How to Study Candlestick

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How to Study Candlestick in Trading

In this article, I am going to discuss How to Study Candlestick in Trading. As part of this article, we are going to discuss the following three important pointers in detail which are related to Candlestick in Trading.

1. What is a candlestick?
2. How to Study Candlestick?
3. The 6 principles for analyzing candlestick

What is a candlestick? 

The candlesticks are the reflections of what buyers and sellers are doing. To what extent they move the price and the strength behind the move. CANDLES TELL YOU who is in control but do not tell you about the strength of buyer or sellers behind the move, candle with volume shows that

The Open:

Open price tells us where the balance between buyers and sellers at the opening of that period, the opening value is the first trade of the day. After the traders have time to review the markets overnight, the open represents the desired position of investors to begin the day. The change from the previous close to the open is a reflection of new sentiments. Also, institutions looking to accumulate (or distribute) a position often place orders at the open because the open trade is often the largest, most liquid trade of the day. In this way, the open might be one of the best times to accumulate/ distribute a large volume of stock while minimizing the impact on the stock’s price.

The High:

The high is the highest point the stock traded during the session. The high is the furthest point the bulls were able to push the stock higher before sellers regained control to push the stock back down. The high represents a stronghold for sellers and a resistance area to buyers. There is one exception when the stock closes on the high, it did not encounter any real resistance from the sellers. The buyers just ran out of time.

The Low:

The low is the lowest point the stock traded during the session. The low is the furthest point the bears were able to force down the stock before buyers regained control to push the stock up. The low represents an area where enough demand existed to prevent the price from moving lower. The exception is when the security closes on the low. When the stock closes on the low, it did not encounter buying support. Rather, the bulls were saved by the closing bell of the session.

The Close:

Close price tells us where the balance point was at the end of the period. The close is the last price agreed between buyers and sellers ending the trading session. The close is the market’s final evaluation. A lot can happen between one close to the next close. The close represents investors’ sentiments and convictions of investors at the end of the day. It is the position investors desire to hold after-hours when investors are unable to trade with liquidity until the next session opens. The closing price is the first (and oftentimes, the only) price the majority of investors desire to know.

The Change:

The change is the difference between close to close. The difference in the closing value one day versus the closing value the next day. When this difference is positive, it tells us that demand is outweighing supply. When this difference is negative, it tells us that supply is increasing beyond demand. The change is perhaps the most sought-after piece of financial data on the planet.

The Range:

The range is the spread of values within which the stock traded throughout the day. The range spans between the bar’s highest point and the same bar’s lowest point. It is measured from the top of the bar, where resistance set into low, where support came in. The size of the range gives us important information about how easily demand can move the s took up or supply forces the price down. The wider the range, typically, the easier it is for the forces of supply and demand to move the stock price.

Bullish CANDLESTICK

This is nothing but when the CURRENT CANDLE close is ABOVE the previous candle close.

Bearish CANDLESTICK

When CURRENT close is BELOW the previous candle close

With the proper understanding of CANDLESTICK, you can predict what about to happen in the near future

#Pro tips, we (retailers) can’t move the market so every candle shows what smart money trying to shows. So their move trap or genuine is only validated by volume
#Pro tips, CANDLESTICK shows half information, another half information shows by volume

Example

WHAT IS TELLING US?

SENIMATE= BULLISH, 2 consecutive higher close candles. Let’s add volume to this candle

2nd candle range smaller than 1st candle
2nd candle volume greater than 1st candle
Think why volume is greater than 1st candle?

Let me explain to you
NARROW SPREAD CANDLE WITH HIGH VOLUME. Two possible explanations

If the volume had represented buying, how can the spread be narrow?

• Either the professional money is selling into the buying, possible reversal on near future
• There is a trading range to the left and the professional money is prepared to absorb the selling from traders locked into this old trading range. I mean break out may happen

Let’s understand with chart

If the next bar is down closing near its lows this confirms the professional selling

Low volume down candle close middle or top, it shows that smart money testing supply and no more supply available 2nd candle was buyer’s volume if the next candle closes above the current candle

6 PRINCIPLE FOR CANDLESTICK ANALYSIS IN TRADING

Principle Number One: 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

Principle Number Two: If no wick is created, then this signals strong market sentiment in the direction of the closing price. SMART-MONEY active there

Principle Number Three: A wide-body represents strong market sentiment and a narrow body present week market sentiment Narrow body with the heavy volume either Smart Money observing for continuous of move or Smart Money enter on the opposite direction

Principle Number Four: A candle of the same type will have a completely different meaning depending on where it appears in a price trend. Start of trend or middle of the trend or end of the trend or at support or resistance or in the consolidation phase. Candlestick should analyze the context of the move. You should never try and read the market looking at one day’s action in isolation. Always read the market phase-by-phase and then read the latest day’s action into the phase

Principle Number Five: Volume validates price. First, see what CANDLESTICK is telling then validated by volume, is It validating or not with the CANDLESTICK price action

Principle Number SIX: When a particular timeframe DON’T make sense then move to the next higher time frame for the big picture or lower timeframe for the microstructure of the move

Advanced Candlestick Analysis

Advanced Candlestick Analysis in Trading

In this article, I am going to discuss Advanced Candlestick Analysis in Trading. Please read the Price Action Analysis article before proceeding to this article. As part of this article, I am going to discuss the following pointers in detail.

1. Advanced Candlestick Analysis
2. What price action validates the resistance/support level?
3. What price action disconfirms the resistance/support level?

Candlestick Analysis in Trading:

Each candlestick tells a story as they are a reflection of what buyers and sellers are doing or what the market is telling you. Use candlestick with support and resistance area

1. Support tends to break into a downtrend
2. Resistance tends to break into an uptrend
3. Support and Resistance tend to break when there is a tight range at SR level
4. The more/frequently test of support resistance is weakening this level and break the level

Then how to know whether the price will reverse from support or resistance or break level. I mean whether price confirms or disconfirm as support or resistance.

DISCONFIRMATION AND CONFIRMATION

At resistance we expect the price to reverse or supply exceed demand confirms the supply.

What price action validates the resistance level?

1. Clear Rejection from resistance in the form of the pin bar or outside bar or engulfing bar
2. Momentum loss when approaching resistance
3. Unable to close above the resistance level
4. Low volume candle when approaching resistance

CANDLE REJECTION

Single candle rejection (pin bar)

In an established downtrend any Clear Rejection from resistance in the form of the pin bar or outside bar or engulfing bar confirm the resistance level

 

MULTIPLE CANDLE REJECTION

Better if multiple candlesticks are rejecting an area as this shows that price tried over and over but failed When multiple candles refuse to go UP or rejection from resistance they ultimately go down Below are some example of multiple rejection candle from an area

  

REJECTION CANDLE SHOULD CONFIRM BY FOLLOW-THROUGH CANDLE

The next candle should follow-through candle for validation of rejection candle

Momentum loss is the key to reversal when approaching a key level

1. Candle getting smaller and multiple colors with wicks signal that buyers or sellers are losing strength
2. Even better when it finishes with long wick candles (for bullish reversal lower ling wick and fro bearish reversal upper long wick)

Below is the example of a bullish reversal

Price unable to close above the resistance

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

Volume

In an up-move, where the price is getting close to the upper trend line (resistance Line), and low volume appearing will tell you that the trend line is likely to hold for that moment in time because there is no effort to change the trend (you need buying to push through resistance).

The resistance area needs demand pressure to penetrate it. Low volume tells us there is little demand and thus the line is likely to hold.

  

What price action disconfirms the resistance?

1. Candle spread and volume increasing when approaching the resistance level
2. If price hug the resistance and hold it disconfirm the supply and shows the presence of

Candle spread and volume increasing when approaching the resistance level

In an up-move, where the price is getting close to the upper trend line (resistance Line), and low volume appearing will tell you that the trend line is likely to hold for that moment in time because there is no effort to change the trend (you need buying to push through resistance).

If the volume is high, with a widespread up, whilst the price is getting close to the upper trend line, we would expect to see the trend line broken due to the extra effort and the next day is level or even higher, then you would now be expecting higher prices. Any low volume down-day (potential test) will confirm this view

If price hug the resistance and hold it disconfirm the supply and shows the presence of demand

1. Price hold (unable to react) after a drive up
2. The price will move up at resistance price form a tight trading range. Nevermore than 50% of the previous drive up. Tighter the better

The main characteristic of BUYERS overcoming SELLERS is the repeated inability of prices to REACT away from the danger point(resistance). Such hugging of the HIGH usually leads to a breakout. Persistently heavy volume hammering the HIGH usually says a break is Imminent