Forget everything you know about candlesticks . Forget about terms like Doji or Morning Star. Candlesticks simply tell us the story about the struggle between buyers and sellers and as traders we want to be able read that story.
Every candle starts out as a baby and at the end of its life, it tells you exactly what happened to price within a certain period. For example the last 5 minutes or the last 24 hours.
Example of bullish and bearish candles
Every candle starts completely neutral as a horizontal line. As soon as price starts to move up or down, the candle moves with it and records the price movement.
If you look at the green candlestick, it tells us that price dropped to the Low at a certain point after this candle was born . Then price rose to the High, dropped a little and finally closed on the Close .
All in all, the bulls (the buyers) were in control during this period and have (for now) clearly beaten the bears (sellers), so price went up.
Exactly the opposite applies to the red candle…
If you look at the red candlestick, it tells us that price rose to the High at a certain point after this candle was born . Then price dropped to the Low, rose a little and finally closed on the Close .
Clearly the bears (the sellers) were in control during this period and have (for now) clearly beaten the bulls (buyers), so price went down.
Multiple candles can form a trend
When we get several candles that open and close higher than their predecessors, a bullish trend is being formed. Buyers are in charge of price for a longer period of time and keep pushing it up.
The same happens when sellers are in control…
When multiple candles open and close lower than their predecessors, a bearish trend is being formed. Sellers are in control of price for a longer period of time and keep pushing it down.
And this is exactly what price action is. The struggle between buyers and sellers. This struggle is ongoing.
You can see that fight clearly by the wicks (or shadows) that are visible above and below candlesticks. These wicks tell us that the bulls or bears have tried to push price the other way to gain control, as you can see below.
In the example above you can see that all candlesticks have a wick at the top. These are all small attempts by the bulls to push the price up.
Their attempts keep failing and the bears are clearly winning because price has dropped. But we can still see that the bulls have fought back.
Candlesticks that show control is about to shift
Everything comes to an end. Similarly to a trend in which the bulls or bears are in full control. Eventually you will see a different type of candle forming, announcing that one side is getting exhausted and the other side could win the fight.
The sellers no longer have enough power to ward off the buyers and eventually the price movement changes direction.
Indecision instead of reversal candles
This is an important point. Many traders call that small candle that you see there a reversal candle. This candle announces a possible reversal of price action. But I prefer to call it an indecision candle. A candle that shows indecisiveness of the current market and the battle between the bulls and the bears.
After that small candle forms price could indeed reverse, but it could just as well break down for a continuation, after which the price moves in the same direction. We don’t know yet!
In the example above you can see that the sellers had control over price. A small candle then forms in the circle, showing indecision. The bears no longer have enough power to push price down. There is still some struggle and after that the bulls win the fight and they manage to take control of price, which makes it move higher.
This is how you should see price action. The constant struggle between buyers and sellers. And every candlestick tells a story about this fight.
This gives you very valuable information about what the prize is doing and what the next chapter in the story may be. In other words; what price will do next.
The complete story of candlesticks
If you look at a chart of a certain asset and you see all the candles, you can read the complete story of price action. Based on this story you can proceed to make an educated guess about what the prize will do in the near future.
Feel free to ask your questions about candlesticks in the comments and don’t forget to share.