The Information Behind Candlesticks

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Video Transcript:

Hello traders. Welcome to the Advanced Technical Analysis Course and the first module, Technical Analysis 101. On this lesson, you will learn all the information behind the Japanese candlesticks.

So what are Japanese candlesticks? Japanese candlesticks are used to show price information on a chart, over a certain period of time. For example, on a onehour chart, a single candlestick shows you the price variations for the last hour. Unlike line charts, candlesticks show you the opening price, the closing price, and the high and low of the last period. So if you are, for example, on a 15-minute chart, the last candle will show you the highest price of the last 15 minutes, the lowest price of the last 15 minutes, and the open and the closing price of the last period.

Japanese Candlesticks

Here’s an example of a bearish candle. Here, you can see that we open here and we close here. This is why this is a bearish candle because the close is lower from the open. You can see that this is the highest level that we achieved during this period and this is the lowest level that we achieved during this period. On the contrary, here’s a bullish candle. This is a bullish candle because the closing price is above the opening price and of course, you can see that the high and the low remain the same. Here, we have the extremes of this given period. It can be a one hour candlestick, a 15-minute candlestick, a one-minute candlestick. All candlesticks show you the same information for the given period. What changes is the length of the period.

Now, the selling and the buying pressure, how to read the selling and the buying pressure with Japanese candlesticks? Candlestick bodies gives us information about volatility and pressure in the markets. For example, a small-body candle, either bearish or bullish, tells us there is an equilibrium between buyers and sellers in the market. If it is a small body, bullish candle, it will mean that the bulls have a little edge over the bears. If it is a small body, bearish candle, it will mean that the bears have a little edge over the bulls. In any case, if the body of the candle is very small and the wicks are long, it shows indecision in the market or equilibrium. The longer the body of a bullish candle, the more buyers are coming in and getting control, making the price rally. When you see that a candlestick is getting longer and longer on the bullish side, it means that more buyers are getting in the market, making price rally so we have volatility and momentum. On the other side, the longer the body of a bearish candle, the more sellers are coming in and moving price lower.

But there is a consideration to take here. Always wait for a candle to close to assess market activity. This is crucial, because if you assess market activity and the candlestick has not closed yet, you might get trapped in an extreme of the candlestick. Remember that the candlestick shows you the high and the low of the period, so you might get trapped in an extreme move of a rejection candle, for example. Let’s go and have a look at what a rejection candle, exhaustion candle, and a continuation candle look like. For example, at a resistant level, a candlestick that opens and closes below the level with a long wick to the upside signals rejection of the level. Here’s an example. You can see that we are in an uptrend and we have achieved a resistance level here. When we retrace back and test it again, you can see that we have a long-wick candle. This signals rejection of the level and we can short this level right here.

At a support level, a candlestick that opens and closes above it with a long wick to the downside shows rejection of the level. This is the same, but they’re all on the opposite side. As you can see here, we have achieved a support level and we have two candlesticks with small bodies and long wicks to the downside. The small bodies of the candlesticks shows indecision at these levels or it can also show that these huge bearish pressure got counterfeited by a lot of buyers that were positioned at this level, so this is why the candlestick went all the way down here but closed above the support level. Now, we can go long when we have rejection of this level. This is how you use the information on candlesticks. Candlesticks are not just bodies and wicks, but they have really important information that you need to use to trade.

At a resistance level, a flat top candlestick with a long down wick shows exhaustion of the up move. For example, you can see that we are in an up move here and the candlestick’s bodies are getting smaller and smaller. When this candlestick has a flat top, but a long wick to the downside, it signals exhaustion of the up move. Why does it signal exhaustion of the up move? Because you can see here that we failed to move above this resistance level and bears move all the way down here. Even though we closed all the way up here, the move has pretty much exhausted at this resistance level and you can see by the next candle that we have a surge of selling pressure here.

On the opposite side of a support level, a flat bottom candlestick with a wick shows exhaustion of the down move. Here, it is the same, but on a downtrend. You can see that here, we have long bodies on these bearish candles and then, the bodies are getting smaller and smaller until we have a flat bottom, meaning that we couldn’t even make a low below this area of support and bulls push price all the way up here. Even though we close here, we have another small body candle with a flat bottom and an upper wick before the move reverses to the upside.

So this is the kind for the information that you need to understand. You need to combine the length of the bodies, the length of the wicks, if we have wicks to the upside or the downside. Remember that if we don’t have wicks to the upside, it means that the buyers couldn’t even make a new low. It means that whenever these periods started, it only kept going down. Also, we have continuation patterns. For example, when a candlestick closes above or below an important level, it shows continuation for a possible breakout.

Using Candlesticks to Find Support and Resistance

Here, we have a clear example of this. As you can see here, we have this area of resistance countless times. We have this candlestick that shows rejection, this candlestick that shows exhaustion, rejection and then, when this candlestick closes above this level and above these highs, we have a continuation of the move up. So this was not a rejection of this area of resistance, but more of a continuation pattern. This pattern was not complete until this candlestick crossed and closed above the level of resistance. This also applies to levels of support. If we are getting rejection on this level of support but then we have a candlestick that closes below this level, we might have a continuation of the move down.

This is what you need to understand and these are the basic concepts behind candlestick reading and the information you can get from them.


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