How to read Price Action through candlestick cluster (Chapter 6)

If you already know how to read the price action of a single candlestick, it will greatly help your Olymp Trade trading process. However, there are many cases where a single candlestick does not fully reflect the story of the market. Therefore, we need to analyze many candles combined to have a broader view. In this article I will guide everyone to read the price action of candlestick cluster.

To analyze 2 or 3 candlesticks in a row, people need to understand the following 2 concepts.

– Context

– Testing, or retesting

Analyze the market context through the price action of candlestick cluster

The market doesn’t move on a candle-by-candle basis, nor does price action. It must be based on each candlestick and the market context at that time to continue moving. So we also have to understand the market context.

In a cluster of 2 candlesticks, we can see the situation for the second candlestick. The first candlestick provides a yardstick from which to understand the next one.

In the previous article, we learned that the longer the candle, the greater the volatility of the market at that moment. But how much is called long? Now we need to rely on the candlestick right before it to evaluate and compare. In this way, we become more objective.

You can see some examples of reading price action through the above picture.

1. The range of the current candlestick is longer than the previous one, which means that the volatility of the market is increasing.

2. The body of the candlestick is shortened – the market turns from bullish to uncertain. The upper shadow of the candle is getting longer, showing that the selling pressure is increasing. It means the possibility of the next drop is very high.

3. The body of the candle is longer, which means that the volatility increases. However, the candle changes color from bullish to bearish. The sellers are turning the tide.

Reading and understanding 2 candlesticks is an important skill. When mastered, it will help you identify swing highs/swing lows and the end of a retracement.

Testing

Testing is when the market moves to a previously determined price to “test” if that level is acceptable for the price to go through. Otherwise, the test fails, i.e. rejection.

High and low prices of a single candlestick are natural support and resistance zones. Test action at these highs and lows is an important market signal that we need to understand.

In the same chart above, but this time we focus on the following candlestick testing the top and bottom of the previous one, to see how the story goes.

1. The second candlestick goes above the top of the previous one but is rejected (bearish)

2. The second candle breaks to the previous low and plummets (bearish)

3. The first candle is strongly bearish. The second candle pierces the bottom of the first but closes higher and leaves a shadow below, which means there is buying force (bullish).

You see, each candle tells its own story. But when combined with the candle before or after it, we have a fuller picture.

Read and understand the price action of 3 candlesticks

Reading and understanding 3 candlesticks is the level that a Price Action Trader needs to reach. With this skill, you can make an entry decision based on price action.

As you just learned, reading 2 candlesticks will give a simple picture of the market at that time, but not enough to enter an order. The third candle will be the confirmation of whether to enter the order or not. Usually, when seeing the first 2 candles, we have enough information to expect the 3rd one.

With the same chart above, try to analyze the cluster of 3 candlesticks from left to right:

1. The first two candlesticks fall with quite good force (because of the good candlestick range). Moreover, the second candlestick has no lower tail, which ensures that the selling pressure is still very strong. So we expect the 3rd one to be a bearish candlestick. The expectation is right. The strong bearish 3rd candlestick has a high probability of forming a downtrend.

2. The first candlestick has a short body with a long lower tail, showing that the selling force has gradually weakened. However, the 2nd and 3rd candlesticks form a Tweezer Top pattern, signaling that the downtrend will continue.

3. The second bearish candlestick has erased the previous candlestick’s bullish momentum. So we expect the price to fall further. Plus the 3rd candlestick has a very long upper tail with an extremely strong selling force. Thus, the possibility that the price will decrease further is very high.

Summary

Now, try to open the Japanese candlestick chart in Olymp Trade and practice analyzing the 3-candlestick cluster. See if you can understand the story the market wants to tell.

If possible, do a few trading orders on the Demo account. It’s okay to be right or wrong, but take notes carefully to learn from experience. Hope this article will help you understand a bit about how to read and understand Price Action. Thank you and happy trading.

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