Candle Stick Psychology
Understanding
candlestick patterns goes far beyond just remembering and recognizing certain
formations. Many books have been written about candlestick patterns, featuring
hundreds of different formations that supposedly provide secret information
about what is going to happen next.
Truth
be told, it will make no difference to your trading performance whether you
know what the Concealing Baby Swallow, Three Black Crows or Unique Three River
Bottom are.
What
really matters is that you understand what the candlesticks in front you of you
tell you about price structure, trend strength, buyer/seller dynamic and the
likely path for future price movements.
The 4 elements of a candlestick
Step 1: The candlestick war
Before
we start getting into the actual elements of candlesticks, it’s important that
you are in the right mindset.
Let’s
think about price movements like a war between bulls and bears. Every
candlestick is a single battle in an overall war and the 5 elements of the
candlestick tell us who is ahead, who is pulling back, who is in control and
who has a better chance of winning the next battle.
Step 2: It’s all about context
It’s
crucial to understand that candlesticks cannot be observed alone, in a vacuum.
A candlestick always must be analyzed in the context of what has happened in
the past. So, whenever we try to analyze a candlestick or a formation, we need
to ask ourselves those questions:
•The
current candlestick larger or smaller than previous ones?
•Is
the size changing meaningfully or not?
•Is
the change happening during an inactive trading period? For example,
candlesticks on EUR Forex pairs tend to shrink in size during the quieter Asian
session.
This
is a good starting point because it helps us avoid the closed mindset thinking
which limits many traders. Now we can start exploring the 4 elements:
Element 1: The size of the body
The
candle body is a great starting point because we can get a lot of information
from it.
•A
long body is showing strength
•When
bodies become larger, it shows an increase in momentum
•When
bodies become smaller, it shows slowing momentum
The
body shows how far price has traveled over the duration of the candle.
Element 2: The length of wicks
Wicks
can show the volatility of price movements.
•Larger
wicks show that price has moved a lot during the duration of the candle but it
got rejected
•When
candle wicks become larger it shows an increase in volatility. This often
happens after long trending phases before a reversal happens. Or at major
support and resistance levels.
Element 3: The ratio between
wicks and bodies
Now
can start slowly putting it together.
•Do
you see longer wicks or bodies?
•In
a high momentum trend, you can often see long bodies with small wicks
•When
uncertainty rises, the volatility picks up and bodies become smaller while
wicks become larger
Element 4: The position of the
body
This
is an extension of the previous point.
•Can
you see a long wick with a body on the opposite side? This is often showing a
rejection
•When
you have a small body in the middle of a candle with long wicks, it means
indecision
You
can see that once we start combining the information that wicks and bodies
provide, we can practically analyze all candlestick formations.
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| 5 Main CandleStick Scenario |
Chart examples
Now
that we have covered the individual elements, we can put things together and
see how we can use our knowledge to dissect price charts.
Example #1
Let’s follow price in the chart below and I share what we are seeing here in the candlesticks:
•During the downtrend, the candlesticks are only red (bearish) and long with very small or no wicks >> this shows strength
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| Example-1 For Chart Understanding |
•At
the bottom, we see a rejection. This is not enough yet to call a reversal but
on the next candle we then start seeing bullish candles
Example #2
Below
we see a typical range behavior and we can see how the candles tell us what is
going on:
•Price trends lower on the left with strong bearish candles and no bullish candles in between
•Then
suddenly the bodies become smaller and the wicks longer, showing that the
momentum is fading
 |
| Example-2 For Chart Understanding |
•At
the support of the range, we see that candles are becoming smaller and have
more wicks, confirming the indecision. It also makes a break of the support
unlikely
•Just
before the support breaks, price is only starting to make bearish candles and
we can see how momentum is picking up
Example #3
In
the final example, we can see a classic pattern at the end of a trend. This is
also often one of the building blocks to the
trading strategy which you can learn in
our pro area.
 |
| Example-3 For Chart Understanding |
•Then
suddenly we see two long wicks to the downside. This shows that price tried to
push lower but it did not yet have enough selling pressure
•But
the candles are becoming smaller and smaller after the failed sell-off attempt
which indicates that the trend is running out of steam
•Then
suddenly we see a strong bearish candle which confirms the new downtrend
Conclusion: No Need For
Candlestick Patterns
With
this article we want to show you that you do not have to remember any
candlestick formation to understand price. Quite the opposite. It’s very
important on your path to becoming a professional and profitable trader that
you start thinking outside the box and avoid the common beginner mistakes.
Learn how to understand how buyers and sellers push price, who is in control
and who is losing control.
HI,This is IQO Trader. My Name is Rajib Sarker. I'm Trading last couple of Years. For More Details Visit About Us .