Candlestick charts are said to have been developed by legendary rice trader, Homma Munihisa in the seventeeth century. It is said that he used candlestick patterns to identify trend reversals, and in so doing executed over 100 consecutive successful trades! It is beyond doubt that he did build a fortune, only the accurate size of his fortune is unclear. It is reputed to be worth over $100 billion (in today`s prices) of profits in total.

In 1755 Homma Munihisa wrote `The Fountain of Gold – The Three Monkey Record of Money`, the first book on market psychology. In it he claimed when all are bearish, there is cause for prices to rise (and vice versa). This is a basic concept understood by R. N. Elliott and used by Elliott Wave traders.

Candlestick patterns can be used in conjunction with Elliott Wave trading to add further confirmation to a wave count. Many traders use bar chart patterns such as head and shoulders, and double tops and bottoms. Candlestick patterns can be used in a very similar way.

When using candlestick patterns in Elliott Wave trading it is important to remember three points. The identification of a candlestick pattern in a trend which indicates a trend change is an indication only, and not definitive. Sometimes a candlestick pattern in a trend may simply mean the trend may end and the market may drift sideways (which it does 80% of the time anyway).

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Please click on the chart below to enlarge.

There are a few patterns Elliott Wave traders can look for to help spot trade setups. I want to give a brief introduction to using Candlestick patterns by showing just three patterns. In the next few days I will be posting a single page `cheat sheet` for recognising candlestick patterns, so watch this space!

Two of the easiest candlestick patterns to recognise necessarily involve just one candlestick, this is obviously what makes them so easy! These are hanging men and hammers. These patterns are both contextual and the colour of the body is irrelevant. In an uptrend a hanging man is a bearish pattern. In a downtrend a hammer is a bullish pattern. There are three hanging men and one hammer identified in the chart above. The first two hanging men preceded a major drop in this currency pair, as did the third hanging man. The hammer came right at the bottom of a smaller downturn, just before this pair gave a final bullish push to post its highest high in over a year!

Hanging men and hammers have a small real body, with a very little or no upper shadow, and a lower shadow that is long with at least twice the length of the real body.

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