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
