Candlestick Analysis in Trading

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Candlestick Analysis in Trading

In this article, I will discuss Candlestick Analysis in Trading. Please read our previous article discussing 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 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 do I 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

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 range bar
• So, the candle body shows to 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

The candle body shows lots of information, such as

Let us see some example

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 importantly, where SMART-MONEY enters.

• Larger wicks show that the price moved a lot during the candle’s duration, but it was rejected, which shows the presence of supply or demand.
• The lower wick acts as support, and the upper wick acts as resistance

Let’s understand the pin bar

What is a pin bar telling us?

When candles cannot break through a zone 70-80% of the time, they will go the opposite way.

Part 3: How to read a chart using a candlestick?

Step 1: First, read the DIRECTION OF the current CANDLE with respect to the previous candle

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

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 to read the market by looking at one day’s action in isolation. A candlestick must always 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
• Does volatility increase or decrease
• Is the change happening during an active trading period or not? For example, candlesticks in mid-period are generally dead or inactive.

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

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
• The 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. Testing these levels or zones shows the market’s undercurrents and is critical for reading price action.

Step 4: Expectation

With a clear read of DIRECTION, CONTEXT, TESTING. we can 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, and 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. There may be a change in market direction.

Part 4: Finding Trading Opportunity

A candlestick pattern is useless if its location is incorrect; where it happens is the most important variable. So, we should analyze the candlestick at support and resistance for opportunity, either reversing or continuing the trend.

AT resistance, we expect the price to reverse or supply to exceed demand, confirming the supply or resistance level. For example, at the support, we expect the price to reverse to confirm demand over supply.

Some key pointers should be considered when trading reversal. This means that candlestick action validates our support and resistance level. Explained below

Point 1: Momentum loss when approaching a key level(support resistance)

Below is an example of a bullish reversal

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, and it indicates buyers tried but failed to close above the resistance.

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 fail shows supply coming and trying to dominate demand.

Point 4: Candle color change

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

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 forms from support, it confirms the support level as strong.

What candlestick action disconfirms the resistance? Opposite for support

There is also a certain point to consider when the price approaches 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

If the price hugs the support and holds, it disconfirms the demand and shows the presence of supply

• If there is a 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 support usually leads to a breakout

What do we learn?

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

In our next article, I will discuss Price Action Analysis in Trading. 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.