The Psychology of Price: Mastering Candlestick Patterns and Market Sentiment

Good evening, fellow students!

It's a pleasure to be here with all of you at Diamond Ridge Financial Academy, where we explore the latest investment ideas and strategies. By committing to daily learning and practice, we aim to sharpen our skills, achieve consistent wealth growth and ultimately attain financial freedom!

Last night, we studied the recent impact of "interest rate cuts" on the investment market, focusing on how changes in monetary policy affect the stock market, forex market and the overall investment environment. Through real-life examples, we discussed the strategy changes in the recent interest rate cuts by the Federal Reserve and the Bank of England, as well as the market’s reaction to these policy expectations. Specifically, how the slowdown of interest rate cut expectations directly led to stock sell-offs and forex market fluctuations, further revealing the core role of monetary policy in market confidence.  

At the same time, we emphasized the simplicity and practicality of technical analysis. Using support and resistance levels as an example, even without diving deep into fundamentals, investors can still capture important trading opportunities by observing price breakouts or pullbacks. We validated the reliability of this method with the recent market trends, especially its value in quickly judging price direction and optimizing trading strategies.

The advantage of technical analysis is that it does not rely on macroeconomic factors and it provides investors with an efficient, intuitive decision-making tool, making it very suitable for beginners to quickly get started and improve their trading skills. Particularly, by analyzing candlestick charts formed by price movements, it’s the most intuitive tool for identifying market sentiment.  

Recently, we have studied how to identify support and resistance levels. Some beginners have asked to review basic investment knowledge during the holidays, especially the meaning of candlestick charts. For the directions or topics you want to learn, whether you're a beginner or experienced, feel free to give suggestions. Based on your feedback, I’ll provide detailed explanations to help you better understand how quantitative trading systems work and achieve steady profits.  

Tonight, we will address the questions you’ve provided and discuss the shapes of candlestick charts and the underlying capital dynamics. Before we start tonight’s session, let’s briefly review today’s market situation.

Today, the UK stock market continued to perform weakly, with the worst performance of the year at one point, highlighting the fragility of market sentiment. The main factors are still focused on the uncertainty around US monetary policy and the political situation.

First, the latest Fed rate decision became the main driving force behind the recent market decline. Although the market had previously expected the Fed to gradually ease monetary policy, its latest statement was clearly hawkish. According to the statement, the Fed expects to cut rates only twice in 2025, by 25 basis points each time. This forecast signals a potential slowdown in economic growth, which weakened the market’s optimistic expectations for liquidity improvement. In this context, funds started flowing out of risk assets into safe-haven assets like government bonds, further intensifying the sell-off pressure on global stock markets.

Next, political uncertainty in the US has also made investors uneasy. The government shutdown crisis has not been fully resolved and President-elect Trump’s threats of tariffs on the EU have further increased market concerns about global trade tensions. As a global economic barometer, US policy fluctuations have obvious spillover effects on other markets. The UK stock market has faced additional sell-off pressure in this environment.

Driven by these external negative factors, the FTSE 100 index saw a significant decline in the early session, hitting the key support level of 8000 points as expected. However, as short-selling pressures gradually eased and the rebound signals from US stocks were transmitted, the FTSE 100 index stabilized and recovered towards the end of the session, eventually closing slightly lower at 8084 points, with the decline significantly reduced.

The performance of US stocks also showed signs of intense market struggle. In the past two days, the Fed’s hawkish stance pushed US Treasury yields higher, attracting a large amount of money out of the stock and crypto markets and into the low-risk Treasury bond market. This directly led to a sharp sell-off in US stocks. In addition, some of Trump’s policies being blocked further triggered panic in the market, deepening the declines of the three major indices. However, from historical experience, the impact of a US government “shutdown” or blocked policies is usually a short-term fluctuation. As Trump’s official inauguration date approaches, the market expects these issues to be gradually resolved.

It’s worth noting that as short-sellers’ power gradually weakened, some funds that were long-term bullish on the US economy began to enter the market and buy the dip, which helped boost US stocks today. Tech stocks again played a leading role in the market rebound, driving the overall market to recover. For investors who have been closely following the market, especially those who recently increased their positions in tech stocks, this rebound has already brought substantial gains.

In fact, any investment is essentially a battle of funds. Whether it’s the stock market, forex, commodities or crypto market, every trade reflects the balance of power between buyers and sellers. The goal of buyers is to push prices up to create value, while the goal of sellers is to lock in profits or avoid losses by selling. Every battle between bulls and bears tries to lead the market trend and the result of this struggle is ultimately reflected in price movements, forming the candlestick patterns we see on the charts.

From the perspective of this battle, the forces of bulls and bears in the market are not isolated, they are influenced by multiple factors such as sentiment, information and capital flow. For example, when positive news appears, the bulls usually take the lead and the large influx of buying will cause prices to rise quickly; while when negative information is released, the bears may focus their efforts, causing prices to drop sharply. This back and forth process not only determines the short-term price fluctuations but also shapes the long-term trends of the market.

Candlestick charts are a direct visual representation of this battle. Each candle shows the open, high, low and close prices for a specific time period, capturing the intense struggle between buyers and sellers during that time. For example, a candlestick with a long lower shadow indicates that although the bears initially controlled the price and pushed it lower, the bulls managed to reverse the trend and push the price back up. This pattern is often interpreted as a sign of strong support in the market. On the other hand, a long upper shadow may suggest that the price faced strong resistance at higher levels, with the bears gaining control.

For this reason, analyzing candlestick chart fluctuations is essentially studying the process of the battle between buyers and sellers. By observing the shape and combination of candlesticks, we can identify shifts in market sentiment. For instance, a "Doji" often reflects a balance of power between buyers and sellers, signaling indecision in market direction, while an "Engulfing Pattern" may signal a trend reversal. When a bullish candle completely engulfs the previous bearish candle, it often signals that the bulls are starting to take control.

This highlights the importance of technical analysis. It focuses on market behavior and reveals collective investor sentiment and behavioral patterns through objective data such as price and volume. Unlike fundamental analysis, technical analysis doesn’t try to explain why prices move but looks for actionable trading signals directly from price fluctuations. The core logic is that history tends to repeat itself and the regularities in market behavior allow technical indicators to reflect the stage of the battle between bulls and bears.

For example, determining support and resistance levels is especially important in technical analysis. A support level is a key area where buyers defend against falling prices and when the price approaches this level, buyers are more likely to enter, preventing further decline. Resistance levels, on the other hand, are where bears defend against rising prices and when the price nears this level, selling pressure increases, preventing further upward movement. The appearance of these key levels reflects the balance of power between buyers and sellers at different price levels.

In actual trading, support and resistance levels are usually not specific single prices but rather a relative range. For example, in today’s crypto market, we can clearly see this in action.

Recently, the crypto market’s fluctuations have been mainly influenced by two factors. First, the Fed's hawkish monetary policy has boosted the USD index, putting pressure on crypto like Eth/USD, causing prices to drop.  Second, due to Trump's strong support for crypto development, when his policies face resistance, the market interprets this as a negative signal.

Yesterday, Trump's proposal to raise or eliminate the debt ceiling faced resistance from Congress, which further increased the downward pressure on the crypto market this morning.

Specifically, Eth’s early morning movement reflected the market’s emotional outburst. My suggested strategy in the morning was to watch the support level around $3.2K. However, during actual trading, due to the intensifying bearish sentiment, the price dropped to $3.1K (as shown in the chart above). Although this didn’t match a specific price point exactly, if traders followed the suggested range, they could have made at least $180 per Eth. This shows the profit potential brought by the support range.

Technical analysis tools, such as candlestick patterns, trend lines and moving averages, are important methods for investors to interpret market fluctuations. Among them, the 21-day moving average is an important indicator of the medium-term trend. It can show the overall direction of the price and help determine whether the price is close to key support or resistance zones.

Take today’s DJT (Trump Media & Technology Group) stock performance as an example. Despite the bearish sentiment caused by Trump's policy setbacks, which temporarily dragged down the stock price, the stock eventually rebounded with the support of several technical signals. First, today’s low point coincided with the low point from Dec 10 and it also matched the previous platform top area, creating a strong support zone. Secondly, today’s pullback stopped near the 21-day moving average, further reinforcing the support signal. When multiple technical signals align, the success rate significantly increases, which is a key principle to watch in technical analysis.

Overall, the trajectory of price fluctuations is the result of the market’s bullish and bearish struggle, while the changes in candlestick patterns visually express this struggle. By analyzing candlestick charts, investors can gain insights into the shifts in market sentiment, thus more accurately identifying trend reversal points and trading opportunities. Mastering technical analysis methods not only provides a deeper understanding of market behavior but also serves as an effective path to improving investment decision making efficiency.

What’s exciting is that we will soon launch the beta version of our Quantitative Trading System 5.0, which is based on the principles of technical analysis and integrates AI algorithms to process and analyze massive market data in real time. This system will combine various technical indicators, helping investors more efficiently identify market opportunities while reducing investment risks. We believe this new system will significantly enhance investors’ trading experience and profitability. Stay tuned!

That’s all for tonight’s session. I hope the content above helps you gain a deeper understanding of the principles behind price fluctuations and key points in trading. Additionally, to encourage everyone to actively learn about the Quantitative Trading System and support its promotion, Diamond Ridge Financial Academy has prepared a Christmas mystery gift. If you haven’t claimed your gift yet, can contact the assistant now to participate in the giveaway.

In our next class, we’ll dive into the candlestick chart’s reversal signals, helping you better pinpoint buy opportunities during price fluctuations. Through systematic learning, we aim to improve the success rate of your investment decisions. If you have any questions, feel free to leave a message and I’ll do my best to answer them.

Through tonight’s session, please think about:

1. How to interpret support signals in price fluctuations?

2. What is the underlying formation principle of candlestick charts? How can you use it to analyze price increases and decreases?