Candles
The absolute basics of price action, candles, can be a much bigger help tool than most new traders realise. Only from them, it should be possible to analyse any chart along with projections on the future movements based on the shape of the candles alone. There are many different alternatives to candles (bars, lines, Heikin Ashi) but because of the basic character of this chapter, we will be covering the most popular one. This is how a candle is built:
(The picture was taken from: http://www.wallstwise.com/Charting.htm)
The central part of the candle – the body – represents the opening and closure of the candle. The shadow (or wick) above and below it, shows how the price reached other levels before the candle’s closure. A candle is the representation of the time frame – on a 1-hour time frame, a candle will represent 1 hour, on a 1-day time frame, a candle will represent one day and so on. If the price closes higher than it opens the candle is green (on our charts, white) and if the opposite happens, it turns red (on our charts, black).
The structure of the candle can tell a lot about the current trend. A long body with dominance over wicks is an indicator of strength, while long shadows and short body suggest trend weakness or potential reversal. The candles with long shadows are called dojis.
