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Price Action Cource CHAPTER 4: PRICE AND CHARTS

CHAPTER 4:     PRICE  AND CHARTS

Now, let’s study price in a little bit more detail…this stuff is for the newbies…please skip this section if you think you know!

What is price?

Price is value given to a particular instrument usually in monetary terms and its value is dependent on supply and demand.
  • If the demand is more, price increases as more traders start buying and driving prices up.
  • Demand zones on your price charts are around support levels, that’s where buyers come and start buying and driving prices up!
  • If there is an oversupply, price falls as there are more seller and less buyers.
  • Supply zones on your charts are on and around resistance levelswhere sellers come in and drive the prices down due the fact that there are very few buyers.
Every time you open up your charts, all you are seeing are the forces of supply and demand at work!
If the market is going up, what does that tell you about the demand and supply then? It means there’s a lot of demand for that instrument.
Or what if the marketing is going down then what does that tell you about the demand and supply then?  There’s a less demand and lots of supply.
But there’s something else about price…it has a time component.
So the price of something today will not be the same tomorrow or in a month or in a year. Supply and demand over time drives up and down the price.
But how do you represent the value of price over time which in turn tells you of the supply and demand forces?
Answer: You need price charts:  price bars, candlestick and line charts. These are graphical and visual representation of price over time, thus telling you a story about supply and demand forces over a certain time period which can be 1 minute up to one month or year.

3 Main Types Of Price Charts

Price over a period of time is graphically represented in 3 main ways:
  1. with a bar chart
  2. a candlestick chart
  3. or a line chart.
Now, I will go through each on of these 3 main charts…

What Is A Bar Chart?

The chart you see below is a bar chart.
Those green and red thingies are called bars. The green bars are bullish bars which simply means that the closing price is higher then the opening price withing a certain time period.
Those red bars are bearish bars and that means that the closing price is lower than the opening price for that period of time.
The bar char chart is simply looks like a “stick” or bar with 2 short knobs on both sides. The knob on the left is the opening price and the knob on the right is the closing price.
Then there’s the wick on the upper end and the lower end. The highest point or level of the wick on the upper end is the highest price that was reached during a certain timeframe or period and the lowest point of the lower wick is the lowest price that was reached also during the same time frame or period.

What Is A Candlestick Chart?

The chart below is an example of a candlestick chart.The candlestick chart conveys the same information as in the bar chart above, the only difference is that a candlestick chart has a body and a bar chart has not body.
A candlestick chart…to put it in another way is like putting a body over a skeleton of the bar chart!
Here’s a comparison of the Bar chart vs the candlestick chart and note how they convey the same information:
barchart vs candlestick chart
That’s the only difference between the bar chart and the candlestick chart…is that the candlestick chart has a body and the bar chart does not.
The red colour is most often used to indicate a bearish candlestickwhich means the price opened up high and closed lower. A green candlestick represents a bullish candlestick and is the exact opposite.

What Is A Line Chart?

This line chart below is based on the same price information as the bar and candlestick chart shown above.
As you can see, even though, it conveys the same price information over time but does not reveal everything.
  • The line chart is one of the least favorite of charts for trading.
  • A line chart is simply drawn by connecting either the closing, high or low price and that’s how you get the line on a chart.
  • Line charts can be useful for looking at the “bigger picture” and finding long term trends but they simply cannot offer up the kind of information contained in a candlesticks chart.
Out of these 3, the candlestick chart is the most popular followed by the bar chart. So from here on, I will be only focused on candlestick chart only but I may end up using the word bar  to refer to candlestick pattern as well so just be aware of that.
I will talk more about the candlestick (and candlestick charts) as this is the bread and butter for price action traders.

The candlestick

  • The candlestick chart had its origins in Japan and can also be referred to as the Japanese candlestick chart.
  • The colour of the candlestick chart tells you if price was up or down in a particular timeframe which means that candlesticks are either bullish or bearish
Now most traders prefer to set green candlesticks as bullish and red candlesticks as bearish. And I like it to be that way for me personally.
  • Some broker’s trading platforms have options where you can change the colours of the candlesticks to any colour you want. If you are a woman, you may change a bullish candlestick to pink! And bearish candlestick to Purple! (I have never seen a pink and purple candlestick yet).
This candlestick shown below is an example of bullish candlestick.
  • A Bullish candlestick simply means the price opened lower and closed up higher after a certain time period, which can be 1minute, 5minute, 1hr or 1 day etc.
  • The candle body represents the distance price has moved from the opening price to the closing price. The longer the body, means price has moved a great deal upward after opening. The shorter the candle body means the exact opposite.
  • The high is the highest price that was reached during that time period.
  • The low is the lowest price that was reached during that time period.
All these candlesticks shown below are bullish candlesticks which mean that their opening prices was lower than the closing prices and therefore reflect and overall uptrend in the timeframe each candlestick was formed:
Now, the candlestick shown below is an example of a bearish candlestick.
A bearish candlestick simply means that the candlestick opened up at a high price and closed lower after a certain time period:
All these candlesticks shown below are bearish candlesticks meaning that the opening price was higher than the closing price, therefore reflecting a downtrend:

Understanding Buying and Selling Pressure on Candlesticks

Did you know that there are bullish candlesticks that are considered bearish and bearish candlesticks that are considered bullish? To really understand this concept, you need to understand buying and selling pressure.
You see, every candlestick that is formed tells you a story about the battle between the bulls and the bears-who dominated the battle, who won at the end, who is weakening etc. All that is reflected in any candlestick you see. The length of the body of the candlestick as well as the shadow (or wick) tells you a story about the buying and selling pressure.
For example, look at the two charts below:
Look at the first green candlestick on the left chart, it’s a bullish candlestick right? Yes.  But you can see that it has a very short body and very long wick (tail).
It tells you the sellers (bears) were dominant. If this candlestick was to form after hitting a resistance level, it will be considered a bearish signal even though it’s a bullish candlestick.
Now, you can apply the same sort of logic to all the other candlesticks above and read the story each one is telling you.
  • If the upper wick is very long, it simple tells you that there’s a lot of selling pressure. It means price opened and got pushed higher by the buyers but then at the highest price, sellers got in and drove it back down.
  • If the lower wick is long, it tells you that there’s a lot of buying pressure. Sellers drove the price down but buyers got in and drove the price back up.
  • If the lower wick is short, it tells your there’s very minimal buying pressure.
  • If the upper wick is short, it tells you that there’s very minimal selling pressure.
What about the length of the body of candlesticks?
  • The longer the body of the candle indicates very strong buying or selling pressure.
  • A short body of a candlestick indicates little price movement and therefore less buying or selling pressure.
  • Sometimes the candles will have no upper or lower shadows but with very long bodies. These are interpreted the same way as standard candlesticks but are an even stronger indication of bullish or negative market sentiment.
  • In the case of bullish candle, prices never decline below the open. In the case of bearish candle, price never trade above the open. See below:

Now, so far we have looked at individual candlesticks…what if you combine more than one candlesticks? What does it show you?
  • Well, one important thing that group of candlestick can show you is how strong or weak a bullish or bearish move is.
  • They can also tell you if the bullish or bearish move is weakening.
  • The word used to describe such a situation is momentum.
The chart below shows 3 bearish candlesticks in a downtrend, each with decreasing length and body lengths.
In a downtrend situation, when you see such happening, it is one signal the that downward trend is weakening.
And if this happens around support levels, you should sit up and take notice and also watch for bullish reversal candlesticks which will give you the confidence to buy!
The following chart below shows you an example of decreasing downward momentum as price nears a support levels.


What you will see is that the prior candlesticks will tend to be longer and as price nears the support level, the candlesticks starts to get shorter:
This next chart below shows 3 bullish candles in an uptrend each with decreasing lengths. In an uptrend, when you see such happening around resistance levels, you should take notice. Also watch for bearish reversal candlestick patterns to form. This will give you the confidence to sell:
Here is an example of a bullish momentum decreasing in an uptrend and then price tumbles right after that :
Notice (on the chart above) how the bullish candlesticks had increasing lengths and then gradually decreased as the price went up then followed by a big downward fall/move?
That’s price momentum. Every time you look at your charts, you need to be aware of such. Very important!

Candlestick Wicks-Why They Are Important

The wicks of candlesticks along with the body tell a story. A wick which can be called a shadow or tail of a candlestick is a line situated above and below the body of the candlestick.
How are candle wicks (tails/shadows) formed and what do they mean?
  • Well, they are formed because of a change in market sentiment.
  • For an upper wick, price is moving up and then market perception is changed by traders and then price is pushed down towards the open by sellers. That’s how the upper shadow is formed.
  • For the lower shadow, price is moving down but the market sentiment changes and price is pushed up towards the close buy the bulls. That’s how a lower wick or shadow is formed.
Longer wicks indicate increase change in market sentiment:

What is the Significance of Candlestick Wicks?

  • Candlestick wicks with long upper shadows commonly occur when an uptrend is losing strength.
  • Long lower shadows occur when the downtrend is losing steam.
Ok, that’t the end of chapter 4 of the price action trading course….now lets head to chapter 5 where you will learn about trends.