Market Psychology By Candlestick Body
Market psychology means the sentiment of its participants. Namely, the intentions and strengths of buyers and sellers. A correct interpretation of the market psychology by Japanese candlesticks can give a hint about an imminent trend change or confirm the current price direction.
Market psychology is determined mainly by the size of the candlestick body:
- If you find a long green (or white) candlestick emerging after relatively short ones, this indicates the growing strength of the bulls. In the near future, the chart is likely to continue to grow. It is worth considering opening a buy trade.
- A long red (or black) candlestick after short ones signals the dominance of bears. They gained enough strength to push the price down significantly. Soon, the market will likely continue to fall. In this situation, it will be correct to sell.
- Several candles with a medium-sized body indicate the equality of both sides. In the near future, the market might go flat (start moving sideways). Or you can expect a pullback of the trend. Be careful not to enter into rash trades.
The formation of an opposite candlestick after a strong trend might signal an imminent market reversal. If you notice a downward candle with a rather large body after constant growth, this might signal to close your buy positions, if any, and prepare for a new trend.
The breakout of the price level also tells quite clearly about the further behavior of the market:
- Closure of a bearish candle below support line gives a signal to open a short position (sell trade)
- Closure of an upward bar above the resistance level implies further growth - open a long trade (buy position).
Sentiment by Shadows
A long shadow, or a pin bar, also provides lots of useful data to the experienced trader. A long tail is formed when one of the parties desperately tries to push the price in the right direction but loses strength. This lost strength signals an imminent trend change.
If the strengths of buyers and sellers are equal, you might see a doji. It’s a candle with shadows but no body. The appearance of this pattern almost always means a market reversal.
Candlestick Sentiment
This term was proposed by the famous trader Lance Beggs. Candlestick sentiment might determine where the chart shall move next. There are three main types:
- Bearish - the candlestick closed below the previous low
- Bullish - the bar closed above the previous high
- Neutral - the candlestick closed in the range of the previous bar
Lance Beggs also suggested to determine the strength of this sentiment by checking in which third the candlestick has closed. To do this, you need to mentally divide the entire bar (including shadows) into three parts and see where the closure took place: in the upper, middle, or lower third.
If you want to become a successful trader, interpreting Japanese candlesticks correctly is one of the first skills you should master. I hope these articles will help you with this.