If you followed the previous articles, I hope that you now realize that candlesticks are not just colored bars or patterns with exotic names such as Inverted Hammer or Shooting Star.
Candles are price. A super detailed representation of what price has recently done and what price is doing at the moment. Nothing more and nothing less.
So what is this?
Is this a reversal pattern? No. This is just a candle that indicates that there is indecision forming at the end of a trend. Or maybe this candle is part of a range, in which stalling and then breaks out.
What I am trying to explain is that reading the story that a candle tells, is much more important than learning a few names by heart.
What will price do in the near future?
As traders, we want information about what price is doing now, in order to make a well-reasoned and calculated guess as to what price will do in the near future.
That’s what trading is all about: making an educated guess about what price will do next.
The extra information that candles give us
Let’s continue. What is this?
This is a line chart of gold. This chart shows price action in its simplest form. It’s just a line that rises when buyers are in control and drops when sellers are in control.
Candles give you extra information. This is the same chart but with candlesticks:
Each individual candle is a snapshot of what the price was doing at that point in time. And each candle can be divided into smaller candles. From candles of a week, to a day, to 4 hours and all the way back to tick charts. This may seem obvious, but the better you understand this concept, the more you will see how important it is.
Differences in time frames
A range on the 4 hour chart can look like indecision on the daily chart. For example, a trend of 24 candles on the 1 hour chart is only 1 large candle on a daily chart.
Suppose you want to know more about an indecision candle on the daily chart, then you can switch to the 4 hour chart. That daily candle will be broken up into 6 4 hour candles, giving you much more information about the price action of that asset.
Try it out on your demo account to see what happens when you switch time frames.
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