The origin of candlestick theory is Japan, and it is one of the oldest technical analysis methods. As early as 1750, the Japanese began using candlesticks to analyze rice futures. Candlestick patterns feature the visual thinking characteristics that Easterners excel at, and they are not as quantitative as the technical indicators derived by the Western deductive method. Therefore, subjectivity dominates the application. Beginners may feel overwhelmed by the various candlestick combinations; however, the essence is concentrated. Mr. Duan summarizes the vast candlestick techniques into three simple moves, which will be briefly introduced below.
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First Move: Look at the bullish and bearish candlesticks. Bullish and bearish candlesticks represent trend direction; a bullish candlestick indicates that the price will continue to rise, while a bearish candlestick indicates that the price will continue to fall. For instance, in a bullish candlestick, after a period of struggle between bulls and bears, a closing price higher than the opening price indicates that the bulls have the upper hand. According to Newton's laws of motion, in the absence of external forces, the price will continue to move in the same direction and speed. Therefore, a bullish candlestick suggests that the next phase will continue to rise, at the very least ensuring an initial upward momentum. Hence, a bullish candlestick often indicates continued price appreciation, which aligns with one of the three fundamental assumptions of technical analysis: stock prices fluctuate along trends. This trend-following approach is also the core idea of technical analysis. Similarly, a bearish candlestick indicates continued price decline.
Second Move: Observe the length of the shadow lines. Shadow lines represent reversal signals; the longer the shadow line in one direction, the more unfavorable it is for the price to move in that direction. Specifically, the longer the upper shadow line, the more unfavorable it is for the stock price to rise, and the longer the lower shadow line, the more unfavorable it is for the price to fall. Taking the upper shadow line as an example, after a period of struggle between bulls and bears, the bulls finally lose their advantage. Once bitten by a snake, one is afraid of a rope for ten years. Regardless of whether the candlestick is bearish or bullish, the upper shadow line has already formed a resistance level for the next stage, making the probability of a downward adjustment in price high. Similarly, the lower shadow line indicates a high probability for price to attack upwards.
Third Move: Observe the size of the body. The size of the body represents intrinsic momentum; the larger the body, the more obvious the trend of rising or falling. For example, in a bullish candlestick, its body is the part where the closing price is higher than the opening price. A larger bullish body indicates stronger upward momentum, similar to the physical principle that an object with greater mass and speed has greater inertia. A larger bullish body represents stronger intrinsic upward momentum, which will be greater than that of a smaller bullish body. Similarly, a larger bearish body indicates stronger downward momentum. The three simple moves of candlestick analysis can be applied to daily, weekly, monthly, or even yearly candlesticks, and can also be used to analyze two, three, or even N candlesticks. The former can be applied simply, while the latter requires stacking N candlesticks into one for analysis.
Note: When trading with the trend, one must be decisive in following the trend as soon as it forms. Most investors easily make the mistake of jumping into a downward trend too quickly, always thinking the price is low, and thus continuously buying against the trend. Occasionally, they may seize a rebound opportunity and make a profit, but if they pick the wrong entry point or fail to take profits in time, they will get trapped. The longer they are trapped, the greater the loss.
