Candlestick Analysis…

I have mentioned in one of my previous articles that in swing trading, we should have clarity on 4 important things before considering a trade. Namely,

Short term bias.
Corrective move to fade.
Price level to look for an entry.
Stop and Targets
I have already covered about short term bias and price levels in my previous article. I hope you already know how to name a swing as impulsive or corrective in hindsight charts. So far, so good.

The real problem comes in naming a swing as corrective or impulsive when the chart is printing at the hard right edge. As we analyse the market information in terms of candles, it makes sense to know how the candles in a corrective move look like, and how the candles in an impulsive move look like.

Don’t expect some mambo jumbo here. It’s pretty straight forward. The candles in an impulsive move are Weak and the candles in a corrective move are strong.

So what information can we get from a candle to know that it is strong or weak ?

Market information during a particular period of time (timeframe) will be represented by tails, close and the range of the candle. Volume is the 4th dimension which I don’t know how to use. So, my focus will be on the first three.

Now go through the following image. Remember, try to read the candle only after the close of the candle because the whole shape of the candle changes in the last few seconds most of the time. A candle that was looking like a hammer at 4 and half a minute suddenly change like a strong close bearish bar at the time of it’s close. So it’s always better to wait for the candle close when you are trading a liquid instrument.

Candlestick analysis

Don’t think that it takes a lot of time to read all those things from a candle. It just takes not more than 5-10 seconds once you know what things to look for.

Let us say that the short term bias is down, the market is moving up and most of the candles are weakly bullish or strongly bearish in it. We can consider that as a corrective swing and can start looking to fade it when it reaches the entry-level. If the premise for the short is valid, the down move that we are trading will have strong bearish or weak bullish candles.

Look for strength in the market to form the bias, and weakness to consider the entry.

I thought of giving some examples for this article, but no matter how detailed I explain things, those charts will be hindsight. You will learn to read the candles better only when you start applying things in the live markets. Use market replay for practice. Remember, it is just a framework to operate in the market and to make informed decisions, not fixed rules.