Price Action and Candlestick Patterns
Candlesticks are graphical representations of market price movements within a specified time period – 1 hour, 1 day, 1 week, 1 month. A candle stick is made up of the thick portion, the body and thin parts, wicks or shadows. Candlesticks can tell us about market price movements and each candle has ‘OHLC’ descriptions meaning O (opening price during the specific time period) C (closing price during that time period), H & L meaning the highest and lowest prices traded during that time period. Candlesticks are also color coded and in most trading platforms, a green or plain candlestick signifies ‘bull’ or ‘buy’ or ‘long’ while a red or shaded candlestick signifies ‘bear’ or ‘sell’ or ‘short’. In a bullish candlestick, the close price is higher than the open price meaning that the market has moved up while in a bearish candlestick, the close price is lower than the open price signifying that the market has moved down.
There are special candlesticks like bullish or bearish shaven that can provide crucial information about where market price may be headed. One important concept in candlestick analysis is Momentum, which is a measure of the strength of price action. A bullish or bearish shaven candle, for example, shows a strong upward or downward movement respectively, which can be used to predict future market price directions.
Candlestick analysis is meant to be one of the many trading criteria you have at your disposal; in essence, do not depend entirely on them, you can combine candlestick analysis with the use of technical indicators.
A candlestick that best shows lack of momentum is the doji candlestick. On trading charts, this candlestick looks like a cross because the opening and closing prices are the same; no body at all.
Doji candlesticks signify that buyers and sellers are equally strong and there is indecision in the market. This candlestick may not necessarily imply a change in market direction; it depends on the reason for the formation, so this time is such a time to tread cautiously. Long shadows represent buyer or seller rejection and they indicate a high chance of price reversal opposite the direction of the shadow.
Multiple shadows, however indicate that prices are likely to move in the same direction as the shadow, emphatically testing the strength of the support or resistance levels. Studying the formations of candlesticks relative to one another can help in deducing the next price movements or directions.
In the case of an anchor candle, which is one with a longer body than the surrounding candlesticks, a price reversal is likely to happen when a candlestick closes beyond the opening price of the anchor candle. Candlesticks also give significant price formations like support/resistance level, double tops/bottom, triangles, which are reliable indicators of potential price movements or directions.