Much has been written and spoken about the 15 or so basic Candlestick patterns. Few, if any, commentators have focused on the one key factor that is basic to the understanding of Candlesticks. Likewise, little attention has been devoted to expositions of variations upon the basic patterns, which carry much of the “DNA” of their parents and thereby embody the same trend-reversal characteristics.
A Candlestick price bar differs from the standard “open-high-low-close” price bar in this respect: The price area between the Open and the Close is “fattened out” into a cylinder. If the Close of the particular time period was higher than the Open, the cylinder is not filled in. It is left blank, or “white.” If the Close was lower than the Open, the cylinder is filled in – it is made “black.” In this fashion, it takes but a glance to see and understand the aggregate sentiment of the traders during that time period.
The area between the Open and the Close is called the “Real Body.” Price excursions above and below the Real Body are called “Shadows.” It is the Real Body which is important in Candlestick analysis – not the total range of prices.
One of the Candlestick patterns which is most frequently seen is the “Spinning Top,” in which the Real Body is attended by Shadows both above and below it. The degree of intensity and direction of trading during the particular time period is easily observable. We are literally reading the minds of the traders, as a group.
Some Spinning Tops have very large Real Bodies; some have very small ones. Some have large Shadows, above and below the Real Bodies. In some cases, the Shadows are small. Everything reflects the mind-set of the traders.
A “Classic” Spinning Top is usually depicted in the literature as a relatively small Real Body attended by modestly-sized upper and lower Shadows.
The key to understanding Candlesticks lies in understanding this: other than a “Classic” Spinning Top itself, every individual Candlestick price bar is a variation on the Classic Spinning Top! Think about it. Once you grasp that concept, everything falls into place.
The author is a long-time investor and retired attorney. He has passed the NASD Series 65 Investment Adviser exam. He owns CandleWave, LLC, which publishes his Investment Newsletter and Action Suggestions for the major Indexes, Gold, Silver, Crude Oil, the Dow Industrials, the Dow Transports, and the NASDAQ 100. He is the developer and owner of the “Candelaabra” technical analysis system, which excels in ferreting out Reversals of Trend as they are developing or even before they emerge.