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In today’s price action post we will cover candles and candle formations. It’s important to understand how candles are formed and the typical candle formations used in a price action trading style.
If you missed out on the other chapters you can follow the links below:
Candles are divided by into their body and the sticks, also called wicks or shadows. We can say that the stick tells a story while the body is reflected the facts of the market… Exploring this concept a little more, we can say that the open and the close of a candle are the facts: the fact is that the price opened and closed at that value. We can say that the wicks tell us the story of the market during a specific time frame. This in a way shows us what all the market participants did in order to reach the candle close level. For example, a long wick can tell us the story of many market participants buying or selling at a certain level printing the wick.
We will focus on only 2 kinds of candles, candles with long wicks, and the momentum/engulfing candles pattern. But first let’s get this concept deep in our minds, wicks tell a story while the body is the facts of the market!
- On candles with long wicks, you can say ‘the longer the better. These candles show how the buyers or sellers tried to push the price higher or lower but failed which causes a long wick to form.
- On momentum/engulfing candles, the body of the candle is a lot larger than the wick and could even not have a wick. These candles show us the strength of buyers or sellers that are in control of the market at that time.
We can use candle patterns in combination with support and resistance zones as part of a trading strategy. Using the long wick candle approach, if we have multiple candles that are rejecting an area, this shows us that the price tried over and over again to break but failed to pass. On the other hand, there is the analogy of the stone on the lake. When you throw a stone to skip across a still pond, the first time the stone touches the water it almost jumps back up, the second time it bounces with less force, very often on the third or fourth time it touches the water it’s less likely to jump but will instead fall into the lake. Sometimes we see this in markets. The more support or resistance is tested, the greater the chance of price breaking through. Like our skipping stone falling into the water.
In this chapter, we have looked at the importance of candles and their formations. We also investigated the importance of using candle patterns near the support and resistance areas when building a strategy based on price action.
In the next chapter (Chapter 6) we will cover the different market conditions (trending and ranging)
If you missed the other chapters follow the links: