As usual, I will first throw out a viewpoint: Candlesticks are a rough treatment of specific market conditions, and they largely hide the details of trading and even distort the original trend of the market.
We can see that almost all current investment books are based on candlestick analysis. This approach is understandable because educators always need a concrete expression of complex things, making it easier to disseminate. Candlesticks have an absolute advantage among all forms of market expression. They intuitively represent the trajectory of price movements and can be easily quantified and analyzed. It is precisely because of the existence of candlesticks that we have the various complex technical indicators and analysis categories in today's trading world. Today, I mainly hope to discuss some details of trading through candlesticks.
The components of candlestick charts include four key prices: opening price, closing price, highest price, and lowest price. The resulting bar chart placed in a specific coordinate system provides an intuitive spatial representation of prices. There is nothing inherently wrong with this, especially in larger time frames, but when applied to specific entry points, such representations can seem crude. I have mentioned in other articles that candlesticks are carriers of price movement, not the prices themselves. Candlesticks are a rough processing of specific market conditions, hiding the details of specific trades. It is challenging to express this relationship in words; it is better explained with illustrations.
These two charts depict the process of candlestick formation. We can see that the movement at point 1 determines the height of this candlestick, while point 2 represents the intentions of the large capital holders. Let's imagine if the high point at position 1 is at the opening price, and the intentions of the main players are the same, the candlestick shapes would be completely opposite: one is a gap down followed by a rise, and the other is a gap up followed by a decline. According to the rough analysis of the market by candlesticks, two different results would be obtained, which would also have a significant impact on technical indicators. If we interpret the market based on the closing price, it will have a different meaning. Therefore, the trading volume at point 2 is a major factor in forming the candlestick of the day, which is the detail that candlesticks conceal. Let’s consider the same blue circled candlestick chart from another angle: if there were no concentrated large capital transactions at position 2 but instead these funds were dispersed throughout the entire trading period, it would also form the same candlestick chart, but the meaning of the market represented would be vastly different. Of course, this still does not allow us to analyze the essence of the market. We should recursively explore the details of the formation of a single candlestick, just like the volume at position 2 in the diagram, and then continue to recursively analyze the transaction details at position 2. Although the exchange server provides a slice of total transactions for a fixed time period, this is sufficient for small traders. Yet, that is not enough; we should push forward to deduce the key factors that make up the previous N such candlesticks (which is quite difficult in reality, hence we need to observe these daily). A long-term recursive analysis of a single stock will give us a rough impression of the main players' movements.
The futures market is much smaller than the stock market. In the futures market, it is common for the first transaction price of the day to hit the limit down or limit up price, followed by the next counterparty transaction occurring within a 'reasonable' fluctuation range. From the perspective of candlesticks, you see candlesticks with long upper or lower shadows. Does this indicate the struggle of bullish and bearish forces behind the market? In the financial derivatives market, the smaller the trading volume, the scarcer the market's liquidity, making it increasingly difficult for candlesticks to reflect the price itself. If interested, one can study the operational techniques of some niche platforms. When 90% of the chips in the market are concentrated in the hands of a few, the essence of candlesticks has already changed; they are no longer a reflection of the struggle between bullish and bearish forces but rather bait used by a few individuals.
Let’s talk about the details of candlestick formation in the gold and foreign exchange markets, which lack trading volume as a reference. Investors who have traded in the overseas market should know that trading is relatively active during the European and American trading sessions. In fact, we can understand the latter half of the American session and the Asian session as periods of lower trading volume, as shown in the diagram. In other words, under the premise of no sudden events, the latter half of the American session and the Asian session can be seen as disorderly fluctuations in the market, i.e., intraday noise. When you narrow the time cycle, you will be influenced by this intraday noise. I often see traders frequently entering and exiting during periods of low market activity, seemingly enjoying it. Let's think about it: if we subjectively eliminate this intraday noise, what should the candlestick patterns in the market look like? Would they still resemble what we see now? How would various technical indicators present? It is precisely because of these trading time periods that the already sharp indicators become blunt on small-cycle charts. For example, if there is a consolidation in a daily candlestick uptrend, then on the hourly chart, most indicators based on 60-minute candlesticks will be blunted. Therefore, distinguishing between effective and ineffective candlesticks in the overseas market is also one of the standards that test an investor's trading level.
In summary, regardless of any market, groups holding large amounts of capital exerting their influence in the same direction at a certain time become the main factors for that day's or even that week's candlestick. Trading often requires investors to have a broad perspective while also handling details more meticulously, precisely blending these two contradictions and mastering the exquisite balance. Only then can one appreciate the subtlety of 'adding a pinch of salt'. Regarding the essence of candlesticks, I believe I have clearly described it in the article I published on Zhihu in 2016 (Those Fake Candlesticks We Saw in Those Years). Friends who have long followed me should be familiar with this article, which was quite popular on Zhihu back then. Here is the original text:
As is customary, I will first present my viewpoint: candlesticks are a rough processing of specific market conditions, and to a large extent, they hide trading details and even distort the market's original trends.
We can see that almost all current investment books are based on candlestick analysis, which is understandable because educators always need a concrete way to express complex concepts, making it simpler to communicate. Candlesticks have an absolute advantage in all forms of expressing market conditions. They intuitively express the trajectory of price movements and can be easily quantified and statistically analyzed. It is precisely because of the existence of candlesticks that the current chaotic and complex array of technical indicators and analysis categories in the trading world has emerged. Today, I mainly hope to discuss some internal details of trading through the lens of candlesticks.
The components of candlestick charts include four key prices: opening price, closing price, highest price, and lowest price. The resulting bar chart placed in a specific coordinate system provides an intuitive spatial representation of prices. There is nothing inherently wrong with this, especially in larger time frames, but when applied to specific entry points, such representations can seem crude. I have mentioned in other articles that candlesticks are carriers of price movement, not the prices themselves. Candlesticks are a rough processing of specific market conditions, hiding the details of specific trades. It is challenging to express this relationship in words; it is better explained with illustrations.
These two charts depict the process of candlestick formation. We can see that the movement at point 1 determines the height of this candlestick, while point 2 represents the intentions of the large capital holders. Let's imagine if the high point at position 1 is at the opening price, and the intentions of the main players are the same, the candlestick shapes would be completely opposite: one is a gap down followed by a rise, and the other is a gap up followed by a decline. According to the rough analysis of the market by candlesticks, two different results would be obtained, which would also have a significant impact on technical indicators. If we interpret the market based on the closing price, it will have a different meaning. Therefore, the trading volume at point 2 is a major factor in forming the candlestick of the day, which is the detail that candlesticks conceal. Let’s consider the same blue circled candlestick chart from another angle: if there were no concentrated large capital transactions at position 2 but instead these funds were dispersed throughout the entire trading period, it would also form the same candlestick chart, but the meaning of the market represented would be vastly different. Of course, this still does not allow us to analyze the essence of the market. We should recursively explore the details of the formation of a single candlestick, just like the volume at position 2 in the diagram, and then continue to recursively analyze the transaction details at position 2. Although the exchange server provides a slice of total transactions for a fixed time period, this is sufficient for small traders. Yet, that is not enough; we should push forward to deduce the key factors that make up the previous N such candlesticks (which is quite difficult in reality, hence we need to observe these daily). A long-term recursive analysis of a single stock will give us a rough impression of the main players' movements.
The futures market is much smaller than the stock market. In the futures market, it is common for the first transaction price of the day to hit the limit down or limit up price, followed by the next counterparty transaction occurring within a 'reasonable' fluctuation range. From the perspective of candlesticks, you see candlesticks with long upper or lower shadows. Does this indicate the struggle of bullish and bearish forces behind the market? In the financial derivatives market, the smaller the trading volume, the scarcer the market's liquidity, making it increasingly difficult for candlesticks to reflect the price itself. If interested, one can study the operational techniques of some niche platforms. When 90% of the chips in the market are concentrated in the hands of a few, the essence of candlesticks has already changed; they are no longer a reflection of the struggle between bullish and bearish forces but rather bait used by a few individuals.
Let’s talk about the details of candlestick formation in the gold and foreign exchange markets, which lack trading volume as a reference. Investors who have traded in the overseas market should know that trading is relatively active during the European and American trading sessions. In fact, we can understand the latter half of the American session and the Asian session as periods of lower trading volume, as shown in the diagram. In other words, under the premise of no sudden events, the latter half of the American session and the Asian session can be seen as disorderly fluctuations in the market, i.e., intraday noise. When you narrow the time cycle, you will be influenced by this intraday noise. I often see traders frequently entering and exiting during periods of low market activity, seemingly enjoying it. Let's think about it: if we subjectively eliminate this intraday noise, what should the candlestick patterns in the market look like? Would they still resemble what we see now? How would various technical indicators present? It is precisely because of these trading time periods that the already sharp indicators become blunt on small-cycle charts. For example, if there is a consolidation in a daily candlestick uptrend, then on the hourly chart, most indicators based on 60-minute candlesticks will be blunted. Therefore, distinguishing between effective and ineffective candlesticks in the overseas market is also one of the standards that test an investor's trading level.
In summary, regardless of any market, groups holding large amounts of capital exerting their influence in the same direction at a certain time become the main factors for that day's or even that week's candlestick. Trading often requires investors to have a broad perspective while also handling details more meticulously, precisely blending these two contradictions and mastering the exquisite balance. Only then can one appreciate the subtlety of 'adding a pinch of salt'.
I am Da Shuai, a professional analyst and educator, your mentor and friend on your investment journey! As an analyst, the most basic requirement is to help everyone make money. I will help you resolve confusion and trapped positions, speaking through strength. When you feel lost and don't know what to do, follow me, and Da Shuai will point you in the right direction#非农就业数据来袭 .