Course Progress
Part of 5 Chapters
The Language of Price: Understanding Candlesticks
Chapter 1. The Language of Price: Understanding Candlesticks
Technical analysis is based on the belief that ==“History repeats itself”== and that all known information is already reflected in the price. The most fundamental way to view this price action is through Candlestick Charts.
Invented by Japanese rice traders in the 18th century, candlesticks provide a visual representation of how buyers and sellers fought during a specific period.
1. Anatomy of a Candle
Each candle tells a story of a battle within a specific timeframe (e.g., 1 day, 1 hour).
Components of a Candlestick
| Component | Definition | Psychological Meaning |
|---|---|---|
| **Open** | The price at the start of the period | The baseline for the day |
| **Close** | The price at the end of the period | The final verdict of the battle |
| **High** | The highest point reached | The limit of the bulls' strength |
| **Low** | The lowest point reached | The limit of the bears' strength |
| **Real Body** | The area between Open and Close | The actual progress made by either side |
| **Shadow (Wick)** | The thin lines above/below the body | Rejected prices (Reversal signals) |
2. Reading the Mood: Basic Patterns
A candle’s shape reveals the ==“Balance of Power”== between bulls (buyers) and bears (sellers).
Bulls are in total control; strong upward momentum
Bears are in total control; strong downward momentum
Indecision; buyers and sellers are perfectly balanced
Potential reversal; sellers tried to push down but buyers fought back
Potential reversal; buyers tried to push up but sellers fought back
3. High-Probability Reversal Patterns
When multiple candles combine, they create high-probability signals.
Key Dual-Candle Patterns
| Pattern | Type | Description |
|---|---|---|
| **Bullish Engulfing** | Reversal UP | A large green body completely 'swallows' the previous small red body |
| **Bearish Engulfing** | Reversal DOWN | A large red body completely 'swallows' the previous small green body |
| **Harami** | Indecision/Pause | A small body is 'pregnant' within the range of the previous large body |
Context is Everything: A single Hammer doesn’t mean “Buy.” It only becomes significant if it appears after a long downtrend near a major support level.
4. Conclusion: The Psychology of the Crowd
Candlesticks are not just drawings; they are ==“Visualized Human Emotion.”== Greed, fear, and indecision are all captured in the wicks and bodies. By mastering these basics, you begin to see the story behind the lines.
📚 Prof. Sean’s Selected Library
- [Japanese Candlestick Charting Techniques] - Steve Nison: The “Bible” that introduced candlesticks to the Western world.
- [Technical Analysis of the Financial Markets] - John Murphy: A comprehensive guide to all aspects of chart analysis.
- [Trading in the Zone] - Mark Douglas: Essential reading for understanding the psychology behind the patterns.
Next time, we will explore ‘Moving Averages and Trends’—learning how to filter out the noise and follow the market’s inertia.