PRICE MOVEMENT DEMONSTRATION

So far we talked about individual candlesticks. This lesson will explain how candlesticks representing smaller periods of time are components of larger time-frame candlesticks representing larger periods of time. Certain types of candlesticks that occur consecutively form candlestick patterns. The identification and use of some of these patterns - candlestick analysis - can be a basis for profitable trading. Candlestick analysis, otherwise known as price action analysis, is more important and usefully predictive than indicators based on price.

ADDITIONAL READING ABOUT PRICE MOVEMENT DEMONSTRATION

Compared to traditional bar charts, many traders consider candlestick charts more visually appealing and easier to interpret. An individual candlestick provides an easy-to-decipher picture of price action. A trader can compare the relationship between the open and close as well as the high and low by just glancing at the candle chart.

This relationship between the opening and closing prices of each time period is considered extremely important information and forms the essence of candlesticks. Hollow candlesticks, where the close is higher than the open, indicate buying pressure. Filled candlesticks, where the close is lower than the open, indicate selling pressure. Normally, the longer the body is, the more intense the buying or selling pressure. Conversely, short candlesticks indicate little price movement and represent consolidation.

If a trader is interested in creating his own candlestick chart, he must have the information that contains open, high, low and close values for each time period he wants to display. This information is available online but must be consolidated and collated within a short period of time or it will not reveal the true relationships. It is important for him to take note of the manner in which the price behaved in the past and how it might behave in the future so that he can correctly predict its movements and profit from them..

INSTRUCTOR'S NOTES

This lesson aims to introduce and/or explain candlesticks and S/R by talking through a real-life candlestick chart, highlighting and explaining the points of importance.
Do not be worried if you find this lesson confusing or hard to understand. It contains a lot of new information, and it is not important that you memorize any new concepts at this stage.
If you only take away one new concept from this lesson, it should be the “engulfing candle”.
The engulfing candle is a candle that does 2 things:

• Reverses the previous candle’s direction. If the previous candle closed below its open, the engulfing candle must close above its open, and vice versa.
• Closes above the previous candle’s open (if it’s a bullish engulfing candle) or below the previous candle’s open (if it’s a bearish engulfing candle).

It is called an “engulfing” candle because it engulfs the real body of the previous candle (the area between its open and close).
Engulfing candles are sometimes confused with outside candles. Outside candles are candles that have both a higher high and a lower low than the previous candle. An engulfing candle may also be an outside candle.
Engulfing candles are often powerful clues that a trend is either going to reverse or continue in the direction of the engulf.

PRICE MOVEMENT DEMONSTRATION - TEXT VERSION

Now let’s apply what we’ve learned about both candlestick patterns and s/r. Points A through H on the chart below are examples of how we combine our knowledge of candles and s/r to better understand how price behaved in the past and how it might behave in the future so that we can correctly predict its movements and profit from them by candlestick analysis.

We’ll delve more deeply into candlestick patterns and candlestick analysis at a later date. The idea now is toreview what we’ve covered thus far on candlesticks and s/r, demonstrate how we apply these concepts and give you a taste of things to come.

Here’s a description on a running basis…..

A. June 21–22: The pair of long upper wicks (a candlestick pattern known as a “tweezers tops” pattern which we’ll cover later) showed strong resistance level around 1.4400 caused by selling pressure from some combination of those who were long the pair taking profits and short sellers opening new positions.
The June 14–15 candlestick analysis shows prior resistance around 1.4400. Round numbers have a psychological appeal as natural buy or sell points, so certain round numbers tend to become significant s/r points.

B. June 23: The lack of much upper wick tells us that prices mostly fell from the start of the day. The long lower wick indicates that the pair managed to recover over half of its losses before the official close ofthe day’s trading in New York. The lower wick shows sellers tested all the way down to around 1.4130 before buyers stepped in and short sellers took profits. Think of the long lower wick as a blind man’scane, probing for obstacles.

C. June 23–26: This 1.4130 support level was tested each day as selling continued, but this level held firm. The June 24 (Friday) candle’s lower opening and even longer red body shows continued firm selling pressure, but the roughly equal upper and lower wicks reflect some indecision about how low to go. The June 26 (Monday) candle is a small light gray (this would be shown in red) body with small wicks, meaning price direction was mostly straight down but with weakening selling pressure. This weakening selling pressure was confirmed by the rally the followed.

D. June 27: Candlestick analysis shows a strong reversal as prices rebounded off this support level. The long dark gray (this would be shown in green) body shows decisive buyer control, with prices closing near the top of the day’s range and it “engulfs” or swallows the prior two days’ losses. Such candles are called “bullish engulfing” patterns because they literally devour and recoup the prior days’ losses.

E. June 30: Long upper wick again serves like a blind man’s cane hitting an obstacle as the market gropes around to locate near-term resistance. Combined with the short dark gray (green) body near the bottom of the daily price range, which means there was little gain loss on the day, suggests the uptrend is weakening, as indeed it was, as shown by the reversal that soon followed.

F. July 3–4: Taking these 2 daily candlesticks together, we see that the market opened above the 1.4550 resistance level twice but couldn’t advance. On July 4th, after six straight days of gains and now failing to break through resistance for the second straight day, selling begins and drives price lower, as those who bought earlier sell and take profits and “short sellers” begin selling the EURUSD pair in hopes of profiting from buying it back at a lower price later.

G. July 12: This is essentially the same form of candlestick analysis as on July 4 (F); however, during a downtrend (and especially after an eight-day long downtrend and close at what was strong long-term support around 1.4000), this is considered a signal that price could reverse direction and move higher. Or to use trading jargon, it’s a “bullish reversal sign”, called a hammer, as sellers probe lower support but buyers send sellers retreating and recover most of the day’s (or any other period’s) losses. In other words, this long lower shadow is a graphic image of the market rejecting lower prices. Once again, the lower wick may have hit bottom. Like the bearish hanging man shown on July 4th, this bullish twin hammer requiredconfirmation from the next candle and got it with the next day’s bullish engulfing candle (it engulfed or recouped the prior day’s move). It signaled the start of a move higher over the coming sessions.

H. July 17: The candle had a mere line instead of a body, meaning that the opening and closing prices were the same or nearly so—price unchanged. The market ruled undecided, a tie between buyers and sellers.Such candles are called ‘dojis’. As signs of indecision, they often suggest a possible reversal of the current trend in a candlestick analysis. This form of doji, with its prominent lower wick, that occurs after a downtrend near strong support around 1.4000, suggests a market groping for a bottom. That was the case, as the following days confirmed this bullish sign and buyers took over and sent prices higher.

I. July 25: This doji, with equidistant wicks, shows complete indecision or perfect balance between buyers and sellers.