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Thursday, September 20, 2007

Understanding Candlestick Formation – Part 1: LONG CANDLES & SHORT CANDLES

One of the reasons why candlestick chart gain popularity among traders is because its formation can provide visual analysis of other traders’ sentiments. Hence, in candlestick chart reading, it’s important to understand what the candlestick formations imply.
The following are some common & important candlestick formations:




1) Long Candles / Wide Range Candles
A long candle represents a large price move from open to close. Basically, the length of a candle body indicates the intensity of buying or selling pressure. The longer the body is, the more intense the buying or selling pressure. Long candles with high volumes normally imply high volatility or high interest in the stock.

Long white candles show strong buying pressure. It means that buyers were aggressive and hence pushed the price up significantly from open to close.

Long red / black candles show strong selling pressure. It means that sellers were aggressive and hence pushed the price down considerably from open to close.

2) Short Candles / Narrow Range Candles
Short candles indicate small price movement (from open to close) and represent consolidation. Short candles with low volumes usually also imply low volatility or little interest in the stock,

This kind of low volatility period may lead to good trading opportunities. Because low volatility leads to high volatility, and high volatility leads to low volatility. Hence, a breakout / breakdown after a period of low volatility usually could result in an aggressive movement & strong momentum.

Continue to Part 2.

Related Posts:
* Learning / Understanding Candlestick Charts
* Learning Charts Patterns

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