Candlestick Basics: Part 2
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to Candlestick Charts: Patterns Part 1
Basic Interpretation of Bull Vs Bear
A Candlestick is designed to draw you a picture
of the battle between bull and bear, fear and greed and demand
Vs supply. There are many different patterns, each with their own
significant meaning but you can interpret the basics as follows:
a) Long hollow/ filled Candles indicate that there
was strong buying/ selling pressure during the given time period
and the bulls/ bears were in complete control.
b) Small hollow/ filled Candles indicate a lack of market volatility
with neither the bulls nor the bears able to move the market.
This could be due to an impending data release or lack of true
market direction.
c) Long lower shadows/ wick/ tails indicate the market was unable
to maintain the selling pressure and hold for a close at low
levels. This could be due to strong buying at important technical
levels with the new low representing good support for the market.
d) Long upper shadows/ wick/ tails indicates strong buying pressure
that was unable to be sustained. As above it could be due to
technical levels and represents good resistance for the market,
especially if the candle printed with high volume.
e) Long upper and lower shadows/ wicks/ tails indicate major market
volatility and an inability of either the bulls or the bears
to control the market. This often occurs at major data releases
where the figures are unable to provide a clear indication to
the future movement of the market.
What a Candlestick Doesn’t
Show You
With these basic interpretations in mind we must
now consider what a candle fails to show us that might be relevant
to your interpretation on the price data. A Candle cannot show
you which came first, the high or the low, or the order of events
that occurred in-between. For example, a long filled candle shows
selling pressure clearly overwhelming buying pressure. The diagram
below shows what this Candle may have failed to tell you:
There are multiple combinations of price action
that could occur during the Candle’s set time period. One
way to overcome this lack of information is to switch between time
frames. For example, if you are observing a chart with Candlesticks
on a one day time period you can change the period to one hour,
fifteen minutes and one minute to get an increasingly detailed
view of each days price action. The process of switching between
time frames is a very popular and important one with technical
analysts.
Blended Candlesticks
As you switch through the time frames you will
notice that longer-term Candlestick patterns are made up of many
smaller time framed Candles. This is known as blending. The example
below shows the many fifteen-minute Candles that came together
to form the long filled one-hour Candles.
