The candlestick chart is the most common amongst traders. I also use it almost exclusively in my trading. I just use the line chart when I want to map out areas of support and resistance.

The candlestick

  • The candlestick chart had its origins in Japan and can also be referred to as the Japanese candlestick chart.
  • The colour of the candlestick chart tells you if price was up or down in a particular timeframe which means that candlesticks are either bullish or bearish

Now most traders prefer to set green candlesticks as bullish and red candlesticks as bearish. And I like it to be that way for me personally.

  • If you use MT4 platform you can customise your chart by pressing F8. There are where you can change the colours of the candlesticks to any colour you want. If you are a woman, you may change a bullish candlestick to pink! And bearish candlestick to Purple! (I have never seen a pink and purple candlestick yet).

This candlestick shown below is an example of a bullish candlestick.

bullish-Candlestick

  • A Bullish candlestick simply means the price opened lower and closed up higher after a certain time period, which can be 1minute, 5minute, 1hr or 1 day etc.
  • The candle body represents the distance price has moved from the opening price to the closing price. The longer the body, means the price has moved a great deal upward after opening. The shorter the candle body means the exact opposite.
  • The high is the highest price that was reached during that time period.
  • The low is the lowest price that was reached during that time period.

All these candlesticks shown below are bullish candlesticks which mean that their opening prices were lower than the closing prices and therefore reflect an overall uptrend in the timeframe each candlestick was formed:

Bullish-Candlesticks

 

Now, the candlestick shown below is an example of a bearish candlestick.

A bearish candlestick simply means that the candlestick opened up at a high price and closed lower after a certain time period:

Bearish candlestick

 

All these candlesticks shown below are bearish candlesticks meaning that the opening price was higher than the closing price, therefore reflecting a downtrend:

Bearish-Candlesticks

Understanding Buying and Selling Pressure on Candlesticks

Did you know that there are bullish candlesticks that are considered bearish and bearish candlesticks that are considered bullish? To really understand this concept, you need to understand buying and selling pressure.

You see, every candlestick that is formed tells you a story about the battle between the bulls and the bears-who dominated the battle, who won at the end, who is weakening etc. All that is reflected in any candlestick you see. The length of the body of the candlestick as well as the shadow (or wick) tells you a story about the buying and selling pressure.

For example, look at the two charts below:

Buying-and-Selling-Pressure-Shown-On-Candlesticks

Look at the first green candlestick on the left chart, it’s a bullish candlestick right? Yes.  But you can see that it has a very short body and very long wick (tail).

It tells you the sellers (bears) were dominant. If this candlestick was to form after hitting a resistance level, it will be considered a bearish signal even though it’s a bullish candlestick.

Now, you can apply the same sort of logic to all the other candlesticks above and read the story each one is telling you.

  • If the upper wick is very long, it simple tells you that there’s a lot of selling pressure. It means price opened and got pushed higher by the buyers but then at the highest price, sellers got in and drove it back down.
  • If the lower wick is long, it tells you that there’s a lot of buying pressure. Sellers drove the price down but buyers got in and drove the price back up.
  • If the lower wick is short, it tells you there’s very minimal buying pressure.
  • If the upper wick is short, it tells you that there’s very minimal selling pressure.

What about the length of the body of candlesticks?

  • The longer the body of the candle indicates very strong buying or selling pressure.
  • A short body of a candlestick indicates little price movement and therefore less buying or selling pressure.

Stronger-buying-and-selling-pressure-reflected-by-candlesticks

  • Sometimes the candles will have no upper or lower shadows but with very long bodies. These are interpreted the same way as standard candlesticks but are an even stronger indication of bullish or negative market sentiment.
  • In the case of a bullish candle, prices never decline below the open. In the case of a bearish candle, price never trades above the open. See below:

Extremely-Strong-Buying-and-Selling-Pressure-shown-buy-bullish-and-bearish-candlesticks

 

Now, so far we have looked at individual candlesticks…what if you combine more than one candlestick? What does it show you?

  • Well, one important thing that group of candlestick can show you is how strong or weak a bullish or bearish move is.
  • They can also tell you if the bullish or bearish move is weakening.
  • The word used to describe such a situation is momentum.

The chart below shows 3 bearish candlesticks in a downtrend, each with decreasing length and body

consecutive-candesticks-showing-decreasing-bearish-momentum

In a downtrend situation, when you see such happening, it is one signal that downward trend is weakening.

And if this happens around support levels, you should sit up and take notice and also watch for bullish reversal candlesticks which will give you the confidence to buy!

The following chart below shows you an example of decreasing downward momentum as price nears a support levels.

 

 

 

What you will see is that the prior candlesticks will tend to be longer and as price nears the support level, the candlesticks start to get shorter:decreasing-bearish-momentum-on-candlestick-chart

This next chart below shows 3 bullish candles in an uptrend each with decreasing lengths. In an uptrend, when you see such happening around resistance levels, you should take notice. Also watch for bearish reversal candlestick patterns to form. This will give you the confidence to sell:

Bullish-Momentum-Decreasing-in-an-uptrend

Here is an example of a bullish momentum decreasing in an uptrend and then price tumbles right after that :

 

bullish-price-momentum-decreasing-in-an-uptrend

Notice (on the chart above) how the bullish candlesticks had increasing lengths and then gradually decreased as the price went up then followed by a big downward fall/move?

That’s price momentum. Every time you look at your charts, you need to be aware of such. Very important!

 

Candlestick Wicks-Why They Are Important

The wicks of candlesticks along with the body tell a story. A wick which can be called a shadow or tail of a candlestick is a line situated above and below the body of the candlestick.

How are candle wicks (tails/shadows) formed and what do they mean?

  • Well, they are formed because of a change in market sentiment.
  • For an upper wick, price is moving up and then market perception is changed by traders and then price is pushed down towards the open by sellers. That’s how the upper shadow is formed.
  • For the lower shadow, price is moving down but the market sentiment changes and price is pushed up towards the close buy the bulls. That’s how a lower wick or shadow is formed.

Longer wicks indicate increase change in market sentiment:

 

What is the Significance of Candlestick Wicks?

  • Candlestick wicks with long upper shadows commonly occur when an uptrend is losing strength.
  • Long lower shadows occur when the downtrend is losing steam.

 

6. TRENDS

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