Using Candlesticks To Trade Commodities
If you want to enhance your trading experience then consider using Japanese candlesticks.
These are a great option and alternative to simple price bars.
So how can using candle indicators help the commodity trader make better trading decisions?
It is easier to picture price movements represented by solid rectangular blocks, a green rectangle showing upward movements, and a red rectangle indicating the move downwards.
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A candle is made up of its body which represents opening and closing positions.
So, for example, a green candle has an opening position at its base and a closing position at the top.
There is also a vertical line running through the body of the candle which protrudes from top to bottom. These are the wicks or upper and lower shadows.
Equally, the lowest point (lower shadow) shows the low for any given time interval.
So, let’s say we are looking at crude oil futures using an hourly candlestick.
The opening price could be $136.57 and the close $136.89, but the price within that hour may have hit a low of $135.77 and a high of $137.25.
Here there would be a vertical line above and below the candle, which would be green because the close is above the opening. If, however, the open or close are also the high or low for the hourly candle, then the body of the candle would have no wicks.
Some traders follow Japanese candles very closely and look for specific patterns, often formed by two or three candles which may suggest a new movement in direction.
The Japanese candlestick was developed in Japan in the 17th century to follow the price of rice contracts.
If these patterns are to act as a meaningful signal to observers then a majority of commodity traders need to identify the indicator and place a trade in a way that effectively fulfills the candlestick pattern signal.
Remember that candlesticks are only a part of the commodity trading technical analysis armoury and you may want to use them with other indicators such as Fibonacci, moving averages and support and resistance lines.
With support and resistance lines the general convention is that if either line is touched at least three times by the vertical wicks protruding from the candlesticks, then they can confidently be viewed as true support and resistance levels.
So as more commodity traders decide that a line is truly a support level the more likely it will be, and the following candles will move upwards.
If enough bearish traders break through the support, however, then subsequent candles will form below that line which would now become a resistance line.
Types of Candlestick and Patterns
Doji
Here the opening and closing is at the same price, so in effect the candle is seen as a flat line, neither green nor red.
Why is this candle pattern significant?
Either in an upward movement or a downward movement it may well suggest that the momentum of that movement is slowing and about to end.
The market is not sure about its direction and is looking for a new lead.
But there is more than one type of the Doji. A plain Doji is where shadows of equal length, where buyers and sellers undecided. The there is a Gravestone Doji (long upper shadow, no lower shadow) which occurs in an upward movement. Here sellers (Bears) are becoming more dominant, so the price could turn downwards.
There is also the Dragonfly Doji, so for example in a downward move the bears failed to keep the close at the low point, with the buyers (Bulls) lifting the price back up to the close.
This suggests that the downward move may end and the next move is upwards.
This involves two candles where the body of the following candle completely covers the previous candlestick and importantly is of the opposite colour. So if the market has been going to the downside (red candles), then the following engulfing candle will be green, indicating the market may move to the upside.
Remember you may need to look at other indicators as well as the candles.
Two other useful indicators to help the commodity trader interpret the likely course of price action are the Fibonacci lines and the relative strength index (RSI). As part of a commodity trading strategy, candles can play a very helpful role in showing the likely future direction of the market and so help increase the chances of successful trading outcomes.
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