[james_gsx]

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.

[habi]

Hi James

Whatever analysis you do, most important thing is the trend and probably the most difficult thing to identify it. Is there a trend and how strong is it? Have a look on the 15min chart. Since the top at ~1360 we are in a downtrend, but with overlapping waves, which means, the trend is not very strong. In surch circumstances candles work very well as turningpoints.

Let's now look on the upmove in the middle in a five minute chart. The 'reversal candles' (inverted hammer, shooting star ...) didn't change the trend, they produced just a small retracement. As with all indicators, in different environments we have to apply them in a different way.

Helpful in determinig the trend are the wide range body candles, in this case the long green upbars.

[Blu-Ray]

James

Good thread, would you mind going in depth about the saying " Not all hammers are equal"

Cheers

Blu-Ray

[trader273]

I think you should also show what time frame your charts are showing. A hammer on a one minute chart is not usually as strong as a hammer on a 10 or 15 min chart.

[brownsfan019]

Here's an important concept that James did not mention (yet) and 273 alluded to it:

CANDLES IN AND OF THEMSELVES BECOME LESS RELIABLE LOWER THE TIMEFRAME.

As I've said many, many times on this very forum, you need to have some sort of additional confirmation when you use candlestick analysis on lower timeframes. And by low, I mean under 1 day. You have to find what works for you.

[james_gsx]

Brownsfan - I actually was telling myself that while writing the thread, but for some reason I never typed it out But you are absolutely correct, a higher time frame will give you better signals. I think that may be one reason why I'm much better swing trading than day trading.

Trader273 - That was a 15 minute chart. Overall, I was just trying to show the basics of candles and how the body tends to get smaller at the end of trends.

Habi - you bring up a very good point. These "reversal" signals don't necessarily mean reversal, in the case of a trend on a 5 minute chart they could simply mean the trend will take a break. It should tell you to either take some profits if you are already in the trend, or wait for the pullback to get back on the train.

[MrGimp]

Yeah I agree Habi, you make a good point about reading the candles differently depending on the trend youre in.

Although, Im no day trader. Not long term either though. I guess Id be labelled a swing trader? Although sometimes I feel like Im trading flat lines. lol

But Im getting better, especially the last couple weeks, I feel like something has clicked with my understanding of what Im doing.

[btrader2]

Originally Posted by james_gsx »

Overall, I was just trying to show the basics of candles and how the body tends to get smaller at the end of trends.

James, I agree with time based charts but with VBC candles, isn't it true that a series of smaller candles (volume increase) can indicate a different type move may be under way?