People seem to think that since they hear that so few people are successful in trading, that there must be a complicated process to complete in order to make money. The truth is, that the simpler we make trading, the more profitable it seems to be. Many traders and investors often seek out complicated indicators, so this week I decided to discuss a simple technique that is often overlooked when traders are reading charts, specifically candle charts. We are all too quick to look at the squiggly lines we call indicators and oscillators and dismiss the simplest signal available to us, PRICE!
The most common way that price is displayed for most traders is through candle charts. If you are not familiar with the construction of a candlestick, I have included the quick reference below. There are two parts to candles. The body of the candle is the colored portion and indicates the opening price and the closing price of the candle. The lines sticking out from the top and or bottom of the candle’s body are known interchangeably as tails, shadows, or wicks.
A green candle usually indicates strength in price and is formed due to price closing higher than it opened during that period. The bottom of the body is the opening and top is the closing. Conversely, the red candle indicates weakness due to the closing price being lower than the open for that period. The top of the body of a red candle is the opening price and the bottom of the body is the closing.
The problem is that many traders end their candle analysis there. You must look to see what the tails (wicks, shadows or whatever else you wish to call them) are telling you. These tails mark the highs and lows of the period. If I asked you what the candle below signifies, you may tell me weakness since it is red.
However, with further examination, you will see that there is a long tail to the downside. This means, that even though the bears pushed the price lower, there was enough bullish pressure to move price higher before the close of that period. This is a bullish candle! Let’s look at the candle chart to see where it was in the whole trend.
This red candle indicated that we were ready to bounce off demand with a lot of bullish pressure. You must listen to the tale the tails are telling you. Any candle tail that is above the real body (colored portion of candle) tells that the bulls were not able to hold price up and the bearish pressure moved prices downward. Any tail below the body indicates buying pressure.
This becomes especially important when price is nearing a level of demand and/or supply. By seeing which force is winning (bulls or bears) we can anticipate a bounce or break of that price level and take appropriate action.
Supply and demand are economic forces that determine price. This is especially true when looking at the financial markets. We can use the same tools for reading supply and demand as the professionals do. We just must refer to the candle charts instead of incoming orders from clients. Remember that price gives us clues as to the immediate direction the stock will go. We just must be open to viewing it and listen to the tale of the tails!
This is one key factor for my trading success. There are several others that we teach in the Professional Trader course. Be sure to stop by your local Online Trading Academy office to see one of our many superstar traders/instructors for an educational experience you won’t ever forget!