Reading Candlestick Patterns

All Candles are Born Neutral

You may be thinking, “What the heck is that? Why is there a picture of just a line?” Well, it’s not just a line—it is a newborn baby candle. That cute little line-up there is a neutral candle. Brand new, it has yet to move up or down a single pip in either direction.

Candles are always born neutral. After birth, they can grow to be either bearish or bullish, or on rare occasions, neither. Traders don’t know what a candle will become when it is born. They can speculate, but they can never know what a candle is until it dies (closes).

After a candle is born, the battle begins. The bulls and bears fight it out, while the candle shows us who is winning. If the buyers are stronger, you will see the candle move up and form a bullish white or green candle. But if the sellers become stronger, you will see the candle move down and form a bearish red candle.

This is all very obvious sounding, but take a moment to think about it. Each of these candlesticks is an indicator as to who is winning the fight between bulls and bears. Don’t you find that quite amazing?

Bullish Candles

A bullish candle is what traders call any candle that has a bullish body. The baby candle has grown up and died with a bullish body. If it has a strong bullish body, it is a strong bullish candle. If it has a small bullish body, it is a weak bullish candle. Simple, right? But think about it. The candle not only tells you the price, but it also tells you how strong the bulls are. These bullish candles tell us there are more buyers than sellers and that one is stronger than the other.

This is critical information in the Forex market. If your system tells you to go short but the candle is bullish, it might be a good idea to hold off on the short. Why would you go short when there are more buyers in the market? Reading candlestick patterns enables you to better assess prices in any situation.

Bearish Candles

A bearish candle is any candle that has a bearish body. What does the bearish candle tell you? It tells you that there are more sellers in the market than there are buyers. It also tells you that the sellers are in control and their relative power. So here, a long position may not be a great idea.

Wicks

Besides displaying a candle’s highs and lows, wicks offer an abundance of information.

Remember the battle between bulls and bears? Well, it’s time to learn what it’s all about in relation to wicks.

If a strong bullish candle suggests that the bulls are in control of the market, what does a bearish candle with a large upper wick and a small bearish body suggest?

Small lower wick, small bearish body, and larger upper wick: This candle tells us that at some point in this candle’s life, the bulls tried to push the price up. That is what the long upper wick tells us. However, before the candle closed, the bears took over and pushed the price back down. This is represented by the bearish body.

Large lower wick, small bullish body, and small upper wick: This candle tells us that at some point in this candle’s life, the bears tried to push the price down. That is what the long lower wick tells us. However, before the candle closed, the bulls took over and pushed the price back up.

These are just two of the very basic concepts of candle trading. In the next section, we will go over why this information is useful.

What You’ve Learned About Reading Candlestick Patterns so Far

A Bullish Candle means: There is currently more buying pressure in the market. As long as buyers maintain enough buying pressure, the candles will be bullish. If the buying pressure eases and the selling pressure increases, we will see the bullish candles become smaller. It represents a decrease in the bull’s strength.

Bearish Candle: There is currently more selling pressure in the market. As long as sellers maintain enough selling pressure, the candles will be bearish. If the selling pressure eases and the buying pressure increases, we will see the bearish candles become smaller. It represents a decrease in the bear’s strength.

Wicks: Wicks shows us the highs and lows, but in certain cases, reading them reveals useful information.