Understanding the Narrative of Candlestick Charts

Filed under: Learn Forex Trading |

 

I talked a little bit today about the narrative of the candlestick charts, and trying to understand this narrative and what each candle is telling us. Indicators only tell us what has happened in the past, but candlesticks tell us what is happening right now – and this is much more valuable information.

 

Figure 1.

Figure 1.

Let’s take a look again at the live trade that we currently have in play (see Figure 1), and talk through this narrative from left to right. To begin with, we have two short black candles with lower highs and lower lows. This tells us, quite simply, that the market is still bearish and that the bulls are losing the battle between the bulls and the bears. Next, we see a very powerful bearish move – telling us that the bears are firmly in control. Then we have a lower low, and a lower high, but the pin bar tells us that these lower levels are being rejected, for the time being at least. This is followed by a higher high, and a high low, suggesting that the bulls are getting stronger. However, a long upper shadow tells us that the bears still lack strength.

 

What follows this is a gap down in the market, and although a bullish candle forms and attempts to close this gap (as it often does when the market gaps), it cannot close above the previous low by very much. The next four candles also cannot close above this level, before the bulls yield and submit to the bears, when the market moves down some more. The bulls then have one final crack at this level, before the market capitulates downwards. What we are currently seeing is the bulls having another go at breaking this level  - but at the moment it is holding firm, and if the bears win this battle, then we will likely see yet another move down.

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