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  • Table of Contents
    • Overview
      • Why Analyze Securities?
      • Technical Analysis
      • Fundamental Analysis
      • Random Walk vs. Non-Random Walk
      • Asset Allocation and Diversification
      • John Murphy's 10 Laws of Technical Trading
      • John Murphy's "Charting Made Easy" eBook
      • Technical Analysis 101
        • TA 101 – Part 1
        • TA 101 – Part 2
        • TA 101 – Part 3
        • TA 101 – Part 4
        • TA 101 – Part 5
        • TA 101 – Part 6
        • TA 101 – Part 7
        • TA 101 – Part 8
        • TA 101 – Part 9
        • TA 101 – Part 10
        • TA 101 – Part 11
        • TA 101 – Part 12
        • TA 101 – Part 13
        • TA 101 – Part 14
        • TA 101 – Part 15
        • TA 101 – Part 16
        • TA 101 – Part 17
      • Irrational Exuberance
      • Cognitive Biases
      • Arthur Hill on Goals, Style and Strategy
      • Arthur Hill on Moving Average Crossovers
      • Multicollinearity
      • "The Trader's Journal" by Gatis Roze
        • Stage 1: Money Management
        • Stage 2: Business of Investing
        • Stage 3: The Investor Self
        • Stage 4: Market Analysis
        • Stage 5: Routines
        • Stage 6: Stalking Your Trade
        • Stage 7: Buying
        • Stage 8: Monitoring Your Investments
        • Stage 9: Selling
        • Stage 10: Re-Examine, Refine, Re-Enhance
        • Additional Reading
      • Bob Farrell's 10 Rules
      • Richard Rhodes' Trading Rules
      • Donchian Trading Guidelines
      • Why and How To Use Correlation
    • Chart Analysis
      • What Are Charts?
      • Support & Resistance
      • Trend Lines
      • Gaps and Gap Analysis
      • Introduction to Chart Patterns
      • Chart Patterns
        • Broadening Top or Megaphone Top
        • Double Top Reversal
        • Double Bottom Reversal
        • Head and Shoulders Top
        • Head and Shoulders Bottom
        • Falling Wedge
        • Rising Wedge
        • Rounding Bottom
        • Triple Top Reversal
        • Triple Bottom Reversal
        • Bump and Run Reversal
        • Flag, Pennant
        • Symmetrical Triangle
        • Ascending Triangle
        • Descending Triangle
        • Rectangle
        • Price Channel
        • Measured Move—Bullish
        • Measured Move—Bearish
        • Cup With Handle
      • Chart Types
        • Arms CandleVolume
        • CandleVolume
        • Elder Impulse System
        • EquiVolume
        • Heikin-Ashi Candlesticks
        • Kagi Charts
        • Renko Charts
        • Three Line Break Charts
        • MarketCarpets
        • Relative Rotation Graphs (RRG Charts)
        • Seasonality Charts
        • Yield Curve
      • Candlestick Charts
        • Introduction to Candlesticks
        • Candlesticks and Traditional Chart Analysis
        • Candlesticks and Support
        • Candlesticks and Resistance
        • Candlestick Bullish Reversal Patterns
        • Candlestick Bearish Reversal Patterns
        • Candlestick Pattern Dictionary
      • Point and Figure Charts
        • Point and Figure Basics
          • Introduction to Point & Figure Charts
          • Point & Figure Scaling and Timeframes
          • P&F Trend Lines
        • Classic Patterns
          • P&F Bullish Breakouts
          • P&F Bearish Breakdowns
          • P&F Signal Reversed
          • P&F Catapults
          • P&F Triangles
          • P&F Bull & Bear Traps
        • P&F Price Objectives
          • P&F Price Objectives: Breakout and Reversal Method
          • P&F Price Objectives: Horizontal Counts
          • P&F Price Objectives: Vertical Counts
        • Point & Figure Indicators
        • P&F Scans and Alerts
          • P&F Pattern Alerts
      • Chart Annotation Tools
        • Andrews' Pitchfork
        • Stock Market Cycles
        • Fibonacci Retracements
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        • Fibonacci Fans
        • Fibonacci Time Zones
        • Quadrant Lines
        • Raff Regression Channel
        • Speed Resistance Lines
    • Technical Indicators & Overlays
      • Introduction to Technical Indicators and Oscillators
      • Technical Indicators
        • Accumulation/Distribution Line
        • Alligator Indicator
        • Aroon
        • Aroon Oscillator
        • ATR Bands
        • ATR Trailing Stops
        • Average Directional Index (ADX)
        • Average True Range (ATR) and Average True Range Percent (ATRP)
        • Balance of Power (BOP)
        • Bollinger BandWidth
        • %B Indicator
        • Chaikin Money Flow (CMF)
        • Chaikin Oscillator
        • Chande Trend Meter (CTM)
        • CMB Composite Index
        • Commodity Channel Index (CCI)
        • ConnorsRSI
        • Coppock Curve
        • Correlation Coefficient
        • DecisionPoint Price Momentum Oscillator (PMO)
        • Detrended Price Oscillator (DPO)
        • Distance From Highs
        • Distance From Lows
        • Distance To Highs
        • Distance To Lows
        • Distance From Moving Average
        • Ease of Movement (EMV)
        • Force Index
        • Gopalakrishnan Range Index
        • High Low Bands
        • High Minus Low
        • Highest High Value
        • Linear Regression R2
        • Lowest Low Value
        • Mass Index
        • MACD (Moving Average Convergence/Divergence) Oscillator
        • MACD-Histogram
        • MACD-V
        • MACD-V Histogram
        • Median Price
        • Money Flow Index (MFI)
        • Negative Volume Index (NVI)
        • On Balance Volume (OBV)
        • Percentage Price Oscillator (PPO)
        • Percentage Volume Oscillator (PVO)
        • Performance Spread
        • Price Relative/Relative Strength
        • Pring's Know Sure Thing (KST)
        • Pring's Special K
        • Rate of Change (ROC)
        • Relative Strength Index (RSI)
        • Relative Volume (RVOL)
        • RRG Relative Strength
        • StockCharts Technical Rank
        • Slope
        • Standard Deviation (Volatility)
        • Stochastic Oscillator (Fast, Slow, and Full)
        • StochRSI
        • Traffic Light
        • TRIX
        • True Range
        • True Strength Index
        • TTM Squeeze
        • Typical Price
        • Ulcer Index
        • Ultimate Oscillator
        • Vortex Indicator
        • Weighted Close
        • Williams %R
      • Technical Overlays
        • Anchored VWAP
        • Bollinger Bands
        • Chandelier Exit
        • Double Exponential Moving Average (DEMA)
        • Hull Moving Average (HMA)
        • Ichimoku Cloud
        • Kaufman's Adaptive Moving Average (KAMA)
        • Keltner Channels
        • Linear Regression Forecast
        • Linear Regression Intercept
        • Moving Averages—Simple and Exponential
        • Moving Average Ribbon
        • Moving Average Envelopes
        • Parabolic SAR
        • Pivot Points
        • Price Channels
        • Triple Exponential Moving Average (TEMA)
        • Volume-by-Price
        • Volume-Weighted Average Price (VWAP)
        • ZigZag
    • Market Indicators
      • Introduction to Market Indicators
        • Market Indicator Dictionary
      • Advance-Decline Line
      • Advance-Decline Percent
      • Advance-Decline Volume Line
      • Advance-Decline Volume Percent
      • Arms Index (TRIN)
      • Bullish Percent Index (BPI)
      • DecisionPoint Intermediate-Term Breadth Momentum Oscillator (ITBM)
      • DecisionPoint Intermediate-Term Volume Momentum Oscillator (ITVM)
      • DecisionPoint Swenlin Trading Oscillator (STO)
      • High-Low Index
      • High-Low Percent
      • McClellan Oscillator
      • McClellan Summation Index
      • Net New 52-Week Highs
      • Percent Above Moving Average
      • Pring's Bottom Fisher
      • Pring's Diffusion Indicators
      • Pring's Inflation and Deflation Indexes
      • Pring's Net New High Indicators
      • Put/Call Ratio
      • Record High Percent
      • Volatility Indices
    • Market Analysis
      • Dow Theory
      • Sector Rotation Analysis
      • Intermarket Analysis
      • The DecisionPoint Chart Gallery
      • DecisionPoint Rydex Asset Analysis
      • Wyckoff Analysis Articles
        • Wyckoff Market Analysis
        • Wyckoff Stock Analysis
        • The Wyckoff Method: A Tutorial
      • Elliott Wave Analysis Articles
        • Introduction to Elliott Wave Theory
        • Identifying Elliott Wave Patterns
        • Guidelines for Applying Elliott Wave Theory
    • Trading Strategies & Models
      • DecisionPoint Trend Model
      • Trading Strategies
        • Bollinger Band Squeeze
        • CCI Correction
        • CVR3 VIX Market Timing
        • Faber's Sector Rotation Trading Strategy
        • Gap Trading Strategies
        • Harmonic Patterns
        • Hindenburg Omen
        • Ichimoku Cloud Trading Strategies
        • The 'Last' Stochastic Technique
        • MACD Zero-Line Crosses With Swing Points
        • Moving Average Trading Strategies
          • Finding Support and Resistance in Moving Averages
          • Guppy Multiple Moving Average: An MA Ribbon Designed to Tip the Market’s Hand
          • How To Trade Price-to-Moving Average Crossovers
          • Trading the Bounce: Finding Support and Resistance in Moving Averages
          • Trading the Death Cross
          • Trading Using the Golden Cross
          • Using the 5-8-13 EMA Crossover for Short-Term Trades
        • Moving Momentum
        • Narrow Range Day NR7
        • Percent Above 50-day SMA
        • Percent B Money Flow
        • The Pre-Holiday Effect
        • RSI(2)
        • Six-Month Cycle MACD
        • Slope Performance Trend
        • Stochastic Pop and Drop
        • Swing Charting
        • Trend Quantification and Asset Allocation
    • Index & Market Indicator Catalog
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      • New 52-week Highs and Lows for Exchanges
      • NYSE Arca Equity Indices
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      • S&P 500 Sector and Industry Groups
      • S&P GSCI Indices
      • StockCharts AD Percent
      • StockCharts AD Volume Percent
      • StockCharts Bullish Percent Index
      • StockCharts High-Low Index
      • StockCharts High-Low Percent
      • StockCharts Percent Above Moving Average
      • StockCharts Pseudo Symbols
      • StockCharts Record High Percent
      • StockCharts Theoretical Indices
      • US Treasury Yields
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On this page
  • Benefits of Candlestick Charts
  • Candlesticks and Moving Averages
  • Candlesticks and Breakouts
  • Candlesticks and the Head & Shoulders Pattern
  • Candlesticks and Volume
  • Concluding Thoughts

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  1. Table of Contents
  2. Chart Analysis
  3. Candlestick Charts

Candlesticks and Traditional Chart Analysis

PreviousIntroduction to CandlesticksNextCandlesticks and Support

Last updated 11 months ago

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Benefits of Candlestick Charts

Candlestick charts have merits as a charting system, but they also confirm signals generated by other technical analysis tools. We will examine how candlesticks interact with , breakout signals, , and volume, and how they form mutually beneficial relationships that strengthen investor confidence when analyzing charts.


Candlesticks and Moving Averages

A key feature provided by candlestick patterns is the ability to confirm moving average signals. In the chart below, the two highlighted areas show two separate candlestick patterns—spinning top and doji—followed by a long white (hollow) candlestick. The interpretation of these candlestick patterns adds bullish confirmation of the around October 10 and February 5. In addition, those same Japanese candlestick patterns confirmed the 30 level on the (RSI) as an oversold condition.


Candlesticks and Breakouts

Candlesticks can also confirm breakouts from traditional chart patterns found within congestion zones. When a bullish or bearish candlestick pattern occurs within the vicinity of a traditional breakout, it adds validity to the direction of that breakout. An example is shown in the chart below, where the eventual breakout is to the downside.

The top line of the triangle is touched twice by spinning-top candlesticks, which indicates indecision. Then, just before the downward breakout from the triangle, there appears a bearish harami candlestick pattern, followed by another down day to provide confirmation. Once the price action gaps down below the ascending triangle, it does so with a long-filled candlestick. All of this information adds up to an overall bearish picture.

An ascending triangle is traditionally recognized as a bullish chart pattern. But, in this case, the evolving bearish behavior was identified using candlestick pattern analysis.

The OHLC bar chart below is based on the same data as the candlestick chart but contains less useful information. The ascending triangle is easily recognizable. However, without candlestick analysis, it's more difficult to evaluate the potential direction of the breakout before it occurs.


Candlesticks and the Head & Shoulders Pattern

One limitation of using candlestick patterns alone is that they do not provide potential price targets. However, this can be achieved by combining candlesticks with other technical analysis techniques.

The following chart shows a head & shoulders pattern with an eventual breakout to the downside. During the development of the right shoulder, there is a bearish harami pattern followed by two long bearish candles. These add confirmation to the breakout when it occurs. However, without identification of the head & shoulders pattern, the bearish harami would not give any inclination of a potential price target. Using the traditional price target calculation of a head & shoulders pattern makes it possible to calculate a price target—take the distance from the top of the head to the neckline and subtract it from the neckline breakout.

Using both types of analysis gives a potentially clearer picture than using either type in isolation. After all, technical analysis is not an exact science; you must look for confirming signals to build evidence to support a likely outcome. A good corroborating signal gives you more confidence in your trading decisions.


Candlesticks and Volume

Volume can be used to confirm candlestick patterns. The following chart is the same XOM chart as the one shown previously. The only difference is the addition of volume below the price chart.

Volume begins to increase and crosses above the 200-day moving average of volume during the formation of the bearish harami pattern. It then increases dramatically at the breakout of the ascending triangle and slowly decreases throughout the gradual bullish correction following the downside breakout. As the price action turns down again, volume also increases. After a second brief correction, a doji is formed on huge volume (green arrows), and the sell-off in Exxon Mobil continued.

Concluding Thoughts

As the previous examples demonstrated, candlestick patterns can be helpful in identifying potential changes in market direction. When used with traditional technical analysis, candlestick patterns can add confirmation to those signals. In general, the more supporting information you can add to your analysis of chart patterns, the more conviction you will have in your trading decisions.

The other advantage of using candlestick pattern analysis with other technical analysis tools is they provide conflicting signals. When you get conflicting signals, it gives you the opportunity to decide if the weight of the evidence is strong enough to proceed with your trading decision or if you should skip the trade altogether and look for better opportunities.

Technical analysis techniques work best when used with confirming techniques. The more evidence you can gather to support your analysis, the more likely you are to make informed decisions and the more likely to know when you are wrong and should get out of a losing position. Candlestick analysis is an excellent tool to help provide extra evidence for your trading and investing decisions. As a result, Japanese Candlesticks have become a vital asset to modern technical analysts worldwide.

Candlestick chart with volume
moving averages
head and shoulders patterns
200-day moving average at support levels
Relative Strength Index
Candlestick chart with volume using StockCharts.com
Confirming candlestick bullish confirmation signals with moving averages.
Bearish candlestick patterns are confirmed by a downside breakout of a triangle pattern.
In an OHLC bar chart, it's more difficult to evaluate the potential direction of the breakout because there are no patterns such as haramis to help forecast the breakout direction.
Combining candlesticks and head and shoulders pattern.
Chart from StockCharts.com showing confirming candlestick bullish confirmation signals with moving averages.
Chart from StockCharts.com showing bearish candlestick patterns confirmed by a downside breakout from a triangle pattern.
Chart from StockCharts.com combining candlestick analysis with a head and shoulders chart pattern.