Candlestick Analysis in Trading

Candlestick Analysis in Trading

In this article, I am going to discuss Candlestick Analysis in Trading. Please read our previous article where we discussed How to Study Candlestick in detail. The ultimate guide you will ever need to understand CANDLESTICK and its behaviors. After the study, you will not need to recognize any CANDLESTICK patterns. As part of this article, you will understand the following four things which are related to Candlestick Analysis in Trading.

  1. Understanding candlestick
  2. How to read a candlestick?
  3. How to read a chart using a candlestick?
  4. How to find an opportunity to use a candlestick?
Part1: Understanding Candlestick Analysis
What is a candlestick?
  • Candlesticks are a reflection of what buyers and sellers are doing. CANDLES TELL YOU who is in control in that specific time frame
  • Candlesticks tell us immediate information about the supply-demand relationship
  • Multiple candles form patterns that tell us a story
  • Understanding candlesticks is paramount to successfully day trade
Elements of candlestick
  • The High
  • The Open
  • The Low
  • The Close
  • The Change(BODY)
  • The Range

Candlestick Analysis in Trading

Understanding Candlestick Analysis

Part2: How to read candlestick
STEP 1: The size of the body (open to close)

Remember that in every bar, the same number of contracts/shares are sold and bought at that time frame

  • The only reason for a bar to end up with a higher price is that the buyers were committed to one direction and more aggressive than the sellers. The reverse is true for a bear wide range bar
  • So candle body shows, What extent they move the price and the strength behind the move
BODY:

Generally, we have to consider 3 types of body

  1. Narrow range candle
  2. Average candle
  3. Wide range candle

Elements of Candlestick Analysis in Trading

The candle body shows lots of information such as

How to read Candlestick Analysis in Trading

Let us see some example

Candlestick Analysis in TradingCandlestick Analysis in Trading

STEP 2: The length of wicks

The length of any wick, either to the top or bottom of the candle is ALWAYS the first point of focus because it instantly shows, strength, weakness, and indecision, and most important where SMART-MONEY enter

  • Larger wicks show that the price has moved a lot during the duration of the candle but it got rejected, which shows the presence of supply or demand
  • Lower wick act as support and the upper wick act as resistance

Candlestick Analysis in Trading

Let’s understand pin bar

Candlestick Analysis in Trading

What a pin bar telling us

What a pin bar telling us Understanding Bearish pin bar in candlestick Elements of candlestick analysis

When candles are not able to break through a zone 70-80% of the time they will go the opposite way

Part3: How to read a chart using a candlestick?
Step 1 First read DIRECTION OF current CANDLE with respect to the previous candle

That means, the relationship of each bar is high/low relative to the previous bar. What it telling us

How to read a chart using candlestick? First read DIRECTION OF current CANDLE with respect to previous candle

Step 2 Context (read the current bar sentiment with respect to the previous bar)

Candlestick should analyze the context of the move. You should never try and read the market by looking at one day’s action in isolation. A candlestick always must be analyzed in the context of what has happened in the past.

Context is what the current candlestick shows with respect to the previous candlestick

  • Is the current candlestick larger or smaller than the previous ones? Which shows momentum increases or decreases
  • Is the size-changing meaningfully or not? Buying or selling pressure
  • Is volatility increases or decreases
  • Is the change happening during an active trading period or not? For example, candlesticks in mid-period are generally dead or inactive.

read the current bar sentiment with respect to previous bar Context is what current candlestick shows with respect to previous candlestick

Step 3 Testing (Read what it showing when testing key level (support or resistance))

The concept of testing refers to the market moving towards a price level to “test” if the price level will accept or reject the market’s advances. Key levels are

  • Previous candles high/low
  • Last swing high/low
  • Previous day’s high/low
  • Major support or resistance

The high and low of each price bar are natural support and resistance levels and the wick generally acts as a supply and demand zone. The test of these levels or zones shows the undercurrents of the market and is critical for reading price action.

Read what it showing when testing key level (support or resistance) Read what it showing when testing key level (support or resistance)

Step 4 Expectation

With a clear read of DIRECTION, CONTEXT, TESTING. we are able to form expectations of the market in the third candle. We would expect the market to move in a certain way in the third bar with our read of DIRECTION, CONTEXT, TESTING. The confirmation or failure of our expectations of the third bar reveals more about the market and adds to our candlestick analysis

To form expectations, we need to make a very simple assumption about how the market should behave and should not behave.

Essentially, the market has momentum and inertia. bearishness should follow bearishness and bullishness should follow bullishness. When it does not obey this assumption, we have to be cautious, Maybe a possible change in market direction.

Expectation Candle spread increasing when approaching resistance level

Part4: Finding Trading opportunity

A candlestick pattern is useless if its location is not correct, where it happens is the most important variable. So we should analyze the candlestick at support and resistance for opportunity either reversal or continuation of the trend

AT resistance we expect the price to reverse or supply to exceed demand confirming the supply or resistance level. Like at the support we expect the price to reverse for confirming demand overcome supply

There are some key pointers that should consider when trading reversal Means what candlestick action validates our support and resistance level

Explained below

Point1: Momentum loss when approaching a key level(support resistance)

Momentum loss when approaching a key level(support resistance)

Below is an example of a bullish reversal

Finding Trading opportunity

Point2: Clear Rejection from resistance in the form of the pin bar multiple rejections

In an established uptrend any Clear Rejection from resistance in the form of the pin bar confirms the resistance level, it indicates buyers tried but failed to close above the resistance

Clear Rejection from resistance in the form of the pin bar multiple rejection

Clear Rejection from resistance in the form of the pin bar multiple rejection

MULTIPLE REJECTION SHOWS THAT BUYERS TRIED OVER AND OVER AGAIN TO PUSH THROUGH THE LEVEL BUT FAILED

MULTIPLE REJECTION SHOWS THAT BUYERS TRIED OVER AND OVER AGAIN TO PUSH THROUGH THE LEVEL BUT FAILED

Point3: Price Unable to close above the resistance level or below the support level

When Buyers try hard each time to close above the resistance level, each time they failed shows supply coming and trying to dominate demand

Price Unable to close above the resistance level or below the support level

Point4: Candle color change

For bearish reversal. The price should break the previous candle low and close below the low at resistance. It shows bullish strength completely lost

Candle color change

Point5: REVERSAL MOMENTUM CANDLE FROM KEY LEVEL

When a reversal momentum candle forms from the key level it confirms the strength of the level of the opposite party. When a bullish strength candle formed from support it confirms the support level as strong

Candlestick Analysis in Trading

What candlestick action disconfirms the resistance? Opposite for support

There is a certain point also considered when price approaches to support or resistance. That validated or invalidated our support or resistance level

Candle spread increases when approaching the resistance level

With a widespread up, while the price is getting close to the resistance, we would expect to see the resistance broken due to the extra effort by buyers

Candlestick Analysis in Trading

If the price hugs the support and holds it disconfirms the demand and shows the presence of supply
  • If there is strong support or resistance level, the price should immediately react within a few candles
  • Price hold (unable to react) after a move down to support. Sellers overcoming buyers is the repeated inability of prices to REACT away from the danger point(support). Such hugging of the support usually leads to a breakout

Candlestick Analysis in Trading

What we learned

Summary of candlestick analysis

Part1: Understanding candlestick
Part2: How to read candlestick
       Wide range bar(show strength or momentum)
       Narrow range bar(momentum or strength decreases)
       A pin bar(shows rejection or either supply or demand came in)
       Doji(indecision )

Part3: How to read a chart using a candlestick

      First, read the current candle direction with respect to the previous candle
      Second, read the current candle sentiment with respect to the previous candle
      Third, read the testing key level
      Expect what you fill

Part4: How to find opportunities using candlestick

Step to find a trading opportunity for reversal
       Point1 Momentum loss when approaching resistance /support
       Point2 Clear Rejection from resistance in the form of the pin bar multiple rejections
       Point3 Price unable to close above the resistance
       Point4 CANDLE COLOR CHANGE
       Point5 REVERSAL MOMENTUM CANDLE FROM KEY LEVEL

What candlestick action disconfirms the resistance?
Candle spread increases when approaching the resistance level
If the price hugs the resistance and holds it disconfirms the demand and shows the presence of demand

Please watch the following video if you want to learn and understand this concept in a better way.

In our next article, I am going to discuss Price Action Analysis in Trading. Here, in this article, I try to explain Candlestick Analysis in Trading. I hope you enjoy this article and understand the Candlestick Analysis in the Trading concept. Please join my Telegram Channel and YouTube Channel as well as my Facebook Group to learn more and clear your doubts. 

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