Candlestick Patterns: Simplify Your Charts
We’ve gone into detail on Technical Analysis strategies. One difficulty traders have is identifying key Candlestick patterns in the market. The highs and lows pattern is easy, but it rarely appears so cleanly on our charts. We are faced with candlesticks that form patterns with ticks outside of key areas.
One key addition to our analysis we can do is use the theory of Encompassing Candlesticks. These are formed when their highs and lows are greater than surrounding candlesticks. This is true for candlesticks before or after encompassing candlesticks. When a market is wide ranging, the specific highs and lows within this range become less important. These price levels are broken, and therefore are less significant. This is true for large swings in the market and down to each individual candlestick.
Why Use These Candlestick Patterns?
When we are able to remove 2 or even 5 candlesticks, it simplifies the price action on the chart. While we are removing information, the inside candlesticks are less important to our analysis. We can choose to ignore them, or take them into account. If we choose to ignore these candlesticks, patterns may start to appear. If we choose to keep these candlesticks in our analysis, we can weight them differently.
We can use these modified charts to clarify our technical analysis on the charts like in the next video here:
Trading Support and Resistance