Price Action trading strategy is based solely on the analysis of Japanese candlestick. It is the soul of this simple strategy.
If you don’t know how to read Japanese candlesticks but still try to use Price Action, what will happen? You will lose without a doubt. It’s like a fool holding a gun in his hand on the battlefield and doesn’t know how to use it.
Therefore, in this article, I will guide you to quickly understand the price action of Japanese candlesticks. After mastering it, you can predict the future trend exactly like a professional trader in Olymp Trade.
For me, you should approach the Price Action trading method not too mechanically. Constantly forcing yourself to remember cumbersome names from theory does not bring any benefit. Instead, we will take a simpler approach by analyzing each candlestick, which is more receptive.
After this article, you will see how simple Price Action is.
Read and understand the price action of Japanese candlestick
A candlestick bar shows the buying and selling price data of the crowd for a fixed period. This is considered a basic part that every trader should know.
There are 4 important things to create a Japanese candlestick.
- Open price (O)
- Highest price (H)
- Lowest price ( L)
- Close price (C)
OHLC is the 4 basic pieces of information of a Japanese candlestick. It provides important data of the price action taking place during the period of the candle.
- Candlestick length (range)
- Candlestick body
- Upper shadow (wick or tail)
- Lower shadow (wick or tail)
The length of the candlestick (range)
The range of a candlestick shows the total length of the entire journey (highest and lowest) that the price action has moved, during the time that candlestick formed.
It shows how volatile the market was during that time. The longer the candle, the more volatile the market is. The shorter the candle, the quieter the market because the buying and selling volume is less.
So we can know how volatile the market is by looking at the range of the candle. If you are currently using the Bollinger Bands indicator to measure the market, you can remove it.
Japanese candlestick body – price action of buyers and sellers
The real body of the candlestick represents buying or selling force from the bears and the bulls. It tells us which side prevails or is inconclusive.
The real body shows how strong a Japanese candlestick is.
If the candle closes higher than its opening price, the bulls are winning. Conversely, if the candle closes below its opening price, the bears are in control.
A bullish candlestick has a longer body, which means that the strength of the buyers outweighs the bears. Conversely, the longer the bearish candlestick, the more sellers are outnumbering the buyers.
If the candlestick closes equal or nearly equal to its opening price, the market is in equilibrium. At that time, it was not possible to know which side was in control and where the price would go. This is called a Doji candle that looks like a plus sign (+).
After looking at a Japanese candlestick, everyone has to answer 2 questions:
- Is the market going up or down?
- Is that increase or decrease force strong?
By now, you probably already know how to see which side has the upper hand on each candlestick, right? So you have heard the story of a candlestick. It’s a good start.
Upper shadow – Lower shadow
The upper shadow represents the stretch where the market was rallied but rejected. The market cannot break through that price zone. Because at that price zone, the sellers were outnumbered and pushed the market lower.
The longer the upper shadow, the stronger the selling pressure for the length of time the candle lasts.
In contrast to the upper shadow, the lower shadow is the part of the market that has dropped but cannot sustain lower. That is, there is buying force pushing the price up. The longer the lower shadow, the stronger the buying force.
The upper and lower shadows of the candle are the key elements of the two concepts of price acceptance and rejection. The short shadow shows that the price has accepted to rise or fall. The long shadow represents a price refusal to move up, or a refusal to fall.
After reading this article, do you understand what a Japanese candlestick wants to convey to you? If you do, then congratulations on a smooth start on your trading journey with Price Action. But a single Japanese candlestick cannot portray the magic of the entire price action. In the next part, we will continue to go into reading and understanding candlestick clusters. See you in the next articles.
Join the Olymp Trade Club Signal Group: https://t.me/olymptradeclub19