Candlestick
Generally, a candlestick has an opening time and a closing time. For example, if a trader selects a daily time frame, a new candlestick forms every 24 hours when the market is open. If the trader chooses a 1-hour time frame, a new candlestick forms every hour.
This means that each candlestick a trader sees in that time frame represents a specific period, such as an hour, a day, etc., depending on the chosen time frame.
In simpler terms, when a time frame is selected, such as 4 hours, it means that every 4 hours a candlestick closes and a new one begins. Each candlestick in that time frame represents the behavior of traders during that period.
In candlesticks, there is a term called “open,” which is the point at which the candlestick is defined to start, whether it’s an hour, day, or minute. For example, in a 1-hour time frame, at 10 AM the price might be $1000.
Besides the open price, a candlestick also has a “close” price. This is the point at which the specified time period ends, and the candlestick closes. Once the time frame of that candlestick closes, no changes will occur to the shape of that candlestick, and all subsequent changes will be shown in the next candlestick. This closing price or end of the time frame is called the close price.
In price movements, there is a highest and a lowest level of fluctuation.
In technical charting, Jabal Amili refers to the highest price as “High” and the lowest and cheapest price recorded in that time frame as “Low.”
Note: If the closing price of the candlestick is higher than the opening price, the candlestick is bullish and is shown in green.
The only decision-making criterion is the closing price of the candlestick.
Note: If the closing price of the candlestick is lower than the opening price, the candlestick is bearish and is shown in red. Thus, by observing the candlestick, one can determine whether the last activity of traders in the market was bullish or bearish.
A candlestick always has four prices or characteristics that are very important to traders.
When a trader wants to analyze price behavior in the market and is looking for clues about price changes, they need to check what is currently happening. Are the major traders still in the market? If so, are they continuing their activities or not? Or when do they plan to enter?
To answer these questions, one should divide the candlestick from its highest price to its lowest price—essentially from the high to the low of the candlestick—into three equal parts, regardless of its color and shape. This is because the closing price within each segment has a different meaning. The three segments are illustrated in the image below.
If the closing price is in the upper third of the range, as shown in the image below, there is a higher likelihood that in the near future, meaning in the next candlestick, the movement will also be bullish
Why Is This Important for Traders?
If a trader wants to enter a new trade, they will only do so when there is a higher probability of having minimal capital exposure. The ideal scenario is when the price immediately moves into the profit zone, which not only prevents the trader from being stuck in a losing position or stagnant at the time of entry but also quickly determines the outcome, moving into the profit zone.
Close in the Lower Third
If the price closes in the lower third of the candlestick, as shown in the image below, there is a higher likelihood that in the next candlestick, the price will be bearish and will drop. In this case, if the trader is looking for a selling opportunity, it is the right time to enter the market.
This helps traders avoid getting caught up in the market’s exhausting movements. When planning to make a buy or sell trade, traders should not enter a trade with every candlestick. This is because a trade might initially be in a high capital exposure state, where it moves in a choppy manner before eventually reaching the profit zone. There is also the possibility of having to exit the trade.
Close in the Middle Third
If the price closes in the middle third of the candlestick, it is likely that the price will continue to range within one or two subsequent candlesticks. This principle also applies to movements. When a trader intends to manage their open trades, it is important to understand whether they should stay in the trade or exit. In technical analysis, the goal is to maximize market potential, and traders must assess the strength of each candlestick to make this decision.
Candlesticks represent the latest behavior of influential traders in the market, and traders should use them to guide their trades.
Note: The significance of candlestick closures is not the same everywhere and at all times. It is particularly important at critical market points, such as the end of corrections or the conclusion of movements.
