I am not going to go into to much depth about the history or design of the candlestick chart. Just Google candlestick charting and you will be inundated with information on this style of charting. Here is a link to a site I feel defines it quite well so feel free to peruse this page before reading the rest of this post. Candlestick Charts
Just on the subject of color, with today’s charting packages you can change the colors of the candles to anything that takes your fancy. I generally use red candles to define a bear candle (sellers are in charge) and blue, green or white to define a bull candle (buyers are in charge). I tend to change these colors regularly as it just changes the appeal of the chart. It can get a bit stale looking at the same colors all of the time.
I primarily look at candlesticks to identify reversals in price. Preferably I like to see price retrace against the trend and then form a reversal at a significant level. This I feel is an ideal place for me to enter a position because it identifies two things for me.

1. Firstly it identifies a turning point in the market
2. Secondly, as I am assuming this is a market turning point, then it also gives me an ideal place to place my stop loss order. I generally place it 10 to 15 pips below the lowest point of the reversal pattern.

I have two patterns that I use consistently that I have found to be reliable enough to use as additional indicators in my weight of evidence strategy. I say this because I don’t use any one indicator in a vacuum as such. What I look for in my trading is multiple key indicators to line up at the one time. These indicators then complement each other and reinforce my decision to take a trade. The two patterns I prefer are:

1. The first, I refer to as twin towers because this is what they look like to me. It is where one candle is the same size as the previous candle or completely engulfs the previous candle. What I am really looking for is a complete reversal of control. For example, a large bull candle indicates the bulls are in charge, but if this is then followed by an equally large bear candle, this signifies that the bulls have completely lost control and the bears are now in charge. Here are some examples on a chart to help identify these patterns.These are not complicated patterns and are very easy to identify. Just pull up any candlestick chart of any instrument. Pick a time frame and observe for yourself, just how reliable this pattern is and then form your own conclusions. For me it is a no brainer.
   

   click image for larger view

2. The second pattern has a lot of names, it can be called a pin bar, a lwc (long wicked candle), a shooting star, a hanging man and the list goes on. I like to call them pin bars because that is what they look like, A PIN. This is a single candlestick pattern whereas the twin towers is a multiple candlestick pattern. Both these patterns signify the same thing, the transfer of control from the bulls to the bears or vice versa. I use this pattern exactly the same way I use the twin tower pattern so I will insert a chart depicting this particular pattern.
   I prefer the wick of the candle to be at least three times the length of the body and negligible on the other side, candles 1 and 4 are great examples of this.
   These are the only two patterns that I regularly use in my trading. There are literally dozens of candlestick patterns and no doubt all very effective used in the right way. I try to keep my trading as simple as I can and thus limit myself to just the two of these patterns.
   Candles do play an important role in a lot of traders trading and therefore are definitely worthwhile further researching. Some books that are definitely worth a read are:
   1. Japanese Candlestick Charting Techniques, Second Edition
   2. The Candlestick Course
   3. The Secret of Candlestick Charting

   
   

Perry

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