Lesson 3: Candlesticks

Here at FoundryStrat, we like candlesticks to represent price. We think it's what price behaviour really looks like (without the voodoo)

Why candlesticks matter

Candlesticks are often taught like spells:
“If you see this shape, price must do that.”

That’s way too over simplistic in our view. Candlesticks don’t predict the future. They describe what just happened between buyers and sellers. Trading off just candle sticks alone is not a reliable strategy.

If you understand that, candles become useful instead of confusing.

The anatomy of a candlestick

Every candlestick tells four things:

Open – where price started
High – the highest price buyers pushed to
Low – the lowest price sellers pushed to
Close – where price settled

The body shows agreement (sold sections). The wick shows rejection (lines on each end of the candle). That’s the whole story. It's clean and simple and intuitive.

What candles really represent

Candles show:

Effort (is a candle elongated or compressed) - we'll talk about volume in another lesson, but combined with volume, you can really see strong/weak effort
Emotion - big wicks for example show the market is swinging around and may lack conviction in the direction.
Acceptance or rejection of price - this can give key indicators of where price might head next.

Long body → strong conviction
Small body → indecision
Long wick → price was rejected

They are a behavioural snapshot, not a signal generator.

Context beats patterns

A candle means nothing on its own. Please remember this. There's many people out there saying, 'buy the break of the hammer', or 'there's a shooting star, you can sell the break', (both types of candles formations)

but you need more than just a single or group of candles.

The same candle:

At support
In a trend
After a strong move

…can mean completely different things.

Rule to remember: Location matters more than shape. The Gold market in the chart below is in a strong up-trend. An inverse hammer candle forms, but the market carries on going on. But in the second example, the inverse hammer forms and the market falls nicely.

The only candle types worth caring about

There's many books out there that cover candles. If you want to go really deep into this subject, You can look at the Encyclopaedia of Candle Stick Charts by Thomas Bulkowski but honestly, it's not necessary. There's a few that are worth figuring out and familiarising yourself with....

Doji – indecision

Open and close are similar
Neither side is in control

Dojis matter most:

After a strong move
At key levels

They warn of potential change, not certainty.

Hammer / Shooting Star – rejection

Long wick, small body
Price tried to move and failed
Hammer: rejection of lower prices
Shooting star: rejection of higher prices

Power comes from:

Location
Prior trend

Below you can see the hammer candle at the bottom of this trend. It forms a low near a prior low. There's also a technical set up that's one of our favourites here at FoundryStrat. There's a break below the prior low and then immediate move back above - a false breakout in effect.. This sets up a really nice move up.