This is one of the most important concepts candlestick analysis, so pay close attention…
Now, what is price momentum?
Price momentum is an approximation of the strength of a price move. As a start, we can gauge the momentum of a candlestick by the length of the real body:
• The longer the real body, the stronger the momentum
• The shorter the real body, the weaker the momentum
Now try to answer this question:
Which of these candlesticks shows stronger momentum?
Take a moment to think about this, and proceed only after you’ve decided on your answer.
Did you guess the candlestick on the right? If you did, good job!
So how do we know that the candlestick on the right had stronger momentum?
Answer: Because prices closed further (i.e. higher) up, or, because the candle had a longer real body.
But that’s not all… there’s more to this.
You see, the length of the shadows matters as well.
Here’s what I mean:
As you can see, the longer the shadows, the weaker the momentum.
Now think about this: why do long shadows indicate weak momentum?
Ready for the answer?
Because long shadows tell us that the market price did not move strongly in one direction. Long shadows are the result of significant fluctuation of the market price.
Fluctuating prices are like a swerving car… they have trouble accelerating in one direction because they are not moving in a straight line.To illustrate this concept, here’s an example of how the market price moved over the duration of each candlestick:
Can you see that for the left candlestick, prices fluctuated a lot more compared to the candlestick on the right?
In this way, long shadows indicate a greater hesitation of prices moving in one direction.
Said another way:
There is strong momentum when the market price moves in one direction without hesitating or fluctuating too much.
So now, by simply looking at the real body and shadows of a single candlestick, you can gauge the strength (i.e. momentum) of a price move.
Umm, that’s nice and everything…
But how do I use this information?
Here’s the thing you should know: the stronger the price momentum, the less likely the market price will reverse immediately afterwards.
Think of price momentum as price inertia.
Like a speeding car, the faster the market price moves, the harder it is to slow down, stop and turn around.
In other words: When price momentum is strong, the market price is more likely to continue moving in the same direction.
Here are two chart examples that show how a candle with strong momentum can predict future price moves:
So remember: the stronger the price momentum, the more likely prices will continue moving in the same direction.
There is however, one exception to this.
When a high-impact economic indicator is released, the market price can move with strong momentum in both directions, in succession. During such periods,price momentum is no longer a reliable predictor of future price moves.