Sami Abusaad-Strategic Day Trader | Candlesticks Guide – T3 Live

Candlestick Charts-The Ultimate Guide-Lesson One

The Strategic Day Trader with Sami Abusaad

Hello, I am Sami Abusaad, Director of Education at T3 Live.

Welcome to today's lesson. I am starting a lesson series on the simple art of trading, going over simple stuff initially, and then kicking it up a notch with every lesson. Today's lesson is going to be about understanding candlesticks.  

I know that you might think you know how to read candles pretty well, but stick around with me for a few minutes and see for yourself.

Why Most Traders Use Candlestick Charts

First, let’s discuss why we use candlesticks. Japanese candlesticks focus on the relationship between the open and the close of a single bar while the Western bars focus on the close of a bar versus the prior period's close. As long as the underlying stock closes higher than the prior day's close, Western thought says it's positive.

However, according to the Japanese view, this is not necessarily the case. If on an up day, the stock closes below its open, the Japanese would regard it as negative. The use of Japanese candlesticks help us determine who won the battle between supply and demand, which is the most important element of technical analysis.

I underlined that for a reason. It’s worth repeating: The most important element of technical analysis is determining who is in control and who is winning the battle: the buyers or the sellers.

How To Tell Who Won: Candlestick Chart Overview

When it comes to Western bar charts, as long as the stock closes above the prior day's close, or above the last bar's close, they say it's bullish. But according to the Japanese view, this is not necessarily the case. For example, let's say Microsoft were to open high and then sell off all day at the lows.

Even though it might have closed above yesterday's close, it is not bullish at all according to the Japanese view. So Japanese candlesticks look at the candles bar by bar, on a bar by bar basis.

And it all depends on which group is in control.

candlestick chart

If the stock closes above where it opened, it is said that the bulls won that battle, right? It's always a battle between the buyers and the sellers. If the stock closes below where it opened, it means that the sellers must have won that battle. Otherwise, price would not have dropped.

There are a few things to be aware of when it comes to a single candle, and it is the high and the low, which are the same for whether it's red or a green candle. The highest high, the lowest low, on the candle is the same. But if it's a green candle, it means the open must have been at the bottom of that green, and the close was at the top of it.

Vice versa if it's a red candle.

The open is at the top of that red, and the close is at the bottom. If it's red, you can tell it closed below where it opened. Now what's the last reference point? It is not necessarily a reference point. It is the body of the candle, which shows the difference between the close and the open.

That's called the body of the candle. The bigger the body, the more bullish it is, or the higher the degree by which the buyers won the battle.

candlestick chart example

When the Bulls Win

This graphic shows you every type of candle that you can get. The first one opened at the low and rallied to close at the high. There was an absence of sellers, so it’s all out bullish. The second candle opened low.

I know this because it's a green candle. It rallied all the way up to the top, and, before the candle had finished forming, the sellers showed up and forced prices to close lower. Since the stock closed higher than where it opened, which mean traders had bet on the bulls, investors would have made money.

Which group was in control at the end for the first bar? Was it the buyers or the sellers? You guessed it – the sellers, of course. In the second example, the sellers pushed back and forced prices to close in the bottom third or so.

That's a bear signal. In the third, we left the topping tail behind. A topping tail is bearish because it's the negation of what was previously a green bar. Those were buyers that bought the stock all the way up to the top, and now they're sitting on a losing position, because most people don't buy and sell in the same bar.

They buy to hold for another three, four, five bars before they look to exit. And, in this case, they're sitting on a losing position. Topping tails are bearish because they trap people, signaling that the sellers basically took back the control.

And in this particular case, the candle also closed in the bottom third. So, while the buyers indeed won the battle, the message is actually bearish, not bullish.

The third and fifth candle are very similar in that we opened in the center, rallied, sold off, and then rallied back up to close slightly above where we opened, meaning they are slightly bullish. It really depends on where it is forming in the trend, or on the chart.

That’s something will discuss later. It depends on the location. Number four is a bottoming tail. This is a green candle, so I know it opened at the bottom of the bar. Initially it was a big red candle, but before that candle had finished forming, buyers showed up and forced prices higher to close at the very top. If that's not bullish, then I don't know what is.

This is the ultimate sign of bullishness, because not only did it reverse what used to be a big red bar, it also closed at the absolute top.

But in this case, what's the difference between number one and four? The difference is that number four is battle tested. The buyers were battle tested, and they won the test. In number one, the sellers weren't around. What if on the next candle we got a big red candle? The first one doesn't show us really the other side of the equation – the sellers.

The fourth one shows us the sellers, and that they were crushed. Number five, we already went over. It’s just like number three.

candlestick charts battle

When the Bears Win

Now on the right side of the slide, the set of red candles is the same as the green candles that we went over, except in reverse. In each and every case, if you shorted the stock, you'd have actually made money. But in number nine, the message is that the stock reversed most of the red to close near the top, which is bullish.

Number seven was the most bearish, followed by number six.

But it also depends on whether number six was an igniting wide range bar, or an exhaustion wide range bar. We'll talk about these in upcoming lessons.
At the bottom of the graphic, we have a bottoming tail and we have a topping tail. If there is no body to the candle, or the body is just a black dot, it means we closed where we opened.

It opened high, sold off, and then rallied to close at the top, leaving a dark wick.

The buyers and the sellers are evenly matched, but in this case it is still considered a very bullish candle, simply because the buyers took back the control.

Let’s use the example of a vacation. When you go on a vacation, everything is going right. And then on the last day, everything goes wrong. You missed your flight, or you have some kind of an accident.

When you look back at that vacation, how do you feel about it? Would you think of it as a great vacation? Maybe not.

To bring it back to the candles, even if number nine was red, the ending is everything. Or even though this was a bullish candle, everything was going great on that vacation, but at the end was pretty bad. So in this case, I would think of it as a bearish candle, even though it's a green candle.

Again, even though the one on the right was red, it's bullish. The one on the left is green, so it's bearish. One more time, those are called bottoming and tapping tails. The difference between one and four depends on how and where they formed.

Number four, as we said, is battle tested. Number one wasn't.

candlestick charts time frames

Here's how a candle like number one in the previous graphic forms: you get the red on a smaller time frame, and then it's reversed through green bars. But, if it's reversed through multiple green bars, that's not necessarily as bullish as getting reversed through one igniting bar, or with a base beforehand.

This would be a really good bullish way to form this bottoming tail, but not so much when it happens through multiple green bars in a row.

Do you know why?

Because, for red bars, it works well when you reverse them in just one big green bar, or one big green bar in a sideways base. When you reverse them quickly like that, it leaves the sellers trapped, with not much time at all to cover.

If the stock goes up with multiple green bars in a row, and slowly reverses those red bars, that's somewhat bullish because it gave the sellers time to cover.

The same is true with a wide range green bar. We don't want it to form with multiple bars. We would rather see it form through just one igniting bar and multiple small bars, and maybe then one breakout bar.

So, you have to look at the smaller time frames and determine how the candle actually formed.

advanced candlestick charting

What’s Coming Up

In upcoming lessons, we'll talk about other advanced uses for candlesticks. We'll talk about wide range bars, narrowing or narrow range bars, and what they mean. In narrow range bars, I like to think of the example of a car making a U-turn.

You don't turn the other way. You don't get the reversal unless you actually slow down and then make a U-turn while driving. Just like that, narrow range bars often signal they're reversal. In fact, the market's biggest moves come from its smallest bars.

That is kind of a trading law.

We'll talk about that in more detail in upcoming videos. We'll also talk about two bar reversals, as well as the potency of the reversal when a second, red bar reverses. We'll talk about the level of penetration and the size of the bar.

candlestick chart analysis

We'll also talk about wide range bars. Plus, in more detail, we’ll discuss topping tails, bottoming tails, and range expansion bottoming tails, which are the single most bullish bars you can have.

Until next time, this is Sami Abusaad with T3 Live. Good trading, everybody.