short-term change in sentiment, and should be applied as one part of a complete strategy. You also need to consider the context of where the pattern is occurring within the market structure, an appropriate entry plan, management plan, exit plan, position sizing and risk management.
     
  • So, given that there is nothing magic about them, why do I prefer candles over price bars? Well, the common reason most traders give is that candlesticks are more visual, and I tend to agree with this. They provide exactly the same information, but it’s displayed in a manner that makes for easier interpretation. This is partly to do with the fact that they’re coloured, but also due to them making the relationship between the open and close stand out more. They also make rejection easier to see (through the tails above or below the candle). It’s the same information as available on price bars, it’s just easier to read. However, in defence of the price bars, many charting packages now allow for colouring of price bars, which removes part of the advantage of the candles. And in addition, price bars lead to a less cluttered chart. Sometimes when I find myself out of sync with the market, I find that changing the way it’s represented and simplifying the screen through removal of some of the clutter, really helps me get back in the flow. This is the 5% of the time when I just find I’m reading the price bars better. If you haven’t used coloured price bars, check them out. Don’t just use candles because someone else said they’re more visual. Try the alternative and make up your own mind. You might find you like the simplicity of coloured price bars.

 

One final important point – in my opinion the more advanced trading of candlesticks moves beyond the patterns themselves to learning to identify the shift in sentiment within the patterns. Then, you’re not reliant on candlestick patterns, but can read the sentiment regardless of the price action and regardless of whether using candlesticks or price bars. I encourage you to review all the candlestick and price bar reversal videos with an emphasis on the part talking about the psychology or sentiment of the pattern. Try to understand what is occurring here, and then look at a whole bunch of charts to try to read the change of sentiment at the reversals – not just the one’s meeting textbook pattern definitions, but ANY and ALL reversals. What are the bulls thinking? What are the bears thinking? Who is dominating the market at each point in time? Where is the shift in sentiment occurring?

Essentially, mastery of candlestick and price bar reversal patterns is achieved when you no longer need them.  (Whoa – maybe that’s the mystical, eastern part of candlesticks???)

Cheers,

Lance Beggs

 

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