Primer: Analysis using candlestick charts
Here is a primer on how to interpret the candlestick charts.
People seem to think that because only a few investors are successful in trading, it must be a complicated process to make money in the markets. The truth is that the simpler we make trading, the more profitable it seems to be. We will discuss a simple technique that is often overlooked when traders are reading charts. We are all too quick to look at the squiggly lines we call indicators and oscillators and dismiss the simplest signal available to us, PRICE!
The most common way that price is displayed for most traders is through candle charts. These charts display pictorial representation of price. (If you are not familiar with the construction of a candlestick, click here).
A green candle usually indicates strength in price and is formed by price closing higher than it opened during that particular period. Conversely, the red candle indicates weakness due to the closing price being lower than the open for that period.
The problem is that many traders end their candle analysis there. You must look to see what the tails (wicks, shadows or whatever else you wish to call them) are telling you. These tails mark the highs and lows of the period. If someone asked you what the candle below signifies, you may say that weakness since it is red.
However, with further examination, you will see that there is a long tail to the downside. This means that even though the bears pushed the price lower, there was enough bullish pressure to move price higher before the close of that period. This is actually a bullish candle! Let’s see where it was in the whole trend.
A red candle actually indicated that we were ready to bounce off support with a lot of bullish pressure. You have to listen to the tale the tails are telling you. Any candle tail that is above the real body (coloured portion of candle) tells that the bulls were not able to hold price up and the bearish pressure moved prices downward. Any tail below the real body indicates buying pressure.
This becomes especially important when price is nearing a level of support and/o resistance. By seeing which force is winning (bulls or bears), we can anticipate a bounce or break of that price level and take appropriate action.
Remember that price gives us clues as to the immediate direction it will go. We just have to be open to viewing it and listen to the tale of the tails!
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