Overview
This lecture covers the basics of candlesticks in trading charts, how to read their bodies and wicks, and the importance of interpreting key single-candle patterns for understanding price movement.
Understanding Candlesticks
- Candlesticks on a chart visualize price movement within a specific timeframe (e.g., 5-minute candle shows 5 minutes of market activity).
- The body of a candlestick displays the opening and closing prices within that period.
- Wicks (or shadows) indicate the highest and lowest prices reached during that timeframe but not maintained at close.
- A green (bullish) candle means price closed higher than it opened; a red (bearish) candle means price closed lower.
- The open and close positions are reversed for bullish and bearish candles.
Interpreting Wicks and Candlestick Closes
- Long wicks show price rejection at certain points, indicating failed attempts to move beyond those levels.
- A strong close (full body, small wick) shows decisive price movement in that direction.
- Weak closes (small body, large wick) indicate indecision or rejection.
Candlestick Patterns Focus
- Ignore most multi-candle and complex candlestick patterns; focus on single-candle types (dojis, hammers, dragonfly dojis, etc.).
- Doji candles (small bodies, long wicks) indicate indecision and potential trend exhaustion.
- Hammer and similar bullish patterns show strong rejection from lower prices.
Practical Chart Analysis
- Do not base trades solely on candlestick patterns; use them to understand price action and market sentiment.
- Wait for candles to close before making decisions, as a forming candle can change appearance before the period ends.
- Wick analysis helps reveal market rejection levels and potential reversals or continuations.
Key Terms & Definitions
- Candlestick — A graph element showing open, close, high, and low prices within a set time interval.
- Body (of candle) — The filled part, representing open and close prices.
- Wick/Shadow — The thin line showing the highest and lowest prices reached.
- Doji — A candlestick with a small body and long wicks, indicating indecision.
- Hammer — A single candle with a small upper body and long lower wick, often bullish.
Action Items / Next Steps
- On your preferred trading pair, find 10 examples of doji or significant wick candlesticks and observe how price reacts afterward.
- Take screenshots and label your examples, noting the subsequent price movement.
- Reflect on how wicks and closes contributed to market direction.