Price Action
Trading
Explained by Siddhantkesiddhant
Translated by Aakash
Content
1. Introduction
2. Analysis of candlesticks.
3. Bullish & bearish candlestick.
4. Indecision candle sticks
5. Candlesticks pattern for reversal.
6. Candlestick’s pattern for continuation.
7. Strength analysis of candlesticks.
Introduction:
Candle graphs are a type of chart that shows a lot of information in one visual,
making them more useful than traditional bar charts or simple line graphs that
only show closing prices.
Candles can form patterns that might help predict future price movements.
Using different colors helps make this tool even more informative. This method
dates back to Japanese rice traders in the 1700s.
Typically, candle graphs are used daily, with each candle representing a whole
day of data and price changes. This makes them more helpful for traders who
focus on longer-term or swing trading.
“Each candle tells a story”
When you look at a candle, it represents a battle between buyers and sellers.
A light-colored candle (usually green or white) means buyers have won for the
day, while a dark-colored candle (usually red or black) means sellers have won.
What makes candle graphs so interesting is the information they provide about
the actions and struggles between buyers and sellers throughout the trading
day.
Pros of using Candlestick Patterns:
1. Visual Clarity: Candlestick patterns offer traders a visually intuitive
depiction of market sentiment and trends.
2. Widespread Recognition: These patterns are universally acknowledged,
making them accessible and comprehensible to traders of varying
experience levels.
3. Optimized Timing: Traders can finely time their entry and exit strategies
through effective pattern analysis.
Cons of using Candlestick Patterns:
1. Subjectivity: Interpreting candlestick patterns can be subjective,
potentially leading to misinterpretations by traders.
2. Challenges in Volatile Markets: Sudden price fluctuations in markets can
trigger false signals from patterns.
3. Exclusive Focus on Technical: Relying solely on technical analysis might
overshadow critical fundamental factors impacting markets.
Analysis Of Candlestick:
A candlestick has a body and shadows, sometimes called the candle and wicks.
T he wicks are an asset's high and low price, and the top and bottom of the
candle are the open and close price.
A daily candlestick represents a market’s opening, high, low, and closing
(OHLC) prices.
T he rectangular real body, or just the body, is colored with a dark color (red or
black) for a drop in price and a light color (green or white) for a price increase.
T he lines above and below the body are referred to as wicks or tails, and they
represent the day’s maximum high and low.
Taken together, the parts of the candlestick can frequently signal changes in a
market’s direction or highlight significant potential moves that frequently must
be confirmed by the next day’s candle.
Bullish & bearish candlestick:
Bullish and bearish candlesticks are key components of technical analysis in
financial markets, particularly in stock trading. They represent the sentiment
and behavior of market participants during a specific time, typically one trading
session.
Here's an explanation of each:
Bullish Candlestick:
1. A bullish candlestick occurs when the closing price of an asset is higher
than its opening price for the given period.
2. T he body of a bullish candlestick is typically colored green or white,
indicating upward price movement.
3. T he upper shadow (wick) represents the highest price reached during the
session, while the lower shadow shows the lowest price.
4. A long bullish candlestick suggests strong buying pressure, while a short
one indicates more moderate bullish sentiment.
5. Bullish candlesticks often signal optimism and upward momentum in the
market. Traders may interpret them as a signal to buy or hold onto a
security.
Bearish Candlestick:
1. A bearish candlestick forms when the closing price is lower than the
opening price for the given period.
2. T he body of a bearish candlestick is typically colored red or black,
indicating downward price movement.
3. Like bullish candlesticks, the upper shadow represents the highest price,
and the lower shadow indicates the lowest price during the session.
4. A long bearish candlestick suggests strong selling pressure, while a short
one indicates more moderate bearish sentiment.
5. Bearish candlesticks often signal pessimism and downward momentum
in the market. Traders may interpret them as a signal to sell or avoid a
security.
“Understanding the patterns and formations of bullish and bearish
candlesticks is crucial for technical analysts to make informed trading
decisions. These candlestick patterns are often used in conjunction with other
technical indicators and chart patterns to analyze market trends, identify
potential entry or exit points, and predict future price movements.”
Indecision candlesticks:
Indecision candlesticks, also known as doji candlesticks, represent a state of
uncertainty or equilibrium between buyers and sellers in the market.
T hey occur when the opening and closing prices of an asset are very close or
equal, resulting in a small or non-existent body with long upper and lower
shadows.
Here's more about indecision candlesticks:
Appearance:
1. Indecision candlesticks typically have very small bodies, indicating that
the opening and closing prices are nearly identical.
2. T hey often have long upper and lower shadows, suggesting that the
price fluctuated significantly during the trading session but ultimately
closed near the opening price.
Interpretation:
1. Indecision candlesticks reflect a lack of consensus or dominance between
buyers and sellers. Neither side was able to push the price significantly
higher or lower during the trading period.
2. T hey signal uncertainty in the market sentiment and can indicate a
potential reversal or continuation of the current trend, depending on the
context in which they appear.
3. Indecision candlesticks are often seen as a sign of market consolidation or
a pause in price movement, as traders wait for new information or a
catalyst to drive the next directional move.
Types of Doji Candlesticks:
1. Standard Doji:T he opening and closing prices arevery close or equal,
resulting in a small or non-existent body with long upper and lower
shadows.
2. Long-legged Doji: The upper and lower shadows are longer than those
of a standard doji, indicating even greater uncertainty and volatility in the
market.
3. Dragonfly Doji:T he opening and closing prices areat the high of the
trading session, with a long lower shadow and little to no upper shadow.
It suggests a potential bullish reversal when it appears at the bottom of a
downtrend.
4. Gravestone Doji:T he opening and closing prices areat the low of the
trading session, with a long upper shadow and little to no lower shadow.
It suggests a potential bearish reversal when it appears at the top of an
uptrend.
Candlesticks pattern for reversal:
Candlestick patterns are a popular tool used by traders to analyze price
movements and predict potential reversals or continuations in the market. Here
are a few candlestick patterns commonly used to identify potential reversals:
Hammer and Hanging Man:
T hese patterns have small bodies and long lower shadows, indicating that
sellers pushed prices lower during the session but were ultimately rejected,
potentially signaling a bullish reversal if found at the bottom of a downtrend
(hammer) or a bearish reversal if found at the top of an uptrend (hanging man).
Engulfing Patterns:
T here are two types of engulfing patterns - bullish and bearish. Bullish
engulfing patterns occur when a smaller down candle is followed by a larger up
candle, completely engulfing the previous candle's range, potentially signaling
a bullish reversal.
Conversely, bearish engulfing patterns occur when a smaller up candle is
followed by a larger down candle, signaling a potential bearish reversal.
Morning Star and Evening Star:
Morning star patterns form after a downtrend and consist of three candles - a
long bearish candle, followed by a small-bodied candle (doji or spinning top)
indicating indecision, and finally a long bullish candle, potentially signaling a
bullish reversal. Evening star patterns form after an uptrend and have the
opposite configuration, potentially signaling a bearish reversal.
Doji:
Doji candles have small bodies with long upper and lower shadows, indicating
indecision between buyers and sellers.
A doji appearing after a strong price move may signal a potential reversal,
especially if it occurs at key support or resistance levels.
Shooting Star and Inverted Hammer:
T hese patterns are like the hammer and hanging man but occur at the top of an
uptrend. A shooting star has a small body with a long upper shadow, while an
inverted hammer has a small body with a long upper shadow. Both patterns
suggest potential bearish reversals.
Candlestick’s pattern for continuation:
Candlestick patterns can also indicate potential continuations of existing trends.
Here are a few patterns often observed in continuation scenarios:
Bullish and Bearish Flags:
T hese patterns form when the price consolidates in a small range after a strong
move in the direction of the trend. In a bullish flag, the consolidation takes the
form of a downward-sloping channel, while in a bearish flag, it's an
upward-sloping channel. The continuation of the trend is expected once the
price breaks out of the flag pattern in the direction of the prevailing trend.
Pennants:
Similar to flags, pennants are also continuation patterns formed by a period of
consolidation after a strong price move. They are characterized by converging
trendlines, indicating decreasing volatility. A bullish pennant forms during an
uptrend, while a bearish pennant forms during a downtrend. The breakout from
the pennant typically occurs in the direction of the preceding trend.
Ascending and Descending Triangles:
T hese patterns are formed by two trendlines - one horizontal and one sloping.
In an ascending triangle, the horizontal trendline acts as resistance, while in a
descending triangle, it acts as support. These patterns suggest a continuation
of the trend once the price breaks out of the triangle in the direction of the
prevailing trend.
Three Inside Up/Down:
T hese patterns are formed by three candles and indicate a continuation of the
existing trend. The "three inside up" pattern occurs in a downtrend when a
bullish candle (second candle) is engulfed by the previous bearish candle (first
candle), followed by a larger bullish candle (third candle). The "three inside
down" pattern is the opposite and occurs in an uptrend.
Moving Average Crossovers:
While not strictly a candlestick pattern, the crossover of short-term moving
averages (e.g., 10-day and 20-day) above or below longer-term moving
averages (e.g., 50-day and 200-day) can also indicate the continuation of a
trend. A bullish crossover (short-term MA crossing above long-term MA)
suggests a continuation of an uptrend, while a bearish crossover (short-term
MA crossing below long-term MA) suggests a continuation of a downtrend.
Strength analysis of candlesticks:
Strength analysis of candlesticks typically involves assessing the significance
and reliability of individual candlestick patterns in predicting price movements.
Here's a framework for evaluating the strength of candlestick patterns:
Size of the Candle:
T he size of the candle relative to previous candles can indicate the strength of
the price move. Larger candles often suggest stronger momentum compared to
smaller candles. For example, a long bullish candle in an uptrend or a long
bearish candle in a downtrend may indicate strong buying or selling pressure,
respectively.
Volume:
T he volume provides additional confirmation of the strength behind a price
move. Higher volume accompanying a candlestick pattern reinforces its
significance. For example, a bullish reversal pattern with a surge in volume
suggests strong buying interest and increases the likelihood of a successful
reversal.
Location within the Trend:
T he position of a candlestick pattern within the broader trend context is crucial.
Patterns that occur near key support or resistance levels or at trendline
intersections tend to be more significant. For example, a bullish reversal pattern
at a major support level or trendline is more likely to result in a successful
reversal.
Confirmation from Other Indicators:
Confirmation from other technical indicators enhances the strength of a
candlestick pattern. For example, if a bullish reversal pattern forms at oversold
levels on the Relative Strength Index (RSI) or with bullish divergence on the
Moving Average Convergence Divergence (MACD), it strengthens the bullish
signal.
Pattern Combination:
Combining multiple candlestick patterns or chart patterns can increase the
strength of the analysis. For example, a bullish engulfing pattern followed by a
confirmation candlestick or a break above a trendline adds more conviction to
the bullish signal.
Timeframe Consideration:
T he strength of a candlestick pattern may vary depending on the timeframe.
Patterns observed on longer timeframes (e.g., daily or weekly) tend to carry
more significance than those on shorter timeframes (e.g., intraday charts).
Historical Performance:
Lastly, considering the historical performance of a candlestick pattern in similar
market conditions can provide insights into its reliability. Patterns with a proven
track record of accurately predicting price movements are considered stronger.
By assessing these factors, traders can gauge the strength of candlestick
patterns and make more informed trading decisions. However, it's important to
remember that no single indicator or pattern guarantees success, and risk
management should always be prioritized.
