Candlesticks and Price Action

Technical analysis is a vast field; if you want to master the art, you must know how to read the charts. 

Two key concepts that help you learn technical analysis are candlesticks and price action. 

So, let’s delve into both of them and understand the world of technical analysis. 

What are candlesticks? 

Did you know candlesticks originated in the 18th century because of rice traders from Japan? 

Candlestick charts are a popular tool used in technical analysis to represent price movements of forex or other financial assets over a specific period. 

Each candlestick typically represents the price action (more on that in a while) for a particular time frame, which can be as short as one minute or as long as a month.

The basic components of a candlestick include:

Body

The rectangular portion of the candlestick represents the opening and closing prices. If the closing price is higher than the opening price, the body is usually colored green or white, indicating a bullish candle. 

Conversely, if the closing price is lower than the opening price, the body is typically colored red or black, indicating a bearish candle.

Wick (or shadow)

The thin lines extending from the top and bottom of the body represent the highest and lowest prices reached during the time frame. These are called wicks or shadows.

Real Body

The candlestick’s body represents the difference between the opening and closing prices. It is sometimes called the “real body.”

Candlestick patterns can provide valuable information about potential market reversals, continuations, or indecision. Common patterns include doji, hammer, shooting star, and engulfing patterns.

How to read candlestick charts? 

Reading candlesticks may sound like deciphering some secret code from ancient times, but fear not, with these simple steps, you can read the candlestick chart like a pro!

I have already covered the anatomy of the candlestick above so that I won’t cover it here. 

2. Identifying Candlestick Patterns

The second step in reading the candlestick chart is to identify the patterns. Some common patterns include:

Doji: This pattern occurs when the opening and closing prices are very close or identical, resulting in a small or non-existent body. It indicates indecision in the market and potential trend reversals.

Hammer: The hammer pattern has a small body near the top of the candlestick and a long lower wick. It suggests a potential bullish reversal, as buyers stepped in to lift the price higher after a significant decline.

Engulfing Patterns: Bullish engulfing patterns occur when a small bearish candle is followed by a larger bullish candle that completely engulfs it. This signals a potential bullish reversal. Bearish engulfing patterns work the opposite way, indicating a potential bearish reversal.

3. Analyzing Trends

Candlestick charts help identify trends in the market. An uptrend consists of a series of higher highs and higher lows, indicating an overall positive trajectory. Conversely, a downtrend consists of lower highs and lower lows, indicating an overall negative trajectory. 

4. Considering Time Frames

Candlestick charts can be viewed over different time frames, such as minutes, hours, days, or months. Shorter time frames provide more detailed and rapid price movements, suitable for day traders and scalpers. 

Longer time frames give a broader market perspective and are preferred by swing traders and long-term investors.

Price Action

Price action refers to the analysis of price movements and patterns on a chart without the use of additional indicators. 

Traders who use price action focus on studying historical price data to identify trends, support, resistance levels, and potential turning points in the market.

Here are the key aspects of price action:

The Naked Truth

Price action trading is sometimes called “naked trading” because it involves looking at the raw price data on a chart without additional indicators.

The Language of the Market

Price action is all about understanding the language of the market. 

By observing the price’s behavior, such as its highs, lows, and how it reacts at certain levels, traders aim to gauge market sentiment and potential future price movements.

Final Thoughts 

So, now you know about candlesticks and price action. These two are important components for any technical trader. 

Join us next time as we explore the thrilling Moving Average. 

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