How To Predict The Next Candle (Candlestick Logic)

Summary

This video explains how to predict the direction of the next market candle by analyzing respect and disrespect candles. Respect candles, characterized by long wicks and small bodies, indicate a shift in order flow, signaling likely continuation in the opposite direction. Disrespect candles, with large bodies and no wicks, suggest the market will follow through in the current trend. By understanding these concepts on higher timeframes, traders can anticipate price movements on lower timeframes, identify potential market shifts, and make more informed decisions for both long and short trades.

Takeaways

• 😀 One candle can provide insights into the likely movement of subsequent candles, making lower time frame analysis simpler.
• 😀 'Respect candles' are those with long wicks and small bodies, indicating rejection at a higher time frame PD array like fair value gaps or order blocks.
• 😀 A bullish respect candle signals a shift in order flow, suggesting a continuation of upward movement in lower time frames.
• 😀 A bearish respect candle indicates that lower time frame order flow has shifted bearish, and the next candle is likely to continue moving lower.
• 😀 'Disrespect candles' are candles without long wicks and with large bodies, which show a lack of rejection at higher time frame PD arrays, and typically suggest continuation in the direction of the candle's movement.
• 😀 By understanding respect and disrespect candles, you can predict the direction of price on lower time frames with high accuracy.
• 😀 Higher time frame PD arrays (such as monthly and weekly fair value gaps) take precedence over lower time frame gaps, which can cause price action to fail or respect certain areas.
• 😀 Once a higher time frame PD array is respected, like a monthly swing low, the next candle can be expected to follow through in the same direction, confirming the bullish or bearish bias.
• 😀 If a higher time frame gap is disrespected, the price is likely to fail to reach expected levels and may continue in the opposite direction, seeking liquidity from opposing areas.
• 😀 Context is key in identifying bullish and bearish setups; analyzing fair value gaps and order flow shifts helps to frame trade opportunities, as seen in the detailed GBP/USD trade examples.

Q & A

What is a 'respect' candle, and how can it be identified?

A 'respect' candle is characterized by a long wick and a small body. It indicates price rejection at a higher timeframe price delivery area (PD array) such as fair value gaps, order blocks, or swing highs/lows. The long wick signifies a rejection, and the small body shows limited price movement during that time.

How does a 'disrespect' candle differ from a 'respect' candle?

A 'disrespect' candle has a large body with no significant wick and closes strongly over a higher timeframe PD array. This suggests a lack of rejection and implies that order flow has not shifted. In contrast, a 'respect' candle shows rejection and indicates a possible reversal or continuation in the direction of the wick.

What role do higher timeframe PD arrays play in candlestick analysis?

Higher timeframe PD arrays, such as fair value gaps, swing highs/lows, and order blocks, serve as key reference points for predicting price direction. Candlestick patterns on lower timeframes are analyzed in relation to these higher timeframe levels to assess whether the price will respect or disrespect the area.

How can a single higher timeframe candle help predict lower timeframe price action?

A single higher timeframe candle, particularly a respect or disrespect candle, can indicate the order flow direction on lower timeframes. By analyzing the rejection or closure behavior at a higher timeframe PD array, we can anticipate whether the lower timeframe will follow through with bullish or bearish movement.

What is an 'impulse shift' in trading, and why is it important?

An 'impulse shift' occurs when price displaces through a higher timeframe PD area and then shifts direction after entering the area. It indicates a change in order flow and momentum, signaling whether the market will continue in the current direction or reverse. It is crucial for confirming trends and validating potential entries.

Why do higher timeframe fair value gaps take precedence over lower timeframe gaps?

Higher timeframe fair value gaps take precedence because they represent larger, more significant market structures. These gaps are typically more influential in driving price action, meaning they have a stronger impact on price movement compared to lower timeframe gaps.

What is 'magnet theory' in trading?

Magnet theory suggests that higher timeframe PD arrays, such as fair value gaps, attract price action. When a lower timeframe PD array is located near a higher timeframe gap, the price is more likely to move toward the higher timeframe gap due to its increased significance.

How can 'respect' and 'disrespect' candles help in determining the strength of a trend?

Respect candles indicate a shift in order flow and suggest that the trend is likely to continue. Disrespect candles, on the other hand, imply that the trend may fail or reverse, as the price fails to respect higher timeframe PD arrays. Identifying these candles helps in assessing whether a trend is strong or weakening.

What is the significance of a 'monthly swing low' in the script?

A 'monthly swing low' is a significant price point on the monthly chart, often serving as a PD array where price may reverse or consolidate. The script uses this concept to demonstrate how price reacts to higher timeframe levels, with respect candles suggesting price rejection and potential upward movement from that level.

How does one combine different timeframe analysis to find trading opportunities?

The key is to establish a context using higher timeframe PD arrays and then refine the analysis on lower timeframes. After identifying respect candles on higher timeframes, traders look for impulse shifts on lower timeframes to confirm the direction and enter trades with higher probabilities of success. This combination of top-down analysis helps create a structured approach to trading.