How to Read Price from Candlesticks

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Video Transcription:

Hello traders! Welcome to the Price Action Course and the first module, ‘Introduction to Price Action Trading.’ In this lesson I’m going to talk about candlestick reading and the information behind candlesticks. I’m going to talk about the importance of candlestick reading for price action traders. And you will understand why this is at the base of this trading style, but we’re going to start with the definition and the information that any candlestick will give you.

Candlesticks are graphic representations of price variation in a given period of time. Candlesticks also display the high, the low, the opening and the closing price for a security for a given period of time. This time periods can vary, and the most common are the 50 minute, the hourly, the four hours and of course the daily. And this means that if you are looking at the 50-minute chart, each and every single candlestick account for a 50-minute period. So, during those 50 minutes you get the highest price that the security reached, the lowest, the opening and the closing price.

Candlesticks explained

And here’s how candlesticks look. On this side you have a bearish candlestick and on this side you have a bullish candlestick. Of course, the wicks on the upside are the high of the period and the wicks on the downside are the low. On a bearish candlestick, the opening price is the top of the body and the closing price is the bottom of the body because when you have a bearish candlestick, it means that price decreased during this period of time. So it opened at the high and it closed at the low. On the contrary, when you have a bullish candlestick you will read the open price at the bottom of the candlestick or the candlestick body and you will read the closing price at the top of the candlestick body. This is a very basic way to look at candlesticks. And once you understand the information that candlesticks give you, you can interpret this information to know if you are in a very strong move or if you are at a support or resistant zone and these zones are being rejected.

Now let’s go to the information behind candlesticks and what we we’re just talking about. Now that we know how to read candlesticks, we need to understand how to interpret the information behind them. For example, when a candlestick, either bearish or bullish, has a real long body and a very small wicks, it means that we have a strong directional move. Here are two examples of the candlesticks that we are talking about. Let’s say that price is ranging inside a triangle and then a very strong bearish move to the downside and a close near the low of the candle. This means that price went all the way down here to this low but closed very close to the low of the period, meaning that we had a very massive bearish pressure during this period of time. If we are looking at the daily chart, we can say that we had a very bearish day because the close was near the wick.

Bullish vs. Bearish Candlesticks

On the contrary, if you have this bullish candle, you can see that the close of the candle is very close to the high of the candle meaning that we closed near the high, meaning that we had a very strong bullish move all throughout this period of time. It can be the daily, the four hour, or the 50-minute chart, it doesn’t matter which time frame you are analyzing price on, what matters is the information that this candlestick gives you. And when you have this candlestick you are not going to be looking for short opportunities because the momentum to the upside is very strong.

On the contrary, when you have a candlestick that’s this massive on the bearish side you are not going to be looking to go long because you have a very strong momentum to the downside. And when you have candlesticks that have such strong momentum, it also can mean that momentum will continue on the same direction on the next candlesticks. When we have long wicks to the upside on small body candles, we can look for rejections to resistance zones and bearish bounces.

Now here’s an example and let me explain how you are going to interpret this candlesticks right here. Let’s say that price is moving to the upside and we achieve this area of resistance and then this candle opens. Now, the information that you’ll get is the following: price went all the way up here, moving above the area of resistance, but the bearish pressure was so big that it made price close very close to the open, meaning that even though price went all the way up here, it couldn’t close at the high of the move and it closed at the low of the move, meaning that the bearish pressure was bigger than the bullish pressure, meaning that it is very probable that we are going to have a bounce to the downside because of this enormous bearish pressure.

Of course, on the opposite side we have candlesticks with small bodies and long wicks to the downside on support zones where we will be looking for bullish bounces. Let’s say that price is moving down here and reaches this are of support, then the bearish pressure kept price moving all the way down here breaking through this area of support but of course, at a support zone, we are going to find buyers. And the buyers were so strong that they pushed back the price all the way up here and made it close near its open at this period of time. If we are looking at the daily chart this is much, much stronger signal of rejection than if we are looking at the 50-minute chart because on the higher time frames, the candlesticks take longer to complete and to close.

This is what you are going to be looking for, and this is how you read candlesticks. You read candlesticks by reading their bodies and by reading their wicks. Long wicks give you an idea of the rejection zones that we may have encountered and long bodies give you an idea of how strong the momentum is on the move. Now, let’s look at a live example and I think that this is an Aussie-US dollar example. You can see that price made a higher high, then a higher low and we went all the way to this high. You can see a very congested zone because candlesticks are moving up and down. The information that you can get out of this congestion is that, well we have a bullish candle, then a bearish candle, a bullish candle, then a bearish candle and a long wick, meaning that price was moving to the upside and after this candle, bulls gave up and bears started to push price down. But you encounter again buyers here at the lows of the move, and then price moved back up again, and then back down when we encounter the buyers at the top of the move. And then we have this long wick to the upside.

Live Example of candlesticks

Now, this is where buyers came and pushed price all the way up here but we were unable to close above this highs, and even though this candle doesn’t have a small body, it does have a very long upper wick, meaning that this area of support is being strongly rejected. And the bears are starting to take over and when you get another bearish candle with the same body length you can see that price rejected this zone because of the bearish pressure and then the bears started to take control on this market. And then we have an indecision candle and you can see price breaking down to this lows.

And this is basically how you are going to be reading candlesticks. Further on this course, we are going to go in depth on how this will help you on your trading decisions.

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