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How to Use Candlestick Patterns for Day Trading

September 27, 2018 by Daniels Trading| Futures 101

Developed in the 18th century by rice trader Munehisa Homma, Japanese candlesticks have a long and storied history in the financial markets. From the Dojima Rice Exchange to their Western introduction by Steve Nison in the early 1990s, Japanese candlesticks have become a futures industry standard for technical analysis.

Want technical trading tips? Download our free guide 12+ Candlestick Formations Every Technical Trader Should Know today!

Active traders use candlesticks in many different ways. One of the most popular applications is the chart pattern. Candlestick patterns for day trading come in all shapes and sizes. Whether you’re interested in trends or reversals, chart patterns are a robust tool for engaging a wide-range of futures products.

Why Use Candlestick Patterns for Day Trading?

Japanese candlestick charts are a fantastic method of conducting technical analysis. Each candle conveys several pieces of information critical to the understanding of the evolving market dynamic. Not only does a candle show the periodic high, low, open, and close, but it also provides a visual representation of bullish or bearish price action.

Chart patterns take candlestick analysis one step further. No matter how simple or complex the formation, there are two primary reasons to use candlestick patterns for day trading:

  • Define market entry or exit: Depending upon whether you’re a momentum, breakout, or trend trader, candlestick patterns can help determine when and where to enter or exit a given market.
  • Trade management: Aligning risk to reward on-the-fly becomes exponentially easier when you’re aware of the current market state. Candlestick chart patterns can help balance the pros and cons of holding or closing an existing position.

You can integrate candlestick patterns into your existing trading plan in any number of ways. With a bit of effort, the real-time execution of strategies based on patterns can become second nature.

The Power of Candlestick Chart Patterns

The study of price action is inherently tricky. Identifying the current market state and subsequent direction of price is always a challenge, but candlestick chart patterns can make the process exponentially easier.

Candlestick patterns are extremely useful in quantifying four unique aspects of market behavior:

  • Consolidation
  • Breakout
  • Trend reversal
  • Trend continuation

For each of these aspects, several candlestick patterns for day trading are ideal for identifying a potential path of price. Upon their recognition, crafting an optimized strategy to capitalize on a forthcoming market move becomes possible.

Candlestick Patterns in Action

Perhaps the greatest challenge in all of active trading is identifying market state. Understanding when price is trending and when it’s poised for a breakout are key elements of predicting future price action.

The following four candlestick patterns are extremely helpful in completing this task:

  • Doji: A single-candle formation, the doji is a signal of consolidation and pending breakout.
  • Bearish/bullish engulfing: Engulfing patterns consist of two candles, with the body of the second enclosing that of the first. Engulfing patterns are used for identifying trend exhaustion and possible reversal.
  • Morning/evening star: Consisting of three candles, morning/evening stars commonly act as points of trend reversal. Morning/evening stars are constructed from a long bullish/bearish candle, a small bullish/bearish candle and a third long bullish/bearish candle.
  • Rising/falling wedge: Wedges are multiple candlestick formations that involve extended durations. They are useful for identifying the continuation of a prevailing longer-term trend.

Given the proper context, each of these patterns can bring consistency to your trading plan. With a bit of screen-time and practice picking them out, these candlestick patterns for day trading can be an invaluable addition to your strategy.

Getting Started

A great place to get started with Japanese candlesticks is “12+ Candlestick Formations Every Technical Trader Should Know” e-book, the educational offerings provide a one-stop shop for veteran and aspiring candlestick traders alike.

Ready to think like a technical trader? Download our free guide to learn how to identify chart formations and take action when the time is right.

Filed Under: Futures 101

About Daniels Trading

Daniels Trading is division of StoneX Financial Inc. located in the heart of Chicago’s financial district. Established by renowned commodity trader Andy Daniels in 1995, Daniels Trading was built on a culture of trust committed to a mission of Independence, Objectivity and Reliability.

Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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Risk Disclosure

The StoneX Group Inc. group of companies provides financial services worldwide through its subsidiaries, including physical commodities, securities, exchange-traded and over-the-counter derivatives, risk management, global payments and foreign exchange products in accordance with applicable law in the jurisdictions where services are provided. References to over-the-counter (“OTC”) products or swaps are made on behalf of StoneX Markets LLC (“SXM”), a member of the National Futures Association (“NFA”) and provisionally registered with the U.S. Commodity Futures Trading Commission (“CFTC”) as a swap dealer. SXM’s products are designed only for individuals or firms who qualify under CFTC rules as an ‘Eligible Contract Participant’ (“ECP”) and who have been accepted as customers of SXM. StoneX Financial Inc. (“SFI”) is a member of FINRA/NFA/SIPC and registered with the MSRB. SFI does business as Daniels Trading/Top Third/Futures Online. SFI is registered with the U.S. Securities and Exchange Commission (“SEC”) as a Broker-Dealer and with the CFTC as a Futures Commission Merchant and Commodity Trading Adviser. References to securities trading are made on behalf of the BD Division of SFI and are intended only for an audience of institutional clients as defined by FINRA Rule 4512(c). References to exchange-traded futures and options are made on behalf of the FCM Division of SFI.

Trading swaps and over-the-counter derivatives, exchange-traded derivatives and options and securities involves substantial risk and is not suitable for all investors. The information herein is not a recommendation to trade nor investment research or an offer to buy or sell any derivative or security. It does not take into account your particular investment objectives, financial situation or needs and does not create a binding obligation on any of the StoneX group of companies to enter into any transaction with you. You are advised to perform an independent investigation of any transaction to determine whether any transaction is suitable for you. No part of this material may be copied, photocopied or duplicated in any form by any means or redistributed without the prior written consent of StoneX Group Inc.

© 2023 StoneX Group Inc. All Rights Reserved

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