Investools Candlesticks 1

Candlesticks

Brian Cox

5/21/06

Investools Discussion Group

Helping People Invest Smartly

La Gro up

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The Essentials

The greatest advantage to using candle on your charts, instead of bars is that single candle lines and multiple candle patterns offer more reliable, earlier and more effective reversal singles

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The Essentials

� Invented by the Japanese. Used first in the 1870s with the opening of the Japanese stock market.

� Can be used with the weekly, daily and 5 minute charts.

� Candlesticks do not give price targets and need a close to confirm candle signal

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The Essentials

� Before placing a trade based on a candle signal:

� other technical signals should be considered

� Consider the risk / reward of the trade.

� Candle charts are best used as a tool not a system.

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Construction

Real body

Lower Shadow

Upper Shadow

White:Open low and close higher

Black / red:Open high and close lower

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Construction

White:Open low and close higher

Black / red:Open high and close lower

Open = 30

low = 29

High = 37

Close = 35

Close = 30

low = 29

High = 37

Open = 35

Lower Shadow

Real body

Upper Shadow

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Construction Review

� The rectangular portion of the candlestick is called the real body.

� The thin line extending above the real body is called the upper shadow.

� The upper shadow of a black candle represents the range between the high and the session’s price.

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Construction Review

� The lower shadow of a white real body candlestick represents the range between the session’s open and low.

� The black real body means that the close was lower than the opening.

� The white real body means that the close was higher than the opening.

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Basic Market Strategies

� Candles play a powerful role in early reversal signals.

� Candle lines and patters confirm support and resistance.

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Basic Market Strategies

Spinning Tops High Wave Candles

Candles come in many different shapes

Tends to indicate indecision Tends to indicate confusion

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Basic Market Strategies

Spotting reversals

Bullish signal

Hammerfollowing a down trend

Possible Bearishsignal

Hanging man following an up trend

Bearish signal

Shooting Star following an up trend

Real Bodies can be black or white

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Basic Market Strategies Review

� A long lower shadow on a daily charts shows the market bouncing off from the lows of the day.

� The spinning top is another name for a small real body.

� The real body of a spinning top can be black or white.

� A wave candle must have long upper and lower shadows

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Basic Market Strategies Review

� A spinning top indicates indecision.

� A wave candle indicates confusion.

� A hammer occurs in a downtrend.

� A hammer can be white or black.

� A hanging man occurs in an up trend.

� The confirmation for the hanging man is a close under the hanging man’s close

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Basic Market Strategies Review

� A shooting star occurs during an up trend.

� A shooting star is considered bearish

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The Dangerous Doji

� The doji can signal a significant trend shift or reversal.

� A doji forms when the opening and closing price are the same.

� There are bearish and bullish doji.

� Are valuable for calling the market tops (especially after a long white candle).

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The Dangerous Doji

Market in BalanceRally could be losing steam

Possible Bullishsignal

Bearish signal

Long-legged Doji Dragonfly Doji Gravestone Doji

The doji is more influential when it is a rare occurrence.

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The Dangerous Doji

Northern doji Southern doji

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The Dangerous Doji Review

� A doji forms when the open and close are the same.

� A doji signals that the bears and bulls are in stalemate.

� The dragonfly doji, the high of the session represents the open, high and close.

� The doji in a rally is sometimes a sell signal.

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The Dangerous Doji Review

� A doji in an uptrend is called a northern doji.

� The northern doji is most effective when the market is overbought and the doji appears at a resistance area.

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Long Real Bodies (Belt-Hold)

� Candles with extended real bodies can also display strong signals

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Belt-hold signs

Bullish belt hold is white near support and bearish is black near resistance

Support

Resistance

Bearish belt-holdBullish belt-hold

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The Dangerous Doji Review

� The bullish belt-hold; following a downtrend will starts low near resistance and raises up and closes out higher

� The bearish belt-hold; following a uptrend will start high near resistance and closes out lower.

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The Belt hold Review

� The bearish belt hold becomes more signification as it nears resistance.

� The longer the height of the belt-hold candle, the more important the signal it gives.

� On the chart, we draw the support line from the bottom of the lower shadow.

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The Belt hold Review

� The smaller the real body, the less force the move behind the move.

� A series of long lower shadows as the market is descending shows that the market is descending reluctantly.

� On the chart, we draw the support line from the bottom of the lower shadow.

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The Belt hold Review

If the trend is mostly higher, caution is warranted due to long upper shadows

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The Power of Candle Patterns

� Candle charts are most powerful when two or more candle lines combine in a candle pattern.

� A dark cloud cover pattern is a bearish signal consisting of a two-candle patter that indicates a top reversal.

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The Power of Candle Patterns

White real body that closes

within the back body,

perferably more than 1/2 of

black body lenght

Dark Cloud coverPiercing Pattern

Follows a strong white body

session. The second session

opens above and closed below

the center of the white body.

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The Power of Candle PatternsBearish EngulfingBullish Engulfing

White real body opens

lower and closes higher

than the black body (the

bulls have taken over!)

Black body opens higher

and closes lower than the

white body (the bears

have taken over)

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The Power of Candle Patterns Review

� As the second session of a piercing pattern pushes more and more deeply into the first candle, it may become a bullish engulfing pattern.

� The opposite pattern to the dark cloud cover is the piercing pattern.

� A piercing pattern is to a bullish engulfing pattern as a dark cloud cover is to a bullish engulfing pattern.

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The Power of Candle Patterns Review

� A bullish engulfing pattern occurs when at second session’s white real body raps around the prior session’s black body

� If an extremely large white candle completes a bullish engulfing pattern you should buy or sell based on the risk reward profile.

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Candle Patterns Review

Lets see an actual set of candle stick patterns

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Candlesticks

End of Part I

What would youDo now?

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Candlesticks

End of Part I

What would youDo now?

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Candlesticks

End of Part I

What does this indicate?

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Candlesticks

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What is this called? (bearish or bullish)

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Candlesticks

End of Part I

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Candlesticks

End of Part I

Is it time to buy?

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Candlesticks

End of Part I

What will you do now?

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Candlesticks

End of Part I

What is the name of this?

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Candlesticks

End of Part I

Buy? Sell?

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Candlesticks

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What is this called?

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Candlesticks

End of Part I

What is the direction?

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Candlesticks

End of Part I

Strong Resistance

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Candle Sticks

End of Part I