- are the patience to wait for the right moment -
and the courage not to be disappointed with what we encounter.»»
Candlestick analysis is the oldest way of studying price movements and still one of the most used. It can be used together with any other form of technical analysis and in any timeframe. This kind of analysis gives useful and unique indications.
Unlike other kind of graph representations, candlestick chart gives some peculiar configuration that represent in a single graphic form four moments of the session (open, min, max, close). Candlestick are used to understand market movements with a complex picture that is more accurate than a classic bar chart.
Even the candle color in a candlestick chart gives us some information. If the opening level is under the close level, we will have a white body candle, while if the opening is over a close, the body will be painted in black. In a first approximation, we might say that black candles decrease their value, while white ones increase it.
At first candlestick appear full of mysteries and difficult to understand as they appear in many variants. Once we understood how to read them, they allow us to simplify the analysis and make it rather easy, without a huge effort.
Four primary categories
Candlestick might be divided into four primary categories from which all the other derives, including graphic patterns.
1) white candles,
2) black candles,
3) big candles,
4) small candles.
- White candle indicate that during the operative session there was an increase of buyers pressure against sellers pressure and, in general, it is considered to be a good sign while prices reach new peaks. The best possible combination is a big white candle (white marubozu line) that indicates how price constantly increased during the session. If we want to go short, it is unwise to do it in a session that closes next to its max as the showed strength together with a long line, should let us consider an upside continuation and not an inversion.
- Black candle indicate that during the session sellers overpowered buyers which are willing to buy at a lower price. A candle that opens at its max and closes at its low is the most negative indication and, if it is a long line as well it is logical to expect a continuation on the downside. Therefore we should avoid speculative buys in the short term.
- Big candles, also called long line, show a huge battle between buyers and sellers, the wider the range, the bigger is the meaning of the given sign. Wide range candles might be followed by some retracement, and those are very good opportunities for intraday and end of the day trading.
- Small candles o short line, also called short line, is a symptom of an undecided market, without direction or certainties. When this kind of candles appear with few volumes, it just represent an even situation between buyers and sellers. Those kind of candle often appear before testing important support and resistance, right before volatility explosion that derives from important levels breakouts.