Candlesticks and Momentum

The advantage of a candlestick is that you’ll be able to see a lot of information in one single glance. Actually the candlesticks are telling a story and it’s up to you as a forex trader to disentangle this story. In this article I’ll show you different kinds of candlesticks to clarify this and I’ll also explain the significance of momentum in case of forex trading.

For reference we’ll shortly return to the image of the candlestick.

forex candlesticks

When you’re taking a closer look at a candlestick, you’ll not only see the standard candlesticks as shown on the image above. Each candlestick reflects the fight between the so called bulls and the bears and the shape of a candlestick consequently depends on the outcome of this fight.

The bulls and the bears

The bulls represent the buyers of the base currency (the green candlestick) and the bears represent the sellers of the base currency (the red candlestick). The price of a currency pair is going to move as a result of the fact that either the bulls or the bears are having the upper hand at that very moment.

Timeframe

A candlestick reproduces the fight between the bulls and the bears within a specific timeframe. When you look at the day chart, the most recently concluded candlestick will reproduce the fight during the past day. When you examine the 30 minutes chart, the most recent concluded candlestick will reproduce the fight during the past 30 minutes.

The colour of the candlestick

The colour of the candlestick makes it immediately clear whether the bulls or the bears have won the fight. If the body of a candlestick is green, the price has risen and the bulls have won the fight and if on the other hand a candlestick has a red coloured body, the bears have won the fight.

As such this is of course a remarkable fact which you’ll notice at a glance, but it’s understandable that you need at least some more information. Fortunately you’ll be able to gather more information with the help of the body and the shadows (also called wicks) and at this the main point of attention will be the momentum.

Momentum in case of forex trading

In general momentum refers to the speed/intensity of a price change. If the price of a currency pair is rising or declining rapidly, we’re talking about a lot of momentum and if the price of a currency pair is hardly changing, in that case we’re talking about little momentum.

When there is a lot of momentum

On the below shown image you can distinguish two green coloured candlesticks. In both cases the bulls have won the fight, but in case of which candlestick was it a matter of more momentum?

candlesticks-momentum

The right answer is the second candlestick.

If we consider the first candlestick, we’ll see that at the opening of this candlestick the price at first was dropping a bit and started to rise not until afterwards. So at the beginning the bears were on the winning side, but they couldn’t keep this up, as a result of which the price yet began to rise. Because of this development the bottom shadow was shaped.

Then clearly a new high was reached as a result of the bulls having by far the upper hand, but they also didn’t manage to see this thorough eventually. The bears fought back, as a result of which the price closed a bit lower compared with de high which it had been reached earlier. This development shaped the shadow at the top.

The story behind the second candlestick is a lot easier. Right from the start the bulls have had the upper hand and during the timeframe of this candlestick this situation did not change. For that reason no shadows have been shaped and you’re merely able to see the body of a candlestick.

Important: When there’s a lot of momentum, a candlestick consequently has a sizeable body and there are hardly any shadows on the upper side as well as on the bottom side.

When there’s a lot of momentum, this means that either the bulls or the bears are overwhelming one another and as a result of that there a big chance that the price is going to rise or drop even more.

When there is little momentum

When there is a lot of momentum, it’s quite clear who’s winning the fight at that very moment. However it might also be possible that the fight between the bulls and the bears is developing well balanced or that there is a question of indecisiveness. When that’s the case, then we’ll consequently see the candlesticks showing such distinctly.

An example of this is the Doji candlestick

doji candlestick

Characteristic of the Doji candlestick is that it has either no body at all or it has only a very small body. This means that the closing price either does not differ from the opening price at all or just for a tiny bit.

Next to different kinds of Doji candlesticks, there are also candlesticks which are very similar to the Doji candlesticks, such as for instance the Hammer, the Inverted Hammer, the Hanging Man as well as the Shooting Star. It goes too far to deal with all these candlesticks separately in this article, with the exception of the remark that all of them have a small body.

If the opening price is almost equal to the closing price, this could have two reasons, namely that it’s a matter of indecisiveness or that the bulls and the bears are in a state of balance.

If it’s a matter of momentum due to this candlestick there is quite a big difference. If however it’s about indecisiveness, momentum is out of the question, the bulls as well as the bears being not strong enough to make the market moving more than just a tiny bit.

If on the other hand it’s question of a battle on equal terms, there’s a fair chance of momentum still coming into existence, in case one of the parties eventually is going to draw the longest straw. The chance of a strong movement of the price could consequently be imminent.

Long shadows

We now have extensively discussed the body of the candlestick as a result of which you’ll learn to know how to obtain a lot of information about the actual momentum. Apart from the body it’s also important to look at the shadow(s) of a candlestick.

If a candlestick has a long shadow (wick) on the top this consequently means that the bulls initially were having the upper hand, but were not able to keep this up. Then the bears took over the upper hand, as a result of which the price went considerably down again. So it’s very important for you to realize that the bears were on the winning side after reaching the top of the candlestick. The other way round of course the same principle counts.

It’s just a part of the story

As a result of this article you now should have a clear view of the kind of information you could derive from a candlestick. It’s extremely useful for you to comprehend the story behind the candlesticks by trying to reflect on this item as logically as possible.

Nevertheless a single candlestick often has not much to say and the truth is that the exact meaning of a candlestick is often dependent on other factors, such as among other things surrounding candlesticks, important support en resistance lines, trend lines etc.

I’d like to recommend to you the course “Candlesticks made easy”, drawn up by Chris Lee. This is a very complete study, in which all important candlesticks, including price action, are intensively dealt with. This e-book is not only utmost complete, but moreover the author is providing you with a clear view on the subject of study with the aid of a lot of examples from price action. Besides the text is extremely easy to read. To put it briefly: This e-book is a very valuable addition to the basic version as well as to the extensive version of the OFS Trading System!

Be Sociable, Share!

Speak Your Mind

*