This is a simple yet effective method of identifying where a ready pool of buyers and sellers are in the market.
Did you know that a single candlestick (on its own) is by its nature, an area of support/resistance?
Let’s take the example of a bull candle:
A bull candle tells us there is a larger volume of buyers than sellers (nothing new here). But this information is based on something that has already happened. How does this help us make trading decisions in the future?
Well, a bull candle indicates the range of prices where there is a ready pool of sellers in the future.
Does this make sense?
OK, imagine…
You’ve just entered a ‘buy’ trade, and prices start moving up — that’s great!
Your trade is making money.
Soon, however, you see that prices are starting to move back down again… your trade is still making money, but the market price is now moving towards to your entry point. What would you do?
If you’re like most traders, you’ll hang on to the trade… and wait for prices to move up again.
But what happens when prices continue to move even closer to your entry point? What do you think most traders would do in this situation?
They will move their stop loss to the break-even price. By now, most traders would be looking to get out of the trade with no loss if prices move back to their entry price.
And so, all the traders who entered a ‘buy’ trade within this bull candle are now looking to SELL to close the trade.
In tho way, a bull candle represents the range of prices where the previous buyers would be looking to ‘sell’ to close their trade.
On a practical level, it would be too tedious to apply this concept to every candlestick on the trading chart.
A better (more effective) way to use this concept is to apply it to situations with a series of consecutive bull or bear candles.
Example:
Prices have been falling sharply with a series of consecutive bearish candles. This is where there is a large pool of traders waiting to close their ‘sell’ trades (with ‘buy’ orders).
And now, the latest (bullish) candlestick shows that the selling momentum is slowing down.
If the buyers in this market manage to push prices high enough, the previous sellers will exit their trades (with closing ‘buy’ orders) and add to the buying pressure.
When this happens, the market will shoot up quickly, like a row of dominos as each closing trade pushes the market price even higher.
This simple but rarely applied knowledge will help you decide if you should keep an existing trade open, or if you should consider opening a new trade to take advantage of the situation.
(By the way, did you also notice the bearish Anchor candle? Did you see how a close above its opening price signalled the reversal?)
Remember: Although I’m describing each concept separately, in practice they
should all be applied simultaneously.