Price Action, as the name goes by, represents the movement of prices during a particular period or session. The best thing about price action is that, it can be easily applied to majority of financial instruments . Traders use candlesticks charts on different financial instruments which could include commodity, currency pairs, stocks , futures, base metals.
The most common ways in which traders interpret price action is by using charts. I will list out how candlestick charts are constructed and understand the movement of prices.
A Time frame represents price action of market during the particular period of time. There are various time frames out there in the market from 1 min chart to a 1 month chart. You can also checkout more on time frames using this link over here.
Traders use these time frames in combinations to achieve profit on their trades. An investor uses a monthly chart or a weekly chart to identify attractive prices to invest in the market. A Bullish Candle represents the session in which buyers are emerging as the clear winners and a bearish candle represents a session in which the sellers were the winners. Trading is a tug of war Between Bulls and Bears. Bull is an acronym which is used in the industry, because when a bull strikes, it strikes from bottom to top and when a bear strikes, it strikes from top to bottom. So a bullish move or session would mean in short, that the prices have increased and a bearish move or session would mean that the prices have decreased.
Candlesticks charts are very popular among the trading community. Candlesticks date way back to the 16th century. These charts were first used by Japanese rice traders who used four critical important points for constructing their charts, which are Open Price, Close Price , High Price and Low Price of the day.
The First Candle in the above Diagram is an Example of Bullish Candle. A bullish candle will have it’s Opening Price at the Bottom and the Closing Price at the Top and the Shadows On the Candle represent the Highest point and the Lowest Point of the Session.The upper shadow will represent the highest point and the lower shadow will represent the lowest point of the session.
A bearish Candle will be opposite to the Bullish Candle. The opening price will be at the top and the closing price will be at the bottom of the candle. The upper shadow will represent the highest point and the lower shadow will represent the lowest point of the session.
Doji or Spinning Top
This is the basic premise of the candlesticks, but there is another type of candle which has many names such as spinning tops or doji. These type of candles form with a very small body and the shadows of the candle will be greater than the size of the body. These type of candle means that there is no clear winner in the session. These candles also means indecision among the traders.
In the above chart, focus on the candle with the arrow mark. That candle is a perfect example of a spinning top Candle. This candle tells us that neither the bulls or bears were victorious in the session, because when price was at the highest point of the session, they got tired and they were unable to push the prices even higher and the bears kicked in and drove the prices down. Similarly, at the lowest point of the session the bears were unable to drive the prices more lower. This is when the bulls stepped in and drove the prices up but they were not able to close the prices above the opening price of the session.
In the next post we will look at Bar Charts and Line Charts.