How to Study Candlestick in Trading

In this article, I am going to discuss How to Study Candlestick in Trading. As part of this article, we will discuss the following three important pointers in detail related to Candlestick in Trading.

1. What is a candlestick?
2. How to Study Candlestick?
3. The 6 principles for analyzing candlestick

What is a candlestick? 

The candlesticks are the reflections of what buyers and sellers are doing. To what extent do they move the price and the strength behind the move? CANDLES TELL YOU who is in control but do not tell you about the strength of buyer or sellers behind the move; candle with volume shows that

The Open:

Open price tells us the balance between buyers and sellers at the opening of that period. The opening value is the first trade of the day. After the traders have time to review the markets overnight, the open represents the desired position of investors to begin the day. The change from the previous close to the open reflects new sentiments. Also, institutions looking to accumulate (or distribute) positions often place orders at the open because the open trade is often the largest, most liquid trade of the day. In this way, the opening might be one of the best times to accumulate/ distribute a large stock volume while minimizing the impact on the stock’s price.

The High:

The high is the highest point the stock traded during the session. The high is the furthest point the bulls were able to push the stock higher before sellers regained control to push the stock back down. The high represents a stronghold for sellers and a resistance area to buyers. There is one exception: when the stock closes on the high, it does not encounter any real resistance from the sellers. The buyers just ran out of time.

The Low:

The low is the lowest point the stock traded during the session. The low is the furthest point the bears were able to force down the stock before buyers regained control to push the stock up. The low represents an area where enough demand exists to prevent the price from lowering. The exception is when the security closes on the low. When the stock closed at the low, it did not encounter buying support. Rather, the bulls were saved by the closing bell of the session.

The Close:

Close price tells us where the balance point was at the end of the period. The close is the last price agreed upon between buyers and sellers, ending the trading session. The close is the market’s final evaluation. A lot can happen between one close and the next close. The close represents investors’ sentiments and convictions of investors at the end of the day. It is the position investors desire to hold after-hours when investors cannot trade with liquidity until the next session opens. The closing price is the first (often the only) price most investors desire to know.

The Change:

The change is the difference between close and close. The difference in the closing value one day versus the closing value the next. When this difference is positive, it tells us that demand outweighs supply. When this difference is negative, it tells us that supply is increasing beyond demand. The change is perhaps the most sought-after piece of financial data.

The Range:

The range is the spread of values within which the stock trades throughout the day. The range spans between the bar’s highest point and the same bar’s lowest point. It is measured from the top of the bar, where resistance is low and support comes in. The size of the range gives us important information about how easily demand can move the s took up or supply forces the price down. The wider the range, the easier it is for the forces of supply and demand to move the stock price.

Bullish CANDLESTICK

This is nothing, but when the CURRENT CANDLE closes, it is ABOVE the previous candle’s close.

Bearish CANDLESTICK

When the CURRENT close is BELOW the previous candle close

With the proper understanding of CANDLESTICK, you can predict what is about to happen in the near future

#Pro Tips: we (retailers) can’t move the market, so every candle shows what smart money is trying to show. So their move trap or genuine is only validated by volume
#Pro Tips: CANDLESTICK shows half of the information, and the other half of the information is shown by the volume

Example

WHAT IS TELLING US?

SENIMATE = BULLISH, 2 consecutive higher close candles. Let’s add volume to this candle

2nd candle range is smaller than 1st candle
2nd candle volume greater than 1st candle
Think why the volume is greater than 1st candle.

Let me explain to you.
NARROW SPREAD CANDLE WITH HIGH VOLUME. Two possible explanations

If the volume had represented buying, how could the spread be narrow?

• Either the professional money is selling into the buying, the possible reversal in the near future
• There is a trading range to the left, and the professional money is prepared to absorb the selling from traders locked into this old trading range. I mean, break out may happen.

Let’s understand the chart.

If the next bar is down, closing near its lows, this confirms the professional selling

A low volume down candle close to the middle or top shows that smart money testing supply and no more supply available 2nd candle was the buyer’s volume if the next candle closes above the current candle

6 PRINCIPLES FOR CANDLESTICK ANALYSIS IN TRADING

• Principle Number One: 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.
• Principle Number Two: If no wick is created, this signals strong market sentiment toward the closing price. SMART-MONEY active there
• Principle Number Three: A wide body represents strong market sentiment, and a narrow body presents weak market sentiment. A Narrow body with a heavy volume of either Smart Money observing for the continuous move or Smart Money entering in the opposite direction
• Principle Number Four: A candle of the same type will have a completely different meaning depending on where it appears in a price trend. Start of the trend or middle of the trend, end of the trend, at support or resistance, or in the consolidation phase. 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. Read the market phase-by-phase and then read the latest day’s action into the phase.
• Principle Number Five: Volume validates price. First, see what CANDLESTICK is telling, then validate by volume. Is It validating or not with the CANDLESTICK price action?
• Principle Number SIX: When a particular timeframe doesn’t make sense, then move to the next higher time frame for the big picture or lower timeframe for the microstructure of the move

How to Study Candlestick in Trading Summary:

Studying candlestick patterns is a critical skill in technical analysis that can provide insights into market sentiment and potential price movements. Here’s a step-by-step approach to learning how to read and interpret candlestick patterns:

1. Understand the Basics

• Candlestick Anatomy: Each candlestick typically represents one trading day and consists of a body and wicks (or shadows). The body shows the open and close prices, while the wicks show the high and low.
• Color Coding: Candlesticks are usually colored to reflect the price movement. A common scheme is red for a closing price lower than the opening (bearish) and green for a closing price higher than the opening (bullish).

2. Learn Single Candlestick Patterns

• Doji: Indicates indecision when the opening and closing prices are virtually equal.
• Hammer and Hanging Man: Small body with a long lower wick, indicating a potential reversal.
• Inverted Hammer and Shooting Star: Small body with a long upper wick signaling potential reversals but in the opposite direction.

3. Explore Multi-Candlestick Patterns

• Bullish Engulfing: A small bearish candle followed by a larger bullish candle that ‘engulfs’ the previous one, suggesting a potential upside reversal.
• Bearish Engulfing: The opposite of bullish engulfing, indicating a potential downside reversal.
• Morning Star and Evening Star: A three-candle pattern that reverses the current trend.
• Three White Soldiers and Three Black Crows: Multiple consecutive long-bodied candles of the same color, indicating strong momentum in the direction of the color.

4. Study the Context

• Candlestick patterns don’t occur in isolation; their significance is greater when they appear at key support or resistance levels, trend lines, or Fibonacci retracement levels.
• Volume is also important—patterns confirmed by higher volume readings are more reliable.

5. Practice Pattern Recognition

• Use historical charts to practice recognizing candlestick patterns. Most trading platforms offer tools to help with this.
• Some traders find using flashcards or apps designed to drill pattern recognition is helpful.

6. Back-Testing

• Once you’re familiar with the patterns, back-test them. Look at historical data to see how the stock price moved after the patterns appeared.
• Understand the success rate of each pattern and under which market conditions they are most reliable.

7. Start with a Simulator

• Use a trading simulator to practice trading with candlestick patterns without risking real money.
• This can help you understand how these patterns play out in real-time market conditions.

8. Integrate Other Analysis Forms

• Combine candlestick patterns with other technical analysis tools, like indicators and oscillators, to confirm signals.
• No pattern is foolproof. Combining candlesticks with other analysis techniques can help validate your trades.

9. Keep Learning

• Candlestick patterns are just one part of technical analysis. Expand your knowledge to include chart patterns, technical indicators, and wave theory.
• Stay current with any new research or methodologies in technical analysis.

10. Apply Risk Management

• Always apply proper risk management when you start trading based on candlestick patterns. Use stop-loss orders to protect your capital.
• Understand that candlestick patterns indicate probabilities, not certainties. Always be prepared for the pattern not to play out as expected.

11. Reflect on Your Trades

• Keep a trading journal documenting the candlestick patterns you trade, the context, the decision-making process, and the outcomes.
• Regularly review your journal to learn from successes and mistakes.

Candlestick patterns can be a powerful tool in a trader’s arsenal, offering valuable insights into market psychology. However, they should be part of a comprehensive trading strategy with sound risk management practices and continual education.