Now that we know the fundamental purposes and components of a candlestick, let’s delve a bit deeper and discuss how to read them. Because candlesticks tell us a lot about price action, we as traders use them to gather basic information about market behavior at a glance.
As traders, we’re all looking at the same information. Some of us may have a few extra filters and guides turned on, but we all use the same sources, same graphs, same charts. If it makes sense to us, it’s probably making sense to other people. If we’re considering an action based on what we’re seeing, they are too. And that’s okay! But, if we’re not seeing what everyone else sees, that presents a problem. That’s why it’s important to have a strong understanding of money management and act in accordance with that understanding.
There are certain candlesticks that signal reversal and continuation. When we notice these in combination with the rest of the overall market’s price direction, we want to pay attention to that. They give us good indications of where the momentum is in the market.
Found at the bottom of a trend, a green candle like the one to the right should tell us that the price moved all the way to the bottom of the wick, but was forced to close much higher. This is a strong reversal signal at the end of a run.
This blue candle has made the same movement down and closed lower than its open. The green candle at the bottom of a downtrend shows us there’s more momentum—if it’s the blue, there’s less momentum—because it closed lower. Because the green closed at the high, we can see it has a higher upward momentum. The blue opened higher, pushed down to the same low, and didn’t carry the momentum upward and closed lower than the open. While both of these candlesticks signal reversal, the green is stronger than the blue.
The inverse of this is true.
At the end of the uptrend, these wicks both signal that the price reached the same high, but was rejected at that level. With the blue, we have the opening price push all the way to the top and close at the bottom. This is a stronger reversal pattern. The green closed higher, so it is a weaker reversal signal of an upward trend.
Pay attention to this when you trade! These candles aren’t enough to trade on all by themselves, but they work well in combination with other things (trend, momentum, etc.).