Understanding Candlesticks: The Auction of Supply and Demand
How Supply & Demand Controls Candlestick Movement
Each candlestick represents a mini auction where buyers and sellers negotiate price. Here’s how it works:
1. Green Candles = High Demand, Low Supply
What happens? There are lots of buyers (high demand) but only a few sellers (low supply). Buyers compete to get shares, pushing the price higher and forming a green candle.
How it happens (step-by-step)
- Buyers outnumber sellers, so buyers must offer higher prices to get shares.
- Buyers “eat” the available shares at $100, $102, $105, etc., pushing the price higher.
- This demand to “buy now” causes the price to increase, forming a green body.
What the candle looks like
- The open price is the first trade.
- As buyers push prices up, the body grows taller and green.
- If sellers push back (by adding more supply), a wick might form at the top.
Example of High Demand, Low Supply
Imagine a new iPhone is released. Everyone wants it (high demand), but Apple only made 100 units (low supply). As people compete to buy, the price jumps from $999 to $1,200 to $1,500. This would look like a long green candle with no wick at the top since buyers never stopped bidding up the price.
2. Red Candles = High Supply, Low Demand
What happens? There are lots of sellers (high supply) but not enough buyers (low demand). Sellers drop their prices to attract buyers, pushing the price lower and forming a red candle.
How it happens (step-by-step)
- Sellers outnumber buyers, so sellers must lower prices to attract buyers.
- Sellers drop prices from $100 to $98, $95, and $90, pushing the price down.
- This constant lowering of prices causes the body of the red candle to grow downward.
What the candle looks like
- The open price is the first trade.
- As sellers push prices down, the body grows taller (downward) and red.
- If buyers push back (by entering the market to buy the dip), you might see a wick at the bottom.
Example of High Supply, Low Demand
Imagine a company announces bad earnings, and suddenly everyone wants to sell. Supply increases as more people list their shares for sale, but buyers hold back. Sellers lower prices from $100 to $98, then $95, and finally $90. This would look like a long red candle with no wick at the bottom since sellers never stopped pushing the price down.
3. What Happens When Supply = Demand?
If supply and demand are balanced, there is no clear winner. Buyers and sellers fight, but neither one takes control. The price stays near the open price for most of the period, forming a doji candle (a candle with a small body and long wicks on both sides).
Example of Balanced Supply & Demand
Imagine a used car listed at $10,000. Buyers want to pay $9,900, and sellers want $10,100. If neither side budges, the price stays near $10,000. This creates a doji candle with a small body (price didn’t change much) and long wicks (because buyers and sellers tried but failed to push the price up or down).
4. How It All Comes Together
| Condition | Supply | Demand | Candle Type | Why It Happens |
|---|---|---|---|---|
| Green Candle | Low (Few Sellers) | High (Many Buyers) | Green Body | Buyers outnumber sellers, price rises |
| Red Candle | High (Many Sellers) | Low (Few Buyers) | Red Body | Sellers outnumber buyers, price falls |
| Doji Candle | Balanced Supply | Balanced Demand | Small Body | Buyers & sellers are equal |
Key Takeaways
- Green Candle = Demand > Supply: Buyers are chasing, so prices rise.
- Red Candle = Supply > Demand: Sellers are chasing buyers, so prices fall.
- Doji Candle = Balanced Supply & Demand: Nobody wins. Price stays close to the open.
Simple Analogy
Green Candle: Imagine 100 people want to buy a limited sneaker release (demand is high) but there are only 10 sneakers (supply is low). The price rises as people compete to get a pair.
Red Candle: Imagine a store trying to sell 1,000 T-shirts but only 10 buyers want them. To get buyers interested, the store keeps cutting the price, from $30 to $20 to $10. This price-cutting forms a red candle.