Please pardon the joke of the title. What I want to discuss here is how to really read the candles. Some things have been discussed lately that I feel display a lack of true understanding of candles.
1 - The name of the candle is irrelevant.
2 - Candles are not some fancy indicator, they are just another visualization of price action
3 - If you disagree with the top two, go eat a cookie and come back in two hours.
As you can see in this simple 15 minute chart a similar characteristic comes up before a major move. This is important, so put on your reading glasses and take out your pen and notepad (you better have one you newbie traders you).
Ready?
The body of the candle gets smaller, this indicates a lack of pressure in the current trend
To make it simple, when price is going up and you see a spinning top/doji all it simply means is bulls are losing steam. There isn't a lot of demand to push price higher, thus the smaller body. The wick simply means someone came in, and pushed price in the other direction. It does not mean go short or long, it simply means price may have hit a point and needs to slow down or reverse.
Look closely at the candles I outlined in the sample. The hammer that I know you all know I'm talking about, is a great example. The wick indicates price kept selling but buyers came in, that's all that matters. There were more buyers at that level than sellers, and price went up. We can now call this the, "James is brilliant" candle, since it really doesn't matter. Now a lot of newbies including myself would say, "but price didn't immediately go up". But that's where you, and myself, would be incorrect. It simply means there are more buyers, and the
probability of price going up is higher. Remember, this is a business of probabilities.
A few candles later price did reverse and go up, then at 1340 a "spinning something" finally came. But notice how it was now on support? That's a good thing, it means buyers are keeping the price stable and allowing for more buyers to come in.
Then we get the inverted hammer after our 12pt run. There is something meaningful about this inverted hammer, it's up against resistance. Notice how we hit that price point earlier and it made that super small doji? Well, that means there aren't anymore buyers. That wick tells us more sellers came in and pushed price down. A few candles later, down we went... to a doji and hammer!
I think you know where I'm going with this... And for grins, I threw in the same chart using bars and line. Similarities come up, guess what they are.
Have a nice trading day.
