what-do-the-candlesticks-shadows-tell-you-CHART READING

I see an article on FxKeys titled “The Language of Japanese Candlesticks“. I like this title because candlesticks really talk to you. They have a language. They inform you about the psychology of the markets. “Market” means buyers and sellers. It is the buyers and sellers that make the market. They make the price go up or down. When most traders (from the central banks and hedge funds to retails traders like us) decide to buy, the price goes up. When they decide to sell, the price goes down. This is what we call it as “market”. It is a place, whether physical or virtual, where you can buy and sell; and there is a price that goes up and down.

So I said when most traders buy, the price goes up, and when they sell the price goes down. Now if someone or something tells you whether most traders want to buy or sell, then you can choose the right direction to get in the market and make some money. Am I right?

Fortunately we have such a tool. It is the candlesticks. They are alive and they have a language. They talk to you lively. They are not like “lagging” indicators. You just need to understand their language. Then you are done. You will make money. You just need to understand what the candlesticks tell you.

Candlesticks have a body and two shadows (refer to this article to learn their anatomy). The candlesticks language is not too complicated. It is very easy. You can learn it within a few hours. The body gives you few signals. The Shadows give you few signals too. I do not want to talk about the candlesticks language, signals and patterns here. FxKeys is full of invaluable information about them. However, I will try to give you a few examples in each article and explain about what the candlesticks told me and the decision I took based on it. Before you go ahead, please make sure to read my previous articles carefully. They are so important:

1. http://exceptionaltechy.blogspot.com/2014/08/money-management-in-forex.html
2. http://exceptionaltechy.blogspot.com/2014/08/what-is-forex-and-how-to-make-serious.html
3.  http://exceptionaltechy.blogspot.com/2014/08/candlestick-trading.html

Taking the right position and making profit is the goal of trading forex. However, you are a good trader both when you know when and where to enter, and when you know when and where you should stay away from the market and not to take any positions. Candlesticks tell you about both. They not only show you the strong setups that you have to take and make money, but also they inform you about the situations that you have to stay away. From my point of view, the second one is even more important. I mean it is more important to know when and where we should not get it, because before we learn to make money, we should learn not to lose money.

In my previous articles I talked about the candlesticks signals a lot. Here, I want to show you one example from the cases that candlesticks told me not to enter.

You know that GBP/USD is strongly bullish both on the daily and weekly charts. We have a strong uptrend. This is what Chris has on his computer screen:

I trade based on the candlesticks signals and their combination with Bollinger Bands. For me, “uptrend” means that I should wait for the long trade setups and I go short only when there is an extremely strong sell signal. You learned how I use the Bollinger Middle Band to locate the trend continuation signals here.

A few days ago, a strong buy signal formed on GBP/USD daily chart, above the Bollinger Middle Band. There is no doubt that it was a good opportunity for me to go long, but I didn’t do it.

The 2014.07.15 (the red arrow on the below screenshot) candle formed a strong buy signal above the middle band. Its strong body tells that bulls still have the control and they succeeded again to defeat the bears who took the price down to test the middle band. In spite of this, this candle has something that made me not to go long. Its “upper shadow” told me that the bulls succeeded to take the control back from the bears, but bears are still serious to take the price down and they are not fully defeated.

Candle 2014.07.15 opened at 1.70824. It goes down to 1.70583 to test the middle band, but the middle band works as a support and makes the price go up. It goes up for over 131 pips to reach 1.71904. But it goes down because of the bears counter-attack, closes at 1.71415  and leaves a relatively long upper shadow. Its last movement (going down to 1.71415) forms the upper shadow. This is what the long upper shadow  tells you. It tells you not to go long, because it is highly possible that the price goes down probably to test the middle band again. And as you see it was true. The price did not go up after the 2014.07.15 candle and is currently trying to test the middle band:

That was the example of a case that a candlestick told me not to enter.

Have a good one