Overview
This lecture introduces candlesticks in trading charts, explains their structure, and emphasizes reading price action through single candlestick patterns like dojis and hammers.
Understanding Candlesticks
- Candlesticks are used on trading charts to represent price movement over a specific time period.
- Each candlestick has a body (shows open and close prices) and wicks (show highest and lowest prices reached).
- A green (bullish) candle means price closed higher than it opened; a red (bearish) candle means price closed lower.
- Wicks indicate where price moved during the time period but did not close.
Time Frames and Candlesticks
- The timeframe (e.g., 5-minute, 1-hour) shows how long each candlestick represents.
- On a 5-minute chart, each candle shows five minutes of price action.
- Understanding higher and lower timeframes can help predict market structure.
Candlestick Patterns and Price Action
- Focus only on single candlestick patterns for price action analysis (doji, long-legged doji, dragonfly doji, hammer).
- Ignore multi-candle patterns or complex shapes (e.g., mountains, W’s, head & shoulders).
- Single candle patterns convey clear information about price rejection and market sentiment.
Interpreting Candlestick Signals
- A doji (small body, long wicks) signals market indecision and possible reversal or pause in trend.
- Long wicks show strong rejection—price moved to a point but couldn’t close there.
- Strong closes (long body, short wicks) indicate momentum in the candle's direction.
- Wait for candlestick closes before making trading decisions; avoid acting on forming candles.
- Use candlestick patterns for context, not as sole trade triggers.
Chart Practice and Building Intuition
- Examine charts to spot dojis, hammers, and long-wick candles.
- Observe how price reacts after these candlestick formations.
- Practical experience builds intuition for reading price action.
Key Terms & Definitions
- Candlestick — Visual chart element showing open, close, high, and low price for a given period.
- Body — The filled portion of a candlestick showing open-to-close range.
- Wick — The lines above/below the body indicating high and low prices reached.
- Doji — A candlestick with a small body and long wicks, indicating indecision.
- Hammer — A single candle with a small body and long lower wick, often signaling reversal.
- Bullish — Indicates upward price movement; candle closes higher than it opened.
- Bearish — Indicates downward price movement; candle closes lower than it opened.
Action Items / Next Steps
- Review your trading chart and identify at least 10 examples of doji or long-wick candlesticks.
- Note how price reacted after each identified candlestick.
- Take screenshots and label each example to reinforce learning.