Candlesticks – Forget Candlestick Patterns – This is All You Need To Know

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Candlesticks – Forget Candlestick Patterns – This is All You Need To Know

Understanding candlestick patterns goes far beyond just remembering and recognizing certain formations. Many books have been written about candlestick patterns, featuring hundreds of different formations that supposedly provide secret information about what is going to happen next.

Truth be told, it will make no difference to your trading performance whether you know what the Concealing Baby Swallow, Three Black Crows or Unique Three River Bottom are.

What really matters is that you understand what the candlesticks in front you of you tell you about price structure, trend strength, buyer/seller dynamic and the likely path for future price movements.

In our Forex pro course, you will learn everything about price action trading as well.

 

The 4 elements of a candlestick

Step 1: The candlestick war

Before we start getting into the actual elements of candlesticks, it’s important that you are in the right mindset.

Let’s think about price movements like a war between bulls and bears. Every candlestick is a single battle in an overall war and the 5 elements of the candlestick tell us who is ahead, who is pulling back, who is in control and who has a better chance of winning the next battle.

 

Step 2: It’s all about context

It’s crucial to understand that candlesticks cannot be observed alone, in a vacuum. A candlestick always must be analyzed in the context of what has happened in the past. So, whenever we try to analyze a candlestick or a formation, we need to ask ourselves those questions:

  • The current candlestick larger or smaller than previous ones?
  • Is the size changing meaningfully or not?
  • Is the change happening during an inactive trading period? For example, candlesticks on EUR Forex pairs tend to shrink in size during the quieter Asian session.

This is a good starting point because it helps us avoid the closed mindset thinking which limits many traders. Now we can start exploring the 4 elements:

 

Element 1: The size of the body

The candle body is a great starting point because we can get a lot of information from it.

  • A long body is showing strength
  • When bodies become larger, it shows an increase in momentum
  • When bodies become smaller, it shows slowing momentum

The body shows how far price has traveled over the duration of the candle.

 

Element 2: The length of wicks

Wicks can show the volatility of price movements.

  • Larger wicks show that price has moved a lot during the duration of the candle but it got rejected
  • When candle wicks become larger it shows an increase in volatility. This often happens after long trending phases before a reversal happens. Or at major support and resistance levels.

 

Element 3: The ratio between wicks and bodies

Now can start slowly putting it together.

  • Do you see longer wicks or bodies?
  • In a high momentum trend, you can often see long bodies with small wicks
  • When uncertainty rises, the volatility picks up and bodies become smaller while wicks become larger

 

Element 4: The position of the body

This is an extension of the previous point.

  • Can you see a long wick with a body on the opposite side? This is often showing a rejection
  • When you have a small body in the middle of a candle with long wicks, it means indecision

 

You can see that once we start combining the information that wicks and bodies provide, we can practically analyze all candlestick formations.

The actual visual formatting of candlestick charts on trading platforms such as MT4, Ninjatrader and JForex can differ, but the fundamentals of  the 4 elements  will equip you with the ability to understand all scenarios on the charts.

 

Chart examples

Now that we have covered the individual elements, we can put things together and see how we can use our knowledge to dissect price charts.

 

Example #1

Let’s follow price in the chart below and I share what we are seeing here in the candlesticks:

  • During the downtrend, the candlesticks are only red (bearish) and long with very small or no wicks >> this shows strength
  • At the bottom, we see a rejection. This is not enough yet to call a reversal but on the next candle we then start seeing bullish candles

Example #2

Below we see a typical range behavior and we can see how the candles tell us what is going on:

  • Price trends lower on the left with strong bearish candles and no bullish candles in between
  • Then suddenly the bodies become smaller and the wicks longer, showing that the momentum is fading
  • Price trades back into a previous support and it now becomes resistance and we see a small rejection candle
  • At the support of the range, we see that candles are becoming smaller and have more wicks, confirming the indecision. It also makes a break of the support unlikely
  • Just before the support breaks, price is only starting to make bearish candles and we can see how momentum is picking up

 

Example #3

In the final example, we can see a classic pattern at the end of a trend. This is also often one of the building blocks to the trading strategy which you can learn in our pro area.

  • During the uptrend, the candles are very long and have very small wicks only
  • Then suddenly we see two long wicks to the downside. This shows that price tried to push lower but it did not yet have enough selling pressure
  • But the candles are becoming smaller and smaller after the failed sell-off attempt which indicates that the trend is running out of steam
  • Then suddenly we see a strong bearish candle which confirms the new downtrend

 

 

Conclusion: No Need For Candlestick Patterns

With this article we want to show you that you do not have to remember any candlestick formation to understand price. Quite the opposite. It’s very important on your path to becoming a professional and profitable trader that you start thinking outside the box and avoid the common beginner mistakes. Learn how to understand how buyers and sellers push price, who is in control and who is losing control.

 



Comments ( 28 )

  • Daniela Camargo

    Thanks for the article Rolf. Your view clarified a lot my understandment in the chart

  • Brian lee

    Thanks you rolf
    I feel like i opened my eyes with clear and confident concept of true candle shapes and wick
    You are the man

  • Fredricka

    Truly one of the simplest and best articles I have read about candlesticks. Thank you.

    • Rolf

      Thank you. I am glad to hear that 🙂
      Rolf

  • Husni A Abou-Saab

    I have lost thousands of dollars. I am now afraid to trade .I understand that the market moves when supply equals less than demand market goes up and vice versa. I am having hard time adjusting the the parameters and stop loss margins.

    • Me

      Forex is simply an odds game, Your edge only tells you that there is a stronger probability that one thing will happen over another. There are no guarantees. A good system simply gives you advantages in the market

  • Deepak RAJA

    Really . . Thanks for that knowledge on price action . .

  • Roy

    Good article.

  • Click bts

    great article

  • Carlene

    Very nice article it gives u a clearer vision on price action

  • Amol

    Wow.. This is fantastic article. I helped me a lot to understand candlestick in better way. Thank you.

  • Emmy

    OMG, this was an awesome and easy to understand breakdown of the candles and wicks. Thank you so much!

  • Jordan

    Thanks rolf this is an easy to read article thats very beneficial for us traders

  • Fredrick

    Thank you for the insight Rolf, its very much appreciated.
    What in your opinion, is the best time frame to use when reading candlesticks?

    • Rolf

      Any time frame will work. Glad you liked the article 🙂

  • Thabo

    Great article and simple to understand you are heavenly sent. Thank you sir and happy trading

  • Sam

    very complete article about candlesticks . thanks a alot

  • Adrian

    Nice article. Help a lot to understand the thinking of buyers and sellers. At the beginning of trading it was hard to accept, that candles only represents the psychology of buyers and sellers.

    Only someone who can read the charts like a book can make profit.

  • Kingsley Besong

    Thank you.

  • Joseph

    Thank you Rolf it couldn’t be more simple as you explain it, I undestand now, a thumbs up 🙂

  • Russell

    Yeah but 90% of traders will still blow there brains out…emotional traders, which are the vast maj will blow it every time regardless of what they know about price action and any other indicators…

  • Mahendra rizky

    reaaly good and simple article, sir. I hope you can make an article about when to buy or sell that pattern psychologically following this article.

  • Jyoti Ranjan Badatya

    Honestly speaking, i am searching exactly this article. i have read two – three books on candle stick but this type of explanation i didnot get anywhere. Thank you a lot for clearing confussion about candle stick.

  • Prakash

    The best article on candlestick ive ever read so far. Most of the articles will teach us the pattern by their names and functions but not really to understand how they tell us the story of price action. Thanks alot Rolf. Soon il be one of your students. Preparing myself for it.

  • Dasa

    Very Realistic. Thank you very much.

  • Eric

    Really useful stuff and very practical

  • Yamallah

    Great teachings. I love this article. It is very clear and simple. Rolf, you are a teacher indeed and I love you.

  • Jacqueline

    Thank You, so helpful, love the information. I have been studying for a long time. Haven’t traded much though. Just trying to gather all info so i understand much first.

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