Candlesticks: What they are and how to use them? NUS Investment Society Global Macro Department Gideon Wong & Devin Nathanael GM Research Analyst

Transcription

1 Candlesticks: What they are and how to use them? NUS Investment Society Global Macro Department Gideon Wong & Devin Nathanael GM Research Analyst

2 Disclaimer NUS Invest is in no way affiliated or representative of any other company, organisation, club or society, and the views presented are solely our own opinions. The author(s) is not a licensed investment advisor. Our services are educational tools designed to assist you in your personal judgment. It is not designed to replace your licensed financial consultant, and nothing in the content shall be construed to be an offer or solicitation for the purchase or sale of a security. All content on our website and related services is for informational purposes only, and opinions have been made on a general basis. No consideration has been given to any particular individual or specific investment objectives, financial situations or other circumstances. As such, the content should not be relied upon as authoritative without further being subject to the recipient s own independent verification and exercise of judgment. The fact that the content has been made available constitutes neither a recommendation to enter into a particular transaction nor a representation that any product described within is suitable or appropriate for the reader. Readers should be aware that many of the products which may be described within involve significant risks and may not be suitable for all investors, and that any decision to enter into transactions involving such products should not be made unless all such risks are understood and an independent determination has been made that such transactions would be appropriate.

3 Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?

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5 History of Candlesticks Homma Steve Munehisa Nison Father of The Japanese Mr. Candlestick Candlestick Charting How it came about? Used by Japanese Rice Traders in the 17 th Century White Candlesticks Prices increased Black Candlesticks Prices decreased Introduced to the Western World in the 90 s

6 Purpose of Candlesticks What do they tell us? Historical representation of trading activity Price Fluctuations for a given time period Direction of the Market Insight into the Psychology of the Market More Buying Pressure (Bullish) or Selling Pressure (Bearish)

7 Bulls vs Bears

8 Buyers vs Sellers

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10 Anatomy of a Candlestick Upper Shadow/Tail Real Body Lower Shadow/Tail

11 Reading Candlesticks

12 Tutorial 1 USD2.00 Low High USD1.50 Open USD1.00 USD2.50 Close

13 Tutorial 2 USD1.25 High Low USD1.50 Open USD2.25 USD1.00 Close

14 Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?

15 Candlestick Patterns

16 Basic Candlestick Patterns Doji (Clumsy) Small Bodies that appear as a thin line Upper Shadow and Lower Shadow usually similar in length Cross or Plus Sign

17 Doji High Open/Close Low Characteristics Opening and Closing Price virtually equal Even balance of Bulls and Bears Indecision between buyers and sellers Market is two-sided

18 Basic Candlestick Patterns Marubozu (Shaven Top) Long Body No Upper and Lower Shadows White Marubozu; Bulls controlled Price from Open to Close Black Marubozu; Bears controlled Price from Open to Close

19 Single Candlestick Patterns Hammer & Hanging Man Small Real Bodies Long Lower Shadow (Two to Three Times of Body) Little or No Upper Shadow Colour of the Real Body is unimportant

20 Hammer Characteristics Open High/Close Formed during downtrend (Bearish) Buyers able to over the strong Selling Pressure Signals a Bullish Reversal Low

21 Hanging Man Characteristics Open/High Formed during Uptrend (Bullish) Close Selling Pressure beginning to accumulate Signals a Bearish Reversal Low

22 Single Candlestick Patterns Recognition Small Real Bodies Long Upper Shadow (Two to Three Times of Body) Little or No Lower Shadow Inverted Hammer; Signals Bullish Reversal Shooting Star; Signals Bearish Reversal

23 Dual Candlestick Patterns Bearish/Bullish Engulfing Formed as part of a trend Small Candle Followed by a Larger Candle of the Opposite Nature Larger Candle Engulfs the entire range of previous candle

24 Bullish Engulfing Characteristics Bearish Candle immediately followed by larger Bullish Candle Buyers overpowered Sellers Signals strong Buying Pressure High Probability of Upward Move

25 Bearish Engulfing Characteristics Bullish Candle followed immediately by larger Bearish Candle Sellers overpowered Buyers Signals strong Selling Pressure High Probability of Downward Move

26 Dual Candlestick Patterns Tweezers First Candle Same as Overall Trend Second Candle Opposite from Overall Trend Lower/Upper Shadows of the Candle should be Equal Length Indicates an upcoming Reversal

27 Triple Candlestick Patterns Three White Soldiers/Three Black Crows Three Long Candles in a row First Candle (Reversal Candle) opposite nature from previous Candle Second Candle larger than first Third Candle should be at least same size as Second Candlestick and have small or no Shadow

28 Three White Soldiers Characteristics Formed after a downtrend Bears exhausted, Bulls take in control Shift from Bear Market to Bull Market Uptrend expected to continue

29 Three Black Crows Characteristics Formed after an uptrend Bulls exhausted, Bears take in control Shift from Bull Market to Bear Market Downtrend expected to continue

30 Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?

31 Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS

32 Type of trades Long = Profit when the price rises Sell : 0.36 Profit : 0.09 Buy : 0.27

33 Short = Profit when the price falls Sell : 0.30 Profit : 0.03 Buy : 0.27

34 Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS

35 Trend : General Movement of price within a period of time Application Up-Trend Down-Trend : Go Long : Go Short

36 Support : Price which stock prices, historically, have difficulty falling through it. How to Draw Mark the lows Connect the lows Extrapolate the support line

37 Support : Price which stock prices, historically, have difficulty falling through it. How to Use Enter a trade at the support

38 Resistance : Price which stock prices, historically, have difficulty rises through it. How to Draw Mark the highs Connect the highs Extrapolate the resistance line

39 Resistance : Price which stock prices, historically, have difficulty rises through it. How to Use Exit a trade at the resistance

40 Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS

41 TRUTH ABOUT CANDLESTICKS LIMITED UTILITY 1 Candlesticks alone are very limited Many failures Require a strategy to combat this problem STRATEGY 2 Reversal zone indication Principle of zonal confirmation Once the zone is confirmed, enter the trade S T R A T E G Y 3 Theory of ranges Principle of range confirmation Once the range is confirmed, enter the trade PRACTISE 4

42 TRUTH ABOUT CANDLESTICKS L I M I T E D U T I L I T Y 1 Candlesticks alone are very limited Many failures Require a strategy to combat this problem

43 Hammer Failure

44 Shooting Star Failure

45 Bearish and Bullish Engulfing Failure

46 TRUTH ABOUT CANDLESTICKS LIMITED UTILITY 1 Candlesticks alone are very limited Many failures Require a strategy to combat this problem STRATEGY 2 Reversal zone indication Principle of zonal confirmation Once the zone is confirmed, enter the trade S T R A T E G Y 3 Theory of ranges Principle of range confirmation Once the range is confirmed, enter the trade PRACTISE 4

47 TRUTH ABOUT CANDLESTICKS S T R A T E G Y 2 Reversal zone indication Principle of zonal confirmation Once the zone is confirmed, enter the trade

48 REVERSAL ZONE : The area where there is high chance of trend reversal Identify Wait & Confirm Enter the trade

49 IDENTIFY INDICATOR What does this indicate? Buyers overtake sellers or vice versa There is a change in market trend/momentum

50 IDENTIFY ZONE Creating a POSSIBLE zone of reversal Identify the candlestick indicator Hammer/Shooting star Mark the high and the lows Identify this area as possible zone of reversal

51 WAIT AND CONFIRM

52 ENTER A TRADE

53 TRUTH ABOUT CANDLESTICKS LIMITED UTILITY 1 Candlesticks alone are very limited Many failures Require a strategy to combat this problem STRATEGY 2 Reversal zone indication Principle of zonal confirmation Once the zone is confirmed, enter the trade S T R A T E G Y 3 Theory of ranges Principle of range confirmation Once the trend is confirmed, enter the trade PRACTISE 4

54 TRUTH ABOUT CANDLESTICKS S T R A T E G Y 3 Theory of ranges Principle of range confirmation Once the trend is confirmed, enter the trade

55 RANGING STRATEGY : The area where price moves aimlessly Identify an aimless market Wait & Confirm Enter the trade according to the trend

56 IDENTIFY INDICATOR What does this indicate? Market is uncertain No one is winning because nobody is fighting Everyone is waiting for a new momentum

57 IDENTIFY RANGING ZONE Creating a POSSIBLE ranging zone Identify the candlestick indicator Doji Mark the high and the lows Identify this area as possible ranging zone

58 WAIT AND CONFIRM

59 ENTER A TRADE

60 TRUTH ABOUT CANDLESTICKS LIMITED UTILITY 1 Candlesticks alone are very limited Many failures Require a strategy to combat this problem STRATEGY 2 Reversal zone indication Principle of zonal confirmation Once the zone is confirmed, enter the trade S T R A T E G Y 3 Theory of ranges Principle of range confirmation Once the trend is confirmed, enter the trade PRACTISE 4

61 TRUTH ABOUT CANDLESTICKS P R A C T I S E 4

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64 Thank You