CHAPTER 4: PRICE AND CHARTS

Now, let’s study price in a little bit more detail…this stuff is for the newbies…please skip this section if you
think you know!

What is price?

Price is value given to a particular instrument usually in monetary terms and its value dependent on
supply and demand.

 If the demand is more, price increases as more traders start buying and driving prices up.

 Demand zones on your price charts are around support levels, that’s where buyers come and
start buying and drive prices up!

 If there is an oversupply, price falls as there are more seller and less buyers.

 Supply zones on your charts are around resistance levels where sellers come in and drive the
prices down due to the fact that there are very few buyers.

Every time you open up your charts, all you are seeing are the forces of supply and demand at work!

If the market is going up, what does this tell you about the demand and supply then? It means there’s a
lot of demand for that instrument.

Or if the market is going down then what does this tell you about the demand and supply? There’s a less
demand and lots of supply.

But there’s something else about price…it has a time component.

So the price of something today will not be the same tomorrow or in a month or in a year. Supply and
demand over time drives up and down the price.

But how do you represent the value of price over time which in turn tells you of the supply and demand
forces?

Answer: You need price bars, candlestick and line charts. These are graphical and visual representation of
price over time, thus telling you a story about supply and demand forces over a certain time period which
can be 1minute up to one month or year.

Bar, Candlestick and Line Charts

Price over a period of time is graphically represented in 3 main ways:

1. The bar chart (as shown below):

The bar chart simply looks like a “stick” or bar with 2 short knobs on both sides. The knob on the left is
the opening price and the knob on the right is the closing price.

Then there’s the wick on the upper end and the lower end. The highest point or level of the wick on the
upper end is the highest price that was reached during a certain timeframe or period and the lowest
point of the lower wick is the lowest price that was reached also during the same time frame or period.

2. The candlestick chart shown below conveys the same information as in the bar chart above:
A candlestick chart…to put it in another way is like putting a body over a skeleton of the bar chart!

Here’s a comparison of the Bar chart vs the candlestick chart and note how they convey the same
information:
That’s the only difference between the bar chart and the candlestick chart… the candlestick chart has a
body and the bar chart does not.

The red color is most often used to indicate a bearish candlestick which means the price opened up high
and closed lower. A green candlestick represents a bullish candlestick and is the exact opposite.

3. The Line Chart (As shown below) conveys the same price information over time but does not
reveal everything.

The line chart is one of the least favorite of charts for trading. A line chart is simply drawn by connecting
either the closing, high or low price and that’s how you get the line on a chart.

Line charts can be useful for looking at the “bigger picture” and finding long term trends but they simply
cannot offer up the kind of information contained in a candlesticks chart.

Out of these 3, the candlestick chart is the most popular followed by the bar chart. So from here, I will be
only focused on candlestick chart only but I may end up using the word bar to refer to candlestick
pattern as well so just be aware of that.

I will talk more about the candlestick (and candlestick charts) as this is the bread and butter for price
action traders.

The Japanese Candlesticks

Today, the use of Japanese candlestick is the most used graphical representation for financial markets.
More readable, more relevant, the Japanese candlestick representation offers a real help for the decision
to enter or exit a position on the market. It should be noticed that Japanese candlesticks are not
sufficient alone to take your decisions. Japanese candlesticks allow mainly detecting areas of market
reversal.

 The candlestick chart had its origins in Japan and can also be referred to as the Japanese
candlestick chart.

 The color of the candlestick chart tells you if price was up or down in a particular timeframe
which means that candlesticks are either bullish or bearish

Now most traders prefer to set green candlesticks as bullish and red candlesticks as bearish. And I like it
to be that way for me personally.

 Some broker’s trading platforms have options where you can change the colors of the
candlesticks to any color you want. If you are a woman, you may change a bullish candlestick to
pink! And bearish candlestick to Purple! (I have never seen a pink and purple candlestick yet).

This candlestick shown below is an example of bullish candlestick.

 A Bullish candlestick simply means the price opened lower and closed up higher after a certain
time period, which can be 1minute, 5minute, 1hr or 1 day etc.

 The candle body represents the distance price has moved from the opening price to the closing
price. The longer is the body, means price has moved a great deal upward after opening. The
shorter the candle body is means the exact opposite.

 The high is the highest price that was reached during that time period.

 The low is the lowest price that was reached during that time period.
All these candlesticks shown below are bullish candlesticks which mean that their opening prices was
lower than the closing prices therefore reflect an overall uptrend in the timeframe each candlestick was
formed:

Now, the candlestick shown below is an example of a bearish candlestick.

A bearish candlestick simply means that the candlestick opened up at a high price and closed lower after
a certain time period:

All these candlesticks shown below are bearish candlesticks meaning that the opening price was higher
than the closing price, therefore reflecting a downtrend:
Candlestick Wicks-Why Are they Important?

The wicks of candlesticks along with the body tell a story. A wick which can be called a shadow or tail of
a candlestick is a line situated above and below the body of the candlestick.

How candle wicks (tails/shadows) are formed and what do they mean?

 Well, they are formed because of a change in market sentiment.

 For an upper wick, price is moving up and then market perception is changed by traders and then
price is pushed down towards the open by sellers. That’s how the upper shadow is formed.

 For the lower shadow, price is moving down but the market sentiment changes and price is
pushed up towards the close buy the bulls. That’s how a lower wick or shadow is formed.

Longer wicks indicate an increasing change in market sentiment:

What is the meaning of Candlestick Wicks?

 Candlestick wicks with long upper shadows commonly occur when an uptrend is losing strength.

 Long lower shadows occur when the downtrend is losing steam.

Understanding Buying and Selling Pressure on Candlesticks

Did you know that there are bullish candlesticks that are considered bearish and bearish candlesticks
that are considered bullish? To really understand this concept, you need to understand buying and selling
pressure.

You see, every candlestick that is formed tells you a story about the battle between the bulls and the
bears-who dominated the battle, who won at the end, who is weakening etc. All that is reflected in any
candlestick you see. The length of the body of the candlestick as well as the shadow (or wick) tells you a
story about the buying and selling pressure.

For example, look at the two charts below:

Look at the first green candlestick on the left chart, it’s a bullish candlestick right? Yes. But you can see
that it has a very short body and very long wick (tail).

It tells you the sellers (bears) were dominant. If this candlestick was formed after hitting a resistance
level, it will be considered a bearish signal even though it’s a bullish candlestick.

Now, you can apply the same sort of logic to all the other candlesticks above and read the story each one
is telling you.

 If the upper wick is very long, it simple tells you that there’s a lot of selling pressure. It means
price opened and got pushed higher by the buyers but then at the highest price, sellers got in and
drove it back down.

 If the lower wick is long, it tells you that there’s a lot of buying pressure. Sellers drove the price
down but buyers got in and drove the price back up.
  If the lower wick is short, it tells your there’s very minimal buying pressure.

 If the upper wick is short, it tells you that there’s very minimal selling pressure.

What about the length of the body of the candlestick?

 The length of the body of the candle indicates very strong buying or selling pressure.

 A short body candlestick indicates little price movement therefore less buying or selling pressure.

 Sometimes the candles will have no upper or lower shadows but with very long bodies. These are
interpreted the same way as standard candlesticks but got a stronger indication of bullish or
negative market sentiment.

 In the case of bullish candle, prices never decline below the open. In the case of bearish candle,
price never trade above the open. See below:
Now, so far we have looked at individual candlesticks…what if you combine more than one candlesticks?
What does it show you?

 Well, one important thing that group of candlestick can show you is how strong or weak a bullish
or bearish move is.

 They can also tell you if the bullish or bearish move is weakening.

 The word used to describe such a situation is momentum.

The chart below shows 3 bearish candlesticks in a downtrend, each with decreasing length and body
lengths.
In a downtrend situation, when you see such happening, it is one signal that the downward trend is
weakening.

And if this happens around support levels, you should sit up and take notice and also watch for bullish
reversal candlesticks which will give you the confidence to buy!

This next chart below shows 3 bullish candles in an uptrend each with decreasing lengths. In an uptrend,
when you see such happening around resistance levels, you should take notice. Also watch for bearish
reversal candlestick patterns to form. This will give you the confidence to sell:

That’s price momentum. Every time you look at your charts, you need to be aware of such. Very
important!

Basic rules:

A - Timing should never be changed for decision making. However, it’s quite advisable to change Timing
for a long term analysis. Candlestick can give two indications completely opposite on the next
movement. Example: you see a reversal on a 15min chart but the 1h chart can show well that the trend
should continue. It can simply have a correction on the 15 min chart and then the movement can go
ahead. This is why you must never change your timing to take your decision.

B - A candlestick should always be analyzed according to the trend or the movement that preceded it.

C - Always wait for a confirmation of the next candlestick to validate the decision of entry (or exit).

Reversal figures with Japanese candlestick

 Evening doji star Gravestone
Whirligig with Hanging
Doji Morning Doji star abandoned baby of Doji/ Dragon fly
long shadows man/Hammer
the evening doji

- Doji: a doji can be a cross, a plus sign or a reverse cross. The common point of these doji is that the
opening price is the same as the closing price (or almost). The doji often appear after a strong move. A
doji plus sign is more neutral (middle).

However, a reverse doji cross (on the right) is bearish if it appears in a bullish movement (Evening doji
star or abandoned baby of the evening).

Evening Doji Star

Conversely, a doji cross (left) is bullish if it is in a bearish movement (morning doji star or abandoned
baby of the morning).

Morning Doji Star

- Doji with long legs: it has long high shadows and long low shadows. It is a strong sign of indecision.
- Gravestone doji: (its opposite is the dragon fly doji, shaped as a T) Gravestone doji indicates that buyers
dominated the first part of the formation of the candlestick, but sellers have been strong enough to push back the
price to the opening price, in the second half of the session. The gravestone doji is a strong sign of reversal. Its
signal is stronger if the doji appears in a bullish trend. (Inversely for the dragon fly doji).

Gravestone Doji

Dragon Doji Fly

- Whirligig with long shadows: this figure is the same as a doji cross except that movements that built it
were more violent and that the price does not close at the same price as the opening price. It is a
reflection of high uncertainty, but can also be interpreted as a figure of reversal if it appears at the end
of a strong movement.
 - Hammer: The hammer is a figure of reversal. It appears in bearish trend and it is a sign of a bullish
reversal. It is said that it is pondering the decrease. The long shadow shows that the price has faced to a
significant selling pressure but this one has disappeared at the end of the formation of the candlestick. It
is better to wait a passing of the highest of the hammer by the next candle as a confirmation. The
hammer can also play a role of spring. There is a spring when bears are unable to maintain the price
below a broken support area. The shadow breaks violently the support but bounces over this line just
after. (Inversely for hanging man).

Morning star Evening star Shooting star Inverted hammer Black cloud coverage

- Morning star and evening star: same as the morning doji star and the evening doji star but the reversal
candlestick is not a doji. It should be noted that the candlestick star will have a higher power of reversal
if it is created with a gap.
Morning Star

Evening Star
- Shooting star: the shooting star implies that the Bullish have oriented the price during the first part of
the formation of the candlestick but that the Bearish took back the control in the second part. The trend
is being challenged on the occurrence of a shooting star. The next candlestick will be waited to confirm it.
It should be noted that a shooting star with a gap has a higher power of reversal.

Shooting Star

- Inverted hammer: the inverted hammer is created in a bearish trend. It implies that buyers have pushed
the price to rise in the early formation of the candlestick but the selling pressure has diminished the
reversal. It is a figure that requires more to be confirmed by the next candlestick.

Inverted Hammer
 - Black cloud coverage: Figure very usual during the announcement of economic news on the Forex. It is
formed by two consecutive candlesticks. The first one is a long bullish candlestick. The second one is a
long bearish candlestick. It comes out in a bullish trend or at the top of a resistance area. The level of
opening and closing price of the bearish candlestick determines the strength of reversal of the black
cloud coverage

Black Cloud Coverage

The important points:

More the level of the closing price of the bullish candlestick is close to the level of opening of the bearish
candlestick as in the previous picture, then stronger the reversal signal is.

More the opening of the bullish candlestick is above the closing price of the bearish candlestick, more the
signal is bearish.

More the candlestick are long, more bearish is the signal.

The confirmation of the figure is important. To be valid, the next candlestick should finish under the black
candlestick of the black cloud coverage.

Bullish Harami Bearish Harami

Penetrating Bullish engulfing Bearish engulfing Top clip
doji doji
- Penetrating: Unlike the black cloud coverage, its start in a bearish trend at the beginning. It’s a reversal
figure which must be validated before enter in a bullish trend.

Penetrating

- Bullish engulfing and bearish engulfing: (or bullish or bearish swallowing) the swallowing structure is a
reversal figure very effective and frequent. A reversal pattern that can be bearish or bullish depending
upon whether it appears at the end of an uptrend bearish engulfing pattern or downtrend bullish
engulfing pattern. The first candle is characterized by a small body, followed by a candle whose body
completely engulfs the previous candle’s body.

Bearish Engulfing Pattern: The market must be in clearly defined uptrend. The first candle is bullish. The
second candle is bearish that entirely swallows the previous one.

Bullish Engulfing Pattern: A reversal trading pattern that typically occurs after a significant downtrend.
It occurs when a small bearish candlestick is swallowed by the next candle which must be bullish.
Bullish Engulfing

Bearish Engulfing
 - Harami (Harami doji or whirligig): The Harami in a composition of a mother candlestick and a
candlestick in position Harami. A candlestick in position Harami is a candlestick that is formed in the
body of the previous candlestick. However, the legs of the Harami should not necessarily be contained in
the body of the previous candlestick. The first candlestick must have a long body. The Harami may be a
doji or a spinning top, as far as his body is inside the body of the mother candlestick. The candlestick in
Harami position can be double, which will increase the signal of reversal.

Bullish Harami Whirligig

Bearish Harami Whirligig

 - Line of bullish counter-attack (or line of bullish connecting) result from two candlesticks, the closing of
the first one will match with the closing price of the second. These candlesticks reverse the movement in
progress and provide signals of buying (or sell for the line of bearish connecting). It is better to wait for a
confirmation by the next candlestick to confirm the reversal.
- Top clip: (opposite bottom clip) relatively similar to the black cloud coverage. The top clip is a reversal
figure special by the fact that the higher of the two candlesticks which formed it are at the same level.
(Conversely, two lower for the bottom clip). This configuration may appear in various ways, with or
without shadows, with formation of a hanging man (hammer, according to the trend that preceded),
with a doji which will be in Harami position, with swallowing and so on.

Top clip
 Figures of continuation with Japanese candlesticks

Bullish White Bullish Line Of

Bullish Gap Bullish Play Gap Bearish Play Gap Bullish Kick
Twins Separation

- Bullish Gap: (opposite of bearish gap) a bullish gap appears when the opening of a candlestick is made
higher than the closing price of the previous candlestick.

- Ascending Tasuki gap (opposite descending Tasuki gap): It results of the formation of three
candlesticks. The first two are both bullish candlesticks and separated by a gap, the third is a bearish
candlestick opening at the inside of the previous candlestick’s body and usually end at the inside of the
gap. The ascending Tasuki gap tends to continue the current trend. There are several ways to trade it:
Enter long at the closing of the third candlestick – Enter long at the next candlestick when he will get
over the third candlestick (more secure because the figure is then validated)

- Bullish play gap: (opposite bearish play gap) it is a gap which was established after the formation of a
line of resistance. This line of resistance is then violently broken by the gap. The bullish will normally
continue thereafter.

- Bullish white twins: The figure results from the formation of three candlesticks with a gap, the opening
of the third candlestick is approximately at the same level as the previous candlestick but the closing
price is also upward and at the same level. This figure can be considered as bullish if the previous gap is
bullish. In contrast, the figure could be considered as bearish if the gap is bearish. (The figure will be
composed of a bearish candlestick, a bearish gap, and two identical bullish candlesticks)

- Bullish line of separation: (opposite bearish line of separation) is the combination of two candlesticks. It
extends the current trend and makes a signal to buy or sell depending on the current movement. The first
candlestick is a large bearish one, the second opens at the opening price of the first one and does almost
not have any shadow. The black candlestick raises some skepticism among bulls, but the white one
comes to reassure and revive the movement. (Conversely for the bearish line of separation)

- Bullish kick: (opposite bearish kick) Figure composed of two marabozu separated by a gap. Figure of
continuation.