Candlesticks in Context

[Sledge 13]

I would like to start a discussion if I may regarding Price Action at a SINGLE candle perspective. Dissecting the bars so to speak (I know Db does this with much skill) This will be very "Candlestick 101" but I would like to discuss this from a different perspective than what appears to be out there currently.

 

Hopefully, after my post- you'll get the idea of what I'm trying to accomplish:

 

I have searched and searched without any real fruit of trying to find a very basic discussion about reading single candles. There are a million sites dedicated to "candlestick patterns"-- but that isn't what I'm trying to accomplish.

 

A better term would be "Candlesticks in Context" As an example: If you see a Dragonfly Doji form at a market top- it is a strong bearish signal. That exact same candle (size, spread etc) formed at a market bottom- is a very strong bullish signal. Obviously, this is the most elementary example I could use to make the point.

 

My ultimate goal is to learn to read SINGLE bars price action as they develop and/or close for them to "speak to me." As another example a nice flat row of doji's and spinning tops at a market bottom- the "sum of all the bars" equals accumulation. Hopefully I am explaining myself appropriately.

 

What I would like to get to with this thread is:

1. Looking at Single Bars and discussing individual bars and their psychology IN CONTEXT

2. BUT BUT BUT- keeping in mind of the greater "landscape" of the chart.

 

I'm not looking to focus on one single bar necessarily to trigger trades in this thread (there is a lot of discussion about that on the web)

 

I was even thinking of going so far as to make up some type of "flash cards" it sounds like "trading 101" type stuff, but I think it would be beneficial- Just to drill myself- staying with the Dragonfly Doji example. If someone popped me that card and said, "What's your next move" the correct answer to the "card" would be "Where on the chart did it form?"

 

It is sort of taking the very basics of price action and going deeper into it at the same time.

 

You see a Spinning top form very quickly off a recent top? That means profit taking is occurring etc. See a down candle with a long tail just one or two bars out of the trend pullback- most likely that is the professional $ moving in to "put on the brakes" - but the downward trend most likely will continue- it is a "warning bar" of sorts- it is this type of discussion I hope to spark.

 

Just an intro Chart to show you what I mean:

 

 

A: You see just prior to it being a Wide Spread Bar with Buying on the bar, this bar (Bar A) shows another attempt to reach lower and failure. After a few bars of wrangling- you see the up move.

 

B. Now this isn't Identical but at bar "B" you have a very similar bar to Bar "A” But now at a Market Top- this bar has a completely different meaning and it is a "warning sign" of impending downward movement to come. We know this because of the preceding two bars show effort without results.

 

C&D: These bars show the "brakes being applied” These are not bars to short without further confirmation- they are bars that if you are short- you would pay attention to as a warning to tighten up stops or be ready to close your position soon.

 

Hope the text plus the chart assist in showing what I would like to try and discuss.

Aaron

[trader273 10]

Here is how i view trading candles. The most important thing is to find the support and resistance. Be it Market profile, trendlines, etc. For the chart I attached i just used the highs and lows. There is really no need to examine each and every bar, imo. Just need to watch the candles when they are approaching what you have defined as support and resistance.

 

[Sledge 13]

Excellent start to the thread.

 

trader273: I know that the norm is to look for the S/R points, and I agree with you 1000% that it is imperative to locate them and utilize them in trading. BUT I would really like to discuss the candles in the thread individually if possible. This exercise may be harder than people think it will be.

 

What I would like to get too is analyzing each candle and then taking a grouping of the individual candles to collectively see the bigger picture.

 

So as an example say we just take 10 candles to start. We analyze the 10 candles 1-by-1, then at the end of analyzing all 10 candles individually- what do they tell us collectively?

 

daedalus:

Yes I actually trade hourly and Daily candles. I know the larger the timeframe- the better the signal.

 

For our purposes though, this should be fine to use a 5 min, hour, 4 hr or Daily chart. Analyzing the meaning of each bar in context can be accomplished on any timeframe.

 

Aaron

[trader273 10]

 

What I would like to get too is analyzing each candle and then taking a grouping of the individual candles to collectively see the bigger picture.

What you are talking about is blending of candles. If you want to see four hourly candles together, open a four hour chart.

 

So as an example say we just take 10 candles to start. We analyze the 10 candles 1-by-1, then at the end of analyzing all 10 candles individually- what do they tell us collectively?

 

Aaron

 

Well, have fun with that. I think you are making this much harder than it needs to be. Bullish candles in a downtrend do not really mean that much if its not at an area of support. Now some might work, but if you get caught in a trend, good luck.

 

I don't see what benefit would come about from analyzing every candle. If you have read any candle book, one of the first things they talk about is using candles in the overall technical picture. What you are doing is zooming in dramatically on each and every candle and ignoring the big picture.

[Sledge 13]

What you are talking about is blending of candles. If you want to see four hourly candles together, open a four hour chart.

 

Well, have fun with that. I think you are making this much harder than it needs to be. Bullish candles in a downtrend do not really mean that much if its not at an area of support. Now some might work, but if you get caught in a trend, good luck.

 

I don't see what benefit would come about from analyzing every candle. If you have read any candle book, one of the first things they talk about is using candles in the overall technical picture. What you are doing is zooming in dramatically on each and every candle and ignoring the big picture.

 

I'm not trying to spark debate with anyone, I'm just attempting to view this landscape a bit differently than it has been done in the past. Let me try to explain it this way:

 

When you learn to play an instrument. You go through the almost painful experience of learning- one note at a time. That one note you have to learn what it not only looks like, but also what it sounds like correct? Ok after you master the one note (reading it and playing it)- you can move onto another note. Over time you have all of the "notes" learned and memorized. You know what they look like in print and you know what they sound like in your mind.

 

After your training of each individual note- you can pick up a piece of sheet music and can acutally read the paper and hear the song start to play in your mind- long before fingers meet the strings. Without the "boring" part of learning each individual note- a piece of sheet music may as well be a foreign language to you.

 

I'm just trying to spark further conversation about the "notes" before I attempt to play the entire piece.

Aaron

[trader273 10]

Then the mod should change the thread title then. This is anything but candles in context. It should be named, candles: one by one, or Micro-view using candlesticks. I dont want a newbie coming here and then getting focused on each candlestick, because they think thats what candles in context are, when in reality whats being talked about here is the complete opposite.

[MC 10]

Then the mod should change the thread title then. This is anything but candles in context. It should be named, candles: one by one, or Micro-view using candlesticks. I dont want a newbie coming here and then getting focused on each candlestick, because they think thats what candles in context are, when in reality whats being talked about here is the complete opposite.

 

I agree that looking at each candle, indicator level or anything in isolation renders the conclusion near useless. The market is all about context, it's used to derive perceived valuation and place a high probability bet. How can 1 candle fit the title of "in context"?

[darthtrader2.0 10]

I agree that looking at each candle, indicator level or anything in isolation renders the conclusion near useless. The market is all about context, it's used to derive perceived valuation and place a high probability bet. How can 1 candle fit the title of "in context"?

 

See this is actually why my brain refuses to get into candle patterns. If one unit of representing data does not have meaning but 3 do...then there should be a better way of representing data by combining what gives those 3 units meaning.

To me a good example is the good ol doji on a 5 minute chart.

Instrument X opens at 100, volatility is high for the day so a massive spike on the NYSE TICK sweeps instrument X to 105, 30 seconds later price falls back to 100 and drifts down over the next 2 minutes to 95, then slowly drifts back up over the next few minutes to close near 100.

Another day Instrument X opens at 100, volatility is low for the day. Instrument X opens time wise 5 ticks below the top of a range, price sits between 99 and 101 for 4 minutes, the test of the top of the range comes quickly after 4 minutes, price is rejected down to 95 quickly...buyers step and defend the top of the range and move price back to 100 over the next minute..bar closes, 20 seconds into the next bar the range breakouts and price blasts to 110.

Both are dojis, both are totally different information wise. Obviously a skilled candle trader would pick up on the totally different context of the doji in those two situations, the newb would not. What I question though is that there is not a better way to summarize the movement of the underlieing ticks that make up both dojis, considering that if you changed your chart to a 1 minute candle chart, you would see a candle pattern and not a doji, and would see a different candle pattern in each instance.

[Guest forsearch]

How would one interpret a doji candle on a constant volume chart then?

[brownsfan019 17]

How would one interpret a doji candle on a constant volume chart then?

 

Depends FS. A doji in and of itself is meaningless w/o a chart to examine. A doji in the middle of a range IMO means absolutely nothing. A doji that is retesting a HOD or LOD in a double/triple top type setup is a different story.

 

Equally important - what constant volume setting is being used? A 500 or 25,000 setting? What market(s)?

 

Not nearly enough information in your question to provide any real response.

[darthtrader2.0 10]

How would one interpret a doji candle on a constant volume chart then?

 

ehh, damn that was fast.. I was going to try to build an arguement towards constant volume charts but I guess its always good to cut to the chase.

To me the problem is no different on volume charts than with the previous time based example as far as respesenting each tick. The problem for me is that the body of a candle is formed by whatever time frame or volume level you decide to chart it as. Just because software developers decide to make the defaults 1,3,5 minutes or 100, 200, 1000 volume wise does not mean that is the optimal way to summerize the underlying tick data. The biggest variable in what patterns are displayed in the summary of the tick data depends on what time or volume variable is chosen...if it makes no sense to display a 4 minute and 39 second chart or 527 volume chart, then to me you need to prove that a 5 minute or 1000 volume chart has utility over the former or your simply accepting randomness in your analysis that could be cut out.

How to cut out that randomness I do not know at this point, but to me that is a very interesting discussion.

[Sledge 13]

 

Ive said it million times before, and Ill say it again: Candle Patterns, by themselves, will make you go broke.

 

Thus the reasoning for looking at an individual candle first. Then placing it into the greater context of the puzzle.

 

I had little reason to believe that a simple concept of discussing candles, their formation and what that candle says to the trader looking at it would ruffle so many feathers.

[trader273 10]

Thus the reasoning for looking at an individual candle first. Then placing it into the greater context of the puzzle.

 

 

You got it backwards there. You look at the overall picture first, THEN a candle pattern to support your idea. You dont look at candle patterns and then try to get the bigger picture to fit those ideas. That's why candles are secondary, not primary.

[sevensa 10]

I had little reason to believe that a simple concept of discussing candles, their formation and what that candle says to the trader looking at it would ruffle so many feathers.

 

Hi Sledge

 

I think the "issue" and what the other people are alluding to is with what you are saying above. Maybe I am not understanding clearly what exactly it is you want, but when you say "...simple concept of discussing candles, their formation and what that candle says to the trader looking at it...", this is the core of the whole issue. A candle pattern by itself doesn't tell you anything and this is a rather pointless excercise to identify them all, although there are several resources giving explanations on what a specific pattern is supposed to mean. Is this what you are looking for?

 

You did mention context, but when trader273 said candle patterns are more relevant at Support/Resistance, you shot that down and say you just want to talk about individual candle patterns. Isn't Support/Resistance context? I think maybe this will be helpful if you can give us an idea of what you mean by context, if you don't consider S/R as context?

 

If you really do not want to talk about context, but just about specific candle patterns and what they mean, maybe this would be easier to look at some of resources Brownsfan has posted with regards to candle patterns elsewhere?

 

I noticed you used to be fairly active on the VSA thread. The same goes for that. This is easy to identify a "no demand" bar, but without looking at where it occurs, it is not really telling you much. If someone post the exact same text you use here on the VSA thread, but instead of using "candle formations" use "VSA formations", would that sound like a logical approach to you to want to look at just the formations and disregarding the big picture?

 

Somehow I suspect though that there is a misunderstanding here on what it is you really are trying to do here. Maybe you can try to explain this again?

[Sledge 13]

Hi Sledge

 

I think the "issue" and what the other people are alluding to is with what you are saying above. Maybe I am not understanding clearly what exactly it is you want, but when you say "...simple concept of discussing candles, their formation and what that candle says to the trader looking at it...", this is the core of the whole issue. A candle pattern by itself doesn't tell you anything and this is a rather pointless excercise to identify them all, although there are several resources giving explanations on what a specific pattern is supposed to mean. Is this what you are looking for?

 

You did mention context, but when trader273 said candle patterns are more relevant at Support/Resistance, you shot that down and say you just want to talk about individual candle patterns. Isn't Support/Resistance context? I think maybe this will be helpful if you can give us an idea of what you mean by context, if you don't consider S/R as context?

 

If you really do not want to talk about context, but just about specific candle patterns and what they mean, maybe this would be easier to look at some of resources Brownsfan has posted with regards to candle patterns elsewhere?

 

I noticed you used to be fairly active on the VSA thread. The same goes for that. This is easy to identify a "no demand" bar, but without looking at where it occurs, it is not really telling you much. If someone post the exact same text you use here on the VSA thread, but instead of using "candle formations" use "VSA formations", would that sound like a logical approach to you to want to look at just the formations and disregarding the big picture?

 

Somehow I suspect though that there is a misunderstanding here on what it is you really are trying to do here. Maybe you can try to explain this again?

 

sevensa-

I think you are correct that their is a misunderstanding. I didn't want to bring any VSA "schtuff" into the Candlestick Corner, but maybe to help with the clarification side of it- I can utilize a VSA example to clarify this topic.

 

Ok we have in VSA a "No Demand bar" as you stated. That is an up bar with volume less than the previous two bars. That bar- by itself means virtually nothing. But if you place that bar in the context of the chart after a wide spread bar up- it has a lot more significance. That exact bar placed at the bottom of a bear run means that we are not ready to rise just yet. That same bar at the top means we are exhausting. Add a few more of those at a market top together and we get a stronger justification for going short.

 

I am not shooting down ideas of candles or candle formations at S/R- I know they are significant and VERY worthwhile. Any spotting of exhaustion at either S or R is significant. So please do not think I am trying to shoot down the idea in any way.

 

Not sure if that helps.

Aaron

[brownsfan019 17]

Aaron - I did my best to clean the thread up, let me know if I missed something.

 

And now back to the regularly scheduled thread already in progress.

 

:thumbs up:

[larsdelgars 10]

sevensa-

I think you are correct that their is a misunderstanding. I didn't want to bring any VSA "schtuff" into the Candlestick Corner, but maybe to help with the clarification side of it- I can utilize a VSA example to clarify this topic.

 

Ok we have in VSA a "No Demand bar" as you stated. That is an up bar with volume less than the previous two bars. That bar- by itself means virtually nothing. But if you place that bar in the context of the chart after a wide spread bar up- it has a lot more significance. That exact bar placed at the bottom of a bear run means that we are not ready to rise just yet. That same bar at the top means we are exhausting. Add a few more of those at a market top together and we get a stronger justification for going short.

 

I am not shooting down ideas of candles or candle formations at S/R- I know they are significant and VERY worthwhile. Any spotting of exhaustion at either S or R is significant. So please do not think I am trying to shoot down the idea in any way.

 

Not sure if that helps.

Aaron

 

the name of this thread is "candles in context" and yet it seems you don't want to talk about S/R as context. Since this is the case... why don't you let us know what you would like to use to establish context... for example... long shadows... solid wide range bars... etc... these are candles that can establish context.... however they really reflect the hidden S/R anyways so really its just another layer of abstraction...

 

maybe it would be actually useful if we first create a list of candles that can be used as context... then move forward and interpret other candles within the context of these "context" candles.

[CandleWhisperer 10]

Dojis:

 

We will start with the three main types.

 

1. Close on the top(High).

2. Close on the bottom (low).

3. Close in the middle of the range.

 

If you divide the candle into three 3 equal segments and label them from the bottom 3,2, and 1. We can talk about the first Doji as 1-1. This implies the open was in the top third and the close was in the top third.

 

This candle represents an "approach-avoidance type of behavior. The market opens, starts to move in on direction and then comes back to where it started. The wick can be seen as sellers selling as it moves down and then buyers buying as the candle moves up. Net effect is to be back where we started. Hence, we KNOW that the sellers where in charge at the beginning of the day and the buyers where in charge at the end. How else can this candle develop?

 

According to Bill Williams, 85% of the time the market will change directions within the next 1 to 5 Candles of the same duration of the candle you are examining when you see this 1-1.

 

Obviously, the same holds true but in the opposite when dealing with 3-3, a Doji with the close equal to the open on the low.

 

The 2-2, close and open in the middle is neutral. We can't really know who was in charge at the open or the close of the day.