Each and every candle is providing traders with information. It is conveying a message how to read and interpret the current status quo of price action. [tweetable alt=””]Being able to judge the communications of the market via the comprehension of candles provides a serious edge to all traders.[/tweetable]
The main messages that the candle stick provides are as always:
Each candle indicates via its internal composition which side of the market is in control – or whether no side is in charge. When viewing the candle, a Forex trader is able to understand whether the bears or bulls controlled that particular bar. By doing so, a trader can make estimations about the strength of a rally or fall – or the lack of it – and use that for their trading purposes.
The candles can be used to judge:
- Trend continuation
- Impulsive continuation
- End of trend
- End of correction
- Break outs
- Failed break out
- Failed break out failure
Let us start with the basics how to calculate and recognize what the candle values mean. Each candle has an open, high, low and close.
Each candle can be analyzed by comparing the open, high, low and close values and the relationship between them.
a) First of all, the close value minus the open value will determine whether the candle was bullish or bearish, or indecisive (equal values). This information will explain whether candle is +20 pips or -100 pips and this is called the body of the candle.
b) Secondly, the difference between the high and close/open and the difference between the low and close/open will determine the size of the wicks on both ends (could be 0 (zero) as well), and this is called the wick of the candle.
c) When subtracting the high from the low, a total candle value is calculated. When dividing the size of the candle body/wick by the total candle length, a ratio is computed. This ratio will provide information regarding the balance of the power in that particular candle.
WHO’S IN CONTROL?
Now let’s discuss what information the ratio and balance of power within a candle conveys to us: who’s controlling the market?
1) Control from one side: this usually happens when a candle has no or little wick. The wick should be none to small (preferably less than 10-20% of the candle body). This is only important for closes near highs in bullish cases; and closes near lows in bearish cases.
- A close near the high/low (h/l) within +/- 0-10%: total control
- A close near the h/l within +/-10-20%: good control
- A close near the h/l within +/-20-30%: some control possible (depends on context)
- A close near the h/l within +/-30-40%: questionable/no control (depends on context)
- A close near the h/l within +/-40+%: no control from one side
2) Loss of control from one side: this happens when candle has 1 big or decent size wick. If the wick is on top, then the bulls lost control during the candle. If the wick is on the bottom, then the bears lost control during the candle. The wick percentage of the total candle size shows how much control was lost:
- A wick of +/- 0-20% indicates little loss of control
- A wick of +/-20-40% indicates some loss of control
- A wick of +/- 40-60% indicates loss of control
- A wick of more than 60% is a major loss of control
3) Loss of / no control from both sides: this happens when the candle has 2 wicks on both sides. There is no clear winner and the bulls and bears remain in balance. The open and close are often equal to each other or almost equal to each other (small body), which indicates indecision.
Besides the fact whether a candle has a bullish or bearish net gain, whether the close is near the h/l, whether there is a wick, which side(s) there is a wick, what percentage of the candle is the wick and body, it is also important to look at the size of the candle.
A big sized candle will have more value than a small sized candle. Of course this depends on the time frame. A candle size of 40 pips is a big sized candle for the 1 hour chart but no for the daily (small). Usually speaking the bigger the candle the more strength and information the candle is relying.
The timeframe itself is of course also important. The higher the time frame, the more valuable the information can become because the candle is providing an understanding of the balance of power of a longer time period. For example, the effect of a major wick on the daily chart indicates massive loss of control during the entire day, which has more importance than a wick on a 15 minute chart (bear/bulls losing control for only 15 min).
When has the candle been printed is also another factor of analysis. A daily candle printed on Sunday is usually small and provides no information. A 1 hour candle printed at 1am GMT on the EURUSD with a 7 pip body also has little value.
Last but not least, the candle needs to be closed before an assessment can be made on the candle itself. When a candle is open it can literally close anywhere it wants to. It is certainly possible to make an analysis of that candle but when the candle is open a trader is actually trading/analyzing a lower time frame.
CANDLE STICK PATTERNS
As explained in the previous paragraphs, each candle provides a value source of information whether the market remains/changes to bullish, bearish or indecisive. Some of the candle sticks, however, do provide more value than others. These candle sticks have various names because they are of more importance than regular and “normal” candles. These special candles are considered to be candle stick patterns.
Certain candle stick patterns consist of 1 candle. Other candle stick patterns need 2 candles to be complete, or even up to 3 candles to form a combination formation. In the images below you will find a summary of the most important candle stick patterns in Forex.
CANDLE STICKS IN MARKET STRUCTURE
Candle sticks are basically the building blocks of what will later become a swing high or swing low. The swing or swing low in turn can either be impulsive / momentum OR corrective / consolidation. The candle stick patterns usually occur at the bottom or top of these swing highs and swing lows, but can also provide information of continuation. Also candle stick patterns often indicate the beginning and end of momentum and corrections.
The various swing highs and swing lows that are labeled as momentum and correction can in turn be the building blocks of a trend channel, trend line, and chart pattern.
CANDLE STICKS IN STRATEGIES
Candle sticks can be used for trading Forex strategies. How these candle sticks are used will depend from strategy to strategy, and from trader to trader. Some Forex traders even opt to trade solely based on the information provided by candle sticks. They make their analysis and trading decisions / management based on the candle stick patterns. An example could be for instance trading pinbars.
Other traders use candle sticks as supportive information. They seek confirmation of their analysis via candle stick patterns. For instance, traders could be waiting for a bounce at a trend line by analyzing candles. This strategy means that traders use candles as part of a broader strategy and use it as confluence. Price action signals at major support and resistance for instance is a method that capitalizes on candle stick patterns in combination with other technical analysis.
Last but not least, some traders may choose not to use it because they prefer other concepts. All traders need to find a balance in their tools, indicators, and analysis.
Do you use candle sticks for analysis and/or trade management? If yes, is there any particular pattern you like most? If not, why not? Let us know down below!
Thanks for sharing this article and Good Trading!
Winner’s Edge Trading, as seen on: