You can’t skip straight to advanced candlestick analysis without knowing some basics first. If you don’t know the basics, that’s fine, I got you covered!
The Truth About Candlestick Analysis
When Forex traders first start out they usually learn about candlesticks.
But what they learn is usually useless.
They normally see a list of “candle patterns” like the one below. Each pattern has a set in stone definition and that is the only meaning it can have.
This is not candlestick analysis, it is pattern recognition.
And for a price action trader, it is useless.
Actually, it is worse than useless. Thinking about candles as just patterns is counterproductive. It makes you a worse trader, it leads you to make massive mistakes.
Giving a pattern a set definition leads to tunnel vision. When you see that specific pattern, you assume that something will happen.
But that is not how candlesticks work.
All candlesticks need to be assessed based on the candlesticks around them, and many other factors.
Below is a candlestick pattern commonly called a “spinning top”.
Normally people say that a spinning top means a reversal is imminent, which can be true. However, this same pattern can also mean that a continuation is imminent. It can mean that price is temporarily stalling.
It can mean a lot of different things.
Thinking of candles as simple patterns is the wrong way to do things.
You need to look beyond the pattern and read the story of price.
What’s an Indecision Candle?
Indecision candles occur when neither buyers or sellers can gain and maintain control of price. They are common, but if used in the right way, they can be very powerful.
Take a look at this bullish trend (yellow highlight), it is a strong trend, there are several bullish candles heading towards an area of resistance. The big bullish candles tell us that during the highlighted period buyers were in complete control of price.
When price hits resistance we get an indecision candle forming (green highlight).
Let’s break this candle down into a story so you understand why it indicates indecision.
Large Upper Wick (Blue Highlight)
A large upper wick shows that buyers tried to continue the bullish trend but failed. Sellers took control of price and pushed it down.
Small Bearish Body (Green Highlight)
The small bearish body shows that sellers were able to close lower than the open. This is significant because in the three candles before this price consistently closed higher than open. This shows us that buyers are losing power.
Small Lower Wick (Red Highlight)
The small lower wick shows us that sellers were not able to gain much ground either. This tells us that sellers are not strong enough to turn price around completely. However, they are strong enough to stall further buyer movement.
All together this indecision candle forming right after strong bullish candles suggests that power has shifted from a decidedly bullish (buyer) market to an undecided market. While sellers are not in control, neither are buyers.
But there is one more thing we need to look at
… The indecision candle is forming on top of a resistance area. Let’s looks at this chart again.
If you remember, in the previous chapter we talked about resistance being a sell area and support being a buy area.
So the image above shows us three strong bullish candles heading into a resistance area. And then…
Price stalls and we get indecision forming on top of that area.
This tells us that the sell area is working. When price pushed into that area sell orders triggered and buyers could no longer continue up.
That is the story of price for this chart.
And this story gives us a nice little price action trade setup.