Candlestick charting is a passion of mine and I enjoy teaching folks about them. I have developed some approaches to demystify and make them easier to comprehend and memorize. The first thing that helps to simplify candlesticks is to recognize that they are simply a reflection of battle waged each day among the bulls and the bears. While candlesticks do not contain anymore information than the western bar chart they are much easier to read and interpret. Roughly 200 years of candlestick pattern study has produced a wealth of information on market behavior. Candle patterns have frequency and accuracy characteristics and given that there are over 100 patterns, each with variations and that makes for a tremendous amount of memorization. OR…
The OR, is learning to read candles. This is different than trying to memorize the books. If you can read the message left by the candle you can read the message of the market. Each day is composed of an Open, High, Low, Close, like a western bar chart, but the candles can easily tell a story about the day's activity that bar charts simply can't.
Now the body size shows how decisive the move was. A small body suggests indecision and a large body suggests a strong sentiment. The body of the candle is the first and most important feature to read but the tails are very important and they add a specific dimension to the day's activity. This newsletter will focus on the differences in candlestick tails as opposed to the bodies.
Let's first define the role of 'Tails' (high or low marks) also known as wicks otherwise shadows. While the candle body tells us the sentiment (up or down direction) and commitment (size of the body) of the traders, the tails show intensity and volatility. The tail show how far away the traders moved for the high and or low of the day. If the stock closes at or near the high or low of the day then there was little or no retreat from the high or low.
Small tails:
In large body candles, a small tail indicates strength and suggests the mood was one sided and only stopped because the market closed. The Marubozu (Shaved Top or Bottom) candle closes at it's high or low and is named after the image of a seated monk whose shaved head has no hair sticking up on it. A small tail means much the same thing except perhaps the monk missed a small spot.
The smaller the body the less strength on the day's price move. A small tail here adds to the indecisiveness. Not only did the stock open and close at or near the same price there was no strength in the minor efforts made to move up or down. The small tails tell us it was a real docile indecisive day with very low volatility.
Long tails on small days add the dimension of high volatility to indecisive days. A small body means indecision but long tails mean that the day's price was action not docile. In fact it shows that there was a strong sentiment to move the stock one direction but at some point the mood reversed and a retreat was made back to the starting point. Indecisive, yes, but also very volatile and almost violent. This show of volatility suggests tension and pressure and often big moves come on the heals of pressure build ups.
Big body candles with long tails show that the traders were very active and the big move (up or down) had an episode where the traders completely reversed the directional sentiment of the day. Perhaps profit taking hit a large up side move or bargain hunters showed up at a certain level in a big down side move. Strong gains are still in place but volatility and emotions are high as are the stakes for the traders in the stock that moves big.
Some of the common candles with significant tails are as follows. No body candles (dojis)
Small body candles
Although the first read on a candle is its body the tails tell a powerful story and add depth to the understanding of the price action. Body size tells the level of commitment and the strength of the directional sentiment. The longer the tail the higher the volatility. Here is a graphic showing a range of candles that all have the same high and low. The body size moves from bullish (left) to indecisive and then on to bearish. The tails contribute to the volatility levels.
Below, is a good exercise in reading the message of the candles.
I have prepared a 6 ½ hour set of DVD's from a live Candlesticks Charting course I taught in Phoenix. It is very valuable to those who have it to study and learn how to read and interpret the message of candlesticks. The 800 number in the newsletter is the best way to get up to date pricing specials and order your copy.
I believe the best way to learn candles is by using them and the best way to do that is in the Trader's Forge (two days of traidin') workshop. I am in Denver right now and will be in Southern California in July. Please take the opportunity to join me in the FORGE soon. Nothing takes the place of experience and in the FORGE we will get apx. 10months of trading experience in two days. That's 10 months of candlestick charting experience in two days. I also teach introductions to Candlestick charting on the web. Watch for the free one hour classes.
See you in class!
Ryan
Ryan Litchfield brings his popular Traders Forge system to a two day intensive training session.
The Traders Forge is a forum for those who already have some understanding of trading and some
experience in the market. Visit Ryan's website to sign up
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