Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close prices for the day. The candlestick has a wide part, which is called the “real body.” This real body represents the price range between the open and close of that day’s trading. In the first part, we are going to cover how to read Japanese Candles, a particularly single candle
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What do we know when we look at candles?
To know what a candle says we need to find the following factors
I. Candle size.
The size of the candle (from the low to the high of the candlestick) shows the amplitude of price movements over a period of time. Looking at this range you can easily tell the level of volatility at that time, whether the market is in a state of “hibernation” or in a vibrant state.
II. Candle body.
The body of a candle represents the price of the market and the power of the market. A full bar candle shows that market pressure is tilting toward the buying / selling side.
While a thin body shows a balance of force on both sides.
Based on the body of the candle we can see :
Is the market going up or down?
And is that movement strong?
III. Candle shadow
The shadow of the candle is the part where the price moves but cannot sustain. The candlestick shows strong buying/selling pressure when it is relatively large in size and completely on one side.
Lots of candles
In this section, we read the price action through a cluster of 2 candles and 3 candles
I. The cluster of 2 candles.
When reading the candles, we need to compare the current candle with the previous candles to find the next direction of the market
1. Smaller range – Decreasing volatility. show that the volatility has decreased through decreasing candle size.
2. Longer upper shadows – Increasing selling pressure. indicating that selling pressure is increasing as the candlestick forms a long upper shadow.
3. Larger range and opposing bodies – Increasing volatility and market reversal. indicates the increase in volatility as it reverses down
Retest the previous price.
1. Test high but fallen – Bearish. The price broke out high but was later denied and created a bearish candlestick
2. Tested low and punched through – Bearish. The lower candlestick penetrates the low of the previous candlestick with a strong force, indicating a bearish momentum
3. Tested low but failed – Bullish. The price initially penetrated the previous low but ended up with a bullish candlestick
II. The cluster of 3 candles
Basically, the market is inertial. Price increases will entail price increases and vice versa or a reversal
1. Bearish expectations confirmed. The first day is bearish with a strong force, the second day also plummets after opening, and we expect the third day’s candle will follow this decline. In fact, the 3rd day has a rising gap but is pushed down shortly thereafter creating a bearish candle.
2. Bearish expectations failed. The first two bars are the opposite of the first one, but the third bar is rejected when approaching new highs, which shows that the selling pressure has increased. A bearish setup
3. Bearish expectations failed. The middle bar fell sharply, eliminating the previous uptrend. We expected the price to decrease further, but this was not true, this price zone was going to be a struggle.
We need to know what the candle is trying to say
Vincent Nyagaka is a Professional Trader, Investor, and Author who is considered ‘The Authority” on Price Action Trading. His blog is read by over 300,000 every month and he has taught over 5,000 students from all over the world since 2016. Check out Vincent’s Professional Trading Course here.