Have you heard of candlesticks called Doji or Hanging Man? You know what – I don’t care. You don’t need to know the name of every candlestick. Actually you don’t need to know the name of any candlestick at all. You can forget all the general candlestick knowledge you have heard. Learn to do the candlestick analysis the right way!
We are going to look at entire life cycle of a candlestick from the beginning to the end.
Below is a newborn candlestick. It has not moved a single pip in either direction. It is totally neutral.
Right now it has nothing interesting to tell us, but in 1 hour (we are using 1 hour timeframe in this example, but it relates to all timeframes) we can see what price was doing for the last 1 hour.
When a candlestick is born, then immediately starts a battle between sellers (bears) and buyers (bulls). Sellers want to push the price down and buyer want to push the price up.
Below in the picture is a candlestick that forms when price drops down fast. It means that sellers were strong and pushed the price down. Buyers couldn’t fight back. Sellers were just too strong.
The longer the candlestick’s body is, the stronger the selling or buying pressure was. It shows that one side managed to take control and drive price in their desired direction.
Short candlestick bodies in the other hand show that there was very little activity by buyers and sellers.
Next is an example of vice versa situation. Buyers are strong and push the price up. Sellers have no chance to fight back. Again, the longer the candlestick’s body, the greater the buyer’s power.
Below is a little bit more interesting candlestick’s life cycle. After 1 hour long struggle buyers won the battle with very small lead, as the candle closed green and very near it’s open. The long upper wick (also called shadow) shows that buyers pushed price high up and were taking control, but eventually sellers managed to drag the price down again. The short lower wick tells us that sellers were weak and couldn’t push the price either. The longer the wicks, the fiercer the battle. This candle tells us that there is no clear winner and it’s yet to be decided.
Next candlestick’s life was mostly in sellers hands. Short upper wick shows that buyers managed to push price up a little, but then sellers became strong and pushed price down as seen by the big red candlestick body. The candlestick’s life cycle ended with sellers in strong control with little signs of struggle from buyers.
When there is a series of candlesticks with only one side having control, then we have a trend.
Below we have an example of an 5 hour long bearish trend. Each candlestick represents 1 hour in this example, so 5 hours long trend in total. Every candle is bearish, so it’s easy to figure it’s a bearish trend. Also it’s very strong trend – you can see that most candles have long bodies and short wicks at opposite direction.
Next example is bullish trend. Everything is the same, just price pushing to the opposite direction. Easy peasy.
Whenever price is moving, sellers and buyers are struggling for control. In above example of uptrend we can see that every candle has short wicks pointing down (lower wicks). These are marks that sellers were trying to fight back, but eventually had to give up and buyers continued to push price up. As said before, longer the wicks, fiercer the battle.
Of course not every trend is so strong like in the previous examples. Most of the time trend is weaker. For example bullish trend might include bearish and indecisive candles like in a picture below. But overall it’s still in buyers control – they push price up.
Trends can’t last forever. Sooner or later we are going to see signs that they start to steam off.
Next let’s take a look at an example of possible end of a trend in our candlestick analysis. In the picture below is the same strong bullish trend. But take a look at the last few candles. As you can see the candlestick bodies are becoming shorter and wicks are becoming longer. We should now understand that this tells us that buyers are starting to lose momentum. Sellers are fighting back and price is not moving up so fast any more. This might be a good time to start looking to take reversal trades.
Trends are easy to identify, but as you probably know the market is not always trending. It’s also very important to understand when the price is ranging.
Price is ranging when it can’t break out from a certain area. That’s because neither side is strong enough. When price is ranging then candles are usually with short bodies and with big wicks. There is no clear price movement up or down. Usually traders stay away from ranging market, because price moves are too short.
Below is an image of a trending price which then becomes ranging. It’s like in a channel without clear direction. Buyers and sellers are struggling and there is no clear winner.
Now you understand that using candlestick analysis you can read a story of what price has done recently and what it is doing right now. It’s an important skill to read price that created the candlesticks, not just knowing candlestick patterns without the story behind them. Candlesticks give us information what price is doing right now, so we can make better predictions what it is going to do. That is the way to trade forex – by making smart predictions.
If you have any questions please comment below or send me an e-mail and I will answer happily.