Understanding Candlesticks in Futures Trading

Candlesticks in Futures Trading

The use of candlesticks is one of the older forms of technical analysis still popular today. They were developed in Japan in the 1700s and are used to analyse price action and predict future movements. They are used extensively in futures trading, but you can apply candlesticks to most other charting forms.

The Components of Candlestick Analysis

  • The colour of the candle body tells you what kind of day it was. A green candle means that the close was higher than the open, while a red candle means that the close was lower than the open. Green doesn’t always imply bullishly, and red doesn’t mean bearish. In the absence of additional price action, it just means that there was a net buying or selling pressure.
  • The colour of the candle wicks tells you whether there was more selling than buying. White candles have small upper wicks, which indicate that buyers controlled the high-end of the trading range for the day. Conversely, black candles have large upper wicks, which indicate that sellers controlled the high-end of the trading range for the day.
  • The length of the candle tells you how strong the move was. A long candle means a significant movement, while a short candle implies that the move was small. Large movements generally lead to reversals, so you can use candlesticks to help you predict when a trend might reverse.
  • The doji is a neutral candle that indicates that the buyers and sellers were equally matched. If the open price is near the candle’s low and the close is at or near the high, you have a doji.
  • The wick (the thin line above and below the candle body) tells you how much volatility there was. A wick far from the body means that there was a significant move. A wick that touches the body means there was gentle movement, and a short wick tells you there was no natural movement at all. Bond volatility usually increases when a trend is about to reverse, so by looking for doji and long wicks, you can get an early signal that a reversal may be coming.
  • Spikes between the open and close tell you how often trades were made at those prices. A long, tall spike between the open and close means lots of trades occurred at those prices, while a short spike tells you that few trades happened there. The volume of trades at specific prices can help you find support and resistance areas and map out how strong a trend is.
  • A hesitation spike tells you that there was a sharp move in one direction, but buyers or sellers didn’t follow through for the rest of the day. This frequently signals that we may have reached an extreme and points to a potential reversal.
  • A star candle is when you have a very long wick to one side and a small body on the other. This pattern means that buyers completely overpowered sellers during the day but eventually succumbed to selling pressure after driving prices to extreme levels for most of the day.

When Can You Use Candlesticks?

We can further use candlesticks to analyse bond futures by comparing them to the bond price chart. Bond price charts are similar to line charts and provide a basic overview of the price action. They show the open, high, low and close prices for a particular period.

You can use candlesticks to identify critical areas on the price chart. For example, you can use them to find support and resistance levels, trendlines and Fibonacci retracements. By identifying these key areas on the price chart, you can pinpoint where you enter and exit trades.

Unlike bond price charts, candlesticks give us a snapshot view of how the market performed that day. If you want to see what happened in greater detail, you can look for high/low shadows on the bond price chart. These shadows show the high and low prices for that day and provide more information about the move’s strength.

Compared to other charts, candlesticks can be a little challenging to read at first. But with a bit of practice, you’ll be able to use them to spot profitable trading opportunities in the bond market. Candlesticks are a valuable tool for futures traders, and by understanding how to read them, you can improve your trading results.

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