Through this website, we will not learn about specific candles and patterns, but rather the emotions and psychology behind moves in the market. The purpose of this website is to aid the user in attaining profitability and it has been found that an understanding the ebb and flow of the underlying supply and demand which drives price is much more important to the trader than a simple memorization of candlestick patterns and formations. In the below diagram, we have drawn the two most frequent color schemes of candles as well as identifying features of a candlestick.
While it is essential for the trader to have the basic skill of identifying the direction of the price: up, down, or sideways; a trader must also be able to identify the emotions behind the candlestick movements. This is an easy skill to define and to put into practice, but it will take a trader dozens of charts before he is able to do it successfully. Many traders frequently place a large amount of their decision making on the current or past candle, however unless the trader is participating in scalping, or profiting from very short moves, this amount of importance on the immediate past is inappropriate. It is more important for a trader to be able to spot and identify areas of candles that are showing weakness or strength and trade accordingly.
The Emotions of a Candle
The skill-set necessary to identify the emotions behind a collection of candles unfortunately cannot be expressed in clear rules and patterns. However, we will attempt to portray "the day in the life" of a professional candlestick trader. In the following example, we encourage the reader to examine the image and at each letter on the chart, write on a piece of paper both what they see and what they feel the message of the market was at that moment of time. Additionally, we encourage the reader to write a trade which they could have taken based purely on the candles in this region of the chart.
There is no perfectly correct answer, however in general, this is what the participant should have concluded from the chart.
A. At this point, there is great indecision showing in the chart. The candles have been caught in a small range and the length of the wicks are large with small bodies. This means that neither the buyers nor the sellers are showing the strength and drive necessary to cause the market to trend in any definite manner. At this point, we should stay away from the market to protect our capital from uncertainty.
B. At point B, the market has been in a clear trend for about 6 candles. However, the trend has begun to falter. The last green candle has a very long upper wick which shows that during that period of time, the buying pressure was overwhelmed by the selling pressure and a temporary reversal may be in order. The red candle immediately below letter B which shows a large wick, both on the underside and on the upperside, with a small body shows us that there is indecision and an immediate reversal is more than likely about to occur. It would be wise for a trader who has been long since the breakout after point A to tighten stops and preserve profits should this move strongly reverse. If a trader were more aggressive, however, he could consider initiating a very short-term scalp (should it be in his trading strategy) to lock in a small profit
C. At this point it can be seen that the reversal from point B was actually just a retracement and the upward momentum, while not continued, is sustained. At point C the trader can determine that the price is range-bound within a retracement and upward momentum will more than likely resume. The trader is also able to see that immediately above point C, price has "rounded out", or formed a bottom. This bottom is not only formed through the "U-shape" that the candles make, but also the indecision in the last, small red candle. This small red candle shows that the sellers are gradually, once again being overwhelmed and price will more than likely proceed upward. It would be safe for a trader to initiate a trade in the long direction with a stop below the lowest point between B and C.
D. At this point indecision once again rears its head, leading the trader to question the strength of the trend. The two last strong bullish, green candles have tall upper wicks, showing that at one point these candles were pushed downward and that the bears are gaining some traction. The two indecision candles located directly below D show the trader that there is a strong struggle between the buyers and sellers over the direction of price. At this point, a trader would be encouraged to tighten his stop to break even or to raise it to the most immediate retracement found between C and D. For the aggressive trader, this may be an opportunity to initiate a scalp position if his trading plan calls for it.