One of the things that fascinates me about technical trading is that the sentiment and behaviour of thousands of people around the world can be laid out in black and white on candlestick charts.

Japanese candlesticks have to be the best – in just a one-minute bar, you can see traders selling, support building, traders coming back in, momentum building…

Candlesticks are like a thermometer pressed to the forehead of every trader of that instrument – when traders get hot under the collar, it shows.

What to look out for when reading candlestick-charts

Here are a couple of basic examples of how a few lines can tell us so much about what’s going on in traders’ heads:

Hammer: Probably one of the best-known bullish candlestick patterns – the long tail shows that sellers dominated during the session, but that buyers then came back in. From this, we can tell that there is strong buying by bulls as panic declines. Bears will be anticipating the end of the downtrend and covering their short positions.

Doji: Another candlestick favourite, a doji can have an upper or lower tail of varying length, but the size of its body is minimal.

It shows us that neither the bears nor the bulls dominated, and that the session closed at the same level that it opened. On its own, a doji isn’t bullish or bearish, but it does signal trading indecision and can herald the end of a trend.

I could talk about these things all day!

But I won’t. If you want to brush up on your candlestick theory, you could do a lot worse than to check out Thomas Bulkowski’s website – useful as an education in candlesticks, but also something of a cautionary tale: candlestick reading can develop from a passion into an obsession!

As I suggested above, you should beware obsessive candlestick reading – candlesticks are of very little use without context, but in conjunction with other signals can be invaluable.

It’s putting all those pieces together that is often where the trader comes apart.

Are you seeing what I’m seeing?

I’m sure you’ve met him … that bloke who, just as you’re lamenting some dog of a trade you got yourself into, offers a few encouraging and helpful words, along the lines of: “Well, if you’d only looked at the 3-minute chart, you’d clearly have noticed the hanging-man candlestick formation, and would never have got in.”

Or, when I’m telling him about a nice little profit I’d creamed off, he’ll say: “Why on earth did you wait for the breakout? I’d already taken 15 pips by the time you’d got in.”

I can recall countless conversations along these lines in my early (and not so early) days of trading.

I’d be left with a feeling of irritation that my chart reading had failed me; combined with a measure of suspicion that anyone could really have such a crystal-ball vision of the markets.

Clear as mud

Of course, there are plenty of folks out there with a clever view of charts in hindsight – we can all be great chart readers that way.

But being able to judge what’s going to come at you from the right of your screen, is something else.

You can read a whole pile of books on candlestick patterns … you can study Fibonacci till your head spins … and you can draw trend lines and support and resistance levels all over your chart until it looks like a spider’s web … oh, and don’t forget to scribble on some Elliot Wave patterns.

Suddenly all become crystal clear?

I thought not. It can be extremely difficult to accumulate all these pieces of information AND THEN form a rational, measured trading decision on the evidence in front of you.

Don’t get me wrong – technical analysis tools are great. But they’re not much use if you’re left scratching your head, and wondering which signal to listen to.

Which way to turn

So, if you’ve ever wondered why you’re missing out on those extra profits … why you’re missing signals that others can see … or which way to turn when your technical analysis is giving you conflicting advice…

… I’m hoping that help is just around the corner.

As you’ll know, I’m always trawling through trading courses and systems of one form or another. Looking at educational tools, one name pops up again and again – always impressing me with his consistent and rational approach.

I hope to bring you more details on his latest training course very soon, as understanding what the charts are telling you is key to becoming a successful trader.