How does candlesticks indicate volume? Why is it critically important?

Reading candlestick charts is an effective way to study the emotions of other traders and to interpret the price. Candlesticks give a trader a picture of human emotions that are used to making buying and selling decisions. Write down the following statement on a piece of paper with a large black mark:

There is nothing on a chart that matters more than price. Everything else is secondary.

*Note that this author is implying volume from the price range on a given day so it is just as easy to say that nothing is more important than volume. I would like to point out that traders should consider price and volume. Volume to identify the level of interest of institutional buyers and price to identify the direction of the market.

Take that piece of paper and tape it to the top of your monitor! I think swing traders too often get caught up in so many other forms of technical analysis that they miss the most important thing on a chart. You don’t need anything on a stock chart other than the candles themselves to be a successful swing trader! And there’s nothing that can improve your trading more than learning the art of reading candlestick charts. Believe it.

Who are the buyers and sellers?

There are only two groups of people in the stock market. There are buyers and sellers. We want to find out which group is in control of the price action now. We use candles to find out. The peaks and troughs of the time period are called wicks and the open and close form the body. The candle itself is the range. When stocks close at the bottom of the range, we conclude that the sellers are in control. When stocks close at the top of the range, we conclude that the buyers are in control.

Note: In the stock market, for every buyer there must be a seller and for every seller there must be a buyer.

If a stock closes at the top of the range, it means that buyers were more aggressive and were willing to get in at any price. The sellers were only willing to sell at higher prices. This makes the stock go up. If a stock closes at the bottom of the range, it means that the sellers were more aggressive and were willing to exit at any price. The buyers were only willing to buy at lower prices. This makes the stock go down. Where a stock closes relative to the range tells you who is winning the war between buyers and sellers. This is the most important thing to know when reading candlestick charts. We can classify candles into two categories: wide range candles (WRC) and narrow range candles (NRC). Wide range candles indicate that there is high volatility (interest in the stock) and narrow range candles indicate that there is low volatility (little interest in the stock). You will notice that stocks tend to move in the direction of a wide range of candles. This is important!

Wide Range Candles (WRC)

If we know that stocks tend to move in the direction of a wide range of candles, we can look to the left of any chart to gauge the interest of either buyers or sellers and trade in the direction of the trend and the candles. The importance of this cannot be overstated! You want to know if there is interest in the stock and if it is being accumulated or distributed by institutional traders.

Light with a narrow range

Narrow range candles mean low volatility. This is a period when there is very little interest in the stock. If you look at the chart below, you can see that these narrow range candles often lead to reversals (up or down) because low volatility leads to high volatility and high volatility leads to low volatility. So knowing this, doesn’t it make sense to enter a stock in periods of low volatility and exit a stock in periods of high volatility?

Yes, it is.

What about hammers, doji’s and shooting stars?

I know what you’re thinking. You thought this page would be about hammers, dojis and shooting stars. Sorry to disappoint you, but knowing all the different types of candlestick patterns really isn’t necessary at all once you understand why a candle represents the struggle between buyer and seller.

Consider this…

When we read candlestick charts, why would we need to know the name of the pattern? What we need to know is why the light looks the way it does rather than spending our time memorizing candlestick patterns!

About the Vikingen

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