Candlesticks can be broken down into four parts, each of which shows a different facet of the current trading activity and market emotion.
Intro: The strength ratio – bulls vs. bears
To comprehend price and candlestick analysis, it is helpful to visualize the price fluctuations in financial markets as a conflict between buyers and sellers. Buyers speculate that prices will rise and, through their transactions and/or buying activity, raise the price. Sellers wager on decreasing prices and use their selling interest to drive prices down.
If one side is stronger than the other, the financial markets will see the following trends emerging:
- Buyers have no one to buy from if there are more buyers than sellers, or if there is more buying interest than selling interest. The price rises until it is so high that the sellers are once again enticed to participate. At the same time, the price becomes too high for the purchasers to continue purchasing.
- Prices will fall if there are more sellers than buyers until the market is balanced and more buyers enter the market.
- The larger the disparity between these two market participants, the faster the market moves in one direction. Prices tend to fluctuate more slowly if there is only a minor overhang.
- There is no reason for the price to move when the buying and selling interests are in balance. The existing price is satisfactory on all sides, and the market is balanced.
Always bear in mind that any price study seeks to compare the strength ratio of the two sides in order to determine which market actors are stronger and, thus, in which direction the price is more likely to go.
Size of the candlestick body
The size of the candlestick body reveals the difference between the starting and closing prices and much about the buying or selling power.
The most crucial characteristics of the candlestick body analysis are described below.
- A long body on a candlestick that leads to prices going up quickly shows that there is a lot of buying interest and a big price change.
- If the size of the candlestick bodies grows with time, the price trend accelerates and the intensity of the trend increases.
- Due to buyers and sellers becoming more equal in strength, a decreasing number of bodies may mean that a trend is coming to an end.
- Unchanging candlestick bodies indicate a consistent trend. If the market quickly changes from long rising candlesticks to long falling candlesticks, this shows that there are strong market forces at work.
Length of candlestick shadows
The length of shadows contributes to the determination of volatility, or the total range of price fluctuations.
Candlestick-shadow analysis characteristics:
- Long shadows may indicate uncertainty since they indicate that buyers and sellers are engaged in fierce competition, but neither party has been able to gain the upper hand.
- Short shadows signal that the market is relatively stable.
- Typically, the duration of candlestick shadows increases following extended trend phases. As indicated by the increasing volatility, the strength ratio is no longer as lopsided as it was during the trend.
- Healthy trends, which move swiftly in one direction, typically exhibit candlesticks with short shadows, as one side of market participants controls the situation.
Body to shadow ratio
The first two components must be correlated in the third component for a better understanding of price fluctuations and market behavior.
Important elements in this context include:
- During a strong trend, candlestick bodies are frequently much longer than shadows. The faster the price moves in the direction of the trend, the stronger the trend. During a strong rising trend, candlesticks typically close towards the top of the candlestick body and, as a result, leave no or very little candlestick shadow.
- When the trend weakens, the ratio shifts and the candlestick shadows grow longer in proportion to the candlestick bodies. Sideways phases and turning points are typically represented by candlesticks with long shadows but short bodies. This means that there is a fair balance between buyers and sellers and that it is hard to predict how prices will move in the future.
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Position of the body
As far as the position of the candlestick body is concerned, we can distinguish between two scenarios in most cases:
- If there is only one dominant shadow on one side and the body of the candlestick is on the opposing side, this is referred to as a rejection, hammer, or Pindar. These candlesticks are depicted in the third and seventh examples of Figure 10. The shadow implies that, despite the price’s attempts to move in a specific way, market participants have firmly pushed the price in the opposite direction. We observe this essential behavior patter and analyze it fully later on.
- A candlestick with two equally lengthy shadows on both sides and a relatively small body is depicted in a second common scene. Figure 10’s fifth candlestick depicts an indecisive candlestick. On the one hand, this pattern can signal uncertainty, but on the other hand, it can reflect a balance between market participants. The buyers have attempted to increase the price, while the sellers have attempted to decrease it. Nonetheless, the price has ultimately recovered to its initial level.
Bottom Line : The size of the candlestick body reveals the difference between the starting and closing prices. Candlesticks can be broken down into four parts, each of which shows a different facet of the current trading activity and market emotion. Price fluctuations in financial markets are viewed as a conflict between buyers and sellers. Long candlestick bodies indicate a lot of buying interest and a big price change. The size of the body grows with time, the price trend accelerates and the intensity of the trend increases.
Long shadows indicate uncertainty since they indicate that buyers and sellers are engaged in fierce competition. Short shadows signal that the market is relatively stable. Body to shadow ratio: The faster the price moves in one direction, the stronger the trend. During a strong rising trend, candlesticks typically close towards the top of the candlestick body and, as a result, leave no or very little candlestick shadow. When candlestick shadows increase, it can foreshadow the end of a trend.