Prepared by Dave Forster April 9, 2016

Transcription

1 Candlesticks Prepared by Dave Forster April 9, 2016

2 Who is this guy? Methods of Technical Analysis Technical Analysis Inputs Price vs. Volume How I approach Charting How a Candlestick is Constructed Neutral Candle Patterns Bullish Candle Patterns Bearish Candle Patterns Scanning for Candles Topics of Discussion

3 Who Is This Guy Dave Forster Professional background mostly in programming I lost my job and I haven t been interested in looking for it Trading for a living full time since 2008 Trading stocks, futures and options Teach options trading currently Run a trading room for the past 3 years Formerly taught options and candlesticks for Steve Nison

4 Technical Analysis Methods Technical indicators i.e. MACD, OBV, etc Technical patterns i.e. head & shoulders, triangles, etc. Seasonality or Cyclicality Drawing Tools i.e. Fibonacci, Price Action i.e. candlesticks, gaps, etc. If I wanted to create a technical indicator, what would inputs to it could I use?

5 Technical Analysis Inputs Price Time Volume So between price and volume, which is it more important to pay attention to?

6 Price vs. Volume With regard to some financial products such as an index, it s not tradable so there is no volume. Black pools and other off-exchange mechanisms make it harder to tell what the volume is. Some say that volume drives price but volume can stay low for quite awhile Sometimes with a stock it can have a large gap and then a lot of volume trades on it, was the volume a result of the gap in price? Candles can be used to chart either volume or price So which is more important price or volume?

7 How I approach charting When I first started trading, I preferred to use technical indicators, then I moved onto patterns and now I primarily use price action. I try to understand how an underlying is behaving does the underlying like to trend, channel, gap, have clear swing highs or lows, etc. I do not use the same technical setup on every underlying I prefer to tune the technicals to the underlying. i.e. I look at a number of technicals to find what works best with the specific underlying I plan on trading I prefer underlyings that appear to be support and resistance driven and react predictably with trend lines Gaps are typically significant to me Overall I m trying to understand how a stock behaves I try to focus on the price itself more than anything since it s the biggest factor in whether or not a trade will be profitable.

8 Creating a Candlestick Chart Candlestick (or candle) charts can be used in any market that has an open, high, low and close. The context that a candle occurs in is important it s effectiveness i.e. If a reversal candle pattern occurs within a neutral range, it s more difficult to reverse than if there was a prior trend. The real body (or body) is the open and closing range of the session. If the close is lower than the open, the body is black. The body is white (or clear) if the close is higher than the open Black and white are traditional colors but green is often used for bullish candles and red for bearish candles) The lines above and below the real body, are called the shadows (or wicks). The high of the upper shadow is the session s high, and the low of the lower shadow, is the low of the session Candle patterns can consist of one or more candles Candle patterns can have bullish, bearish or neutral implications In some candle patterns the shadows are more important than the body while in others the body is more important than the shadows

9 Candlestick Formation Bullish Bearish

10 Neutral Candlestick Signals

11 Identify this candlestick signal

12 Doji Context The opening and closing prices are the same or very close to one another resulting in little to no body Meaning Indicates a balance between buyers and sellers Criteria There are specific forms of doji such as the gravestone doji, dragonfly doji, and the long legged doji but this criteria is a high level description of all doji The plural for doji is doji not dojis Doji usually work better as potential resistance than acting as support A later candle that is bullish or bearish could act as confirmation that the balance of sellers and buyers has ended Doji could be used as a target giving the idea that momentum has ended rather than as an entry based on a doji only

13 Identify this candlestick signal

14 High Wave Candle Context Can be used in either up or down trends Long upper and lower shadows relative to recent candles The color of the real body is not important but the long shadows are Meaning The long shadows indicate that the market s volatility has increased. The small body indicates that the candle is neutral in direction Criteria Ideally the real body would be small and toward the middle of the session s range Shows that volatility has increased but the session overall tended to be neutral Can often occur on days where markets are responding to news

15 Bullish Candlestick Signals

16 Identify this candlestick signal

17 Hammer Context The body can be white or black The body should be at or close to the session s high A downtrend is required prior to the hammer occurring The lower shadow must be at least twice the height of the body Meaning After this last burst of selling, new buying has started. This rejection of lower prices is indicating a change in balance between bulls and bears. The net result: lessening of bears confidence of sustainability of lower price levels (and a reason for bulls to start getting more optimistic). Criteria Very small upper shadow acceptable Bullish counterpart of Shooting Star As a single candle line, it is same in FX as other markets

18 Identify this candlestick signal

19 Inverted Hammer Context The underlying needs to be in a downtrend prior to the inverted hammer The body can be bullish or bearish There should be a smaller real body at or close to the bottom of the high to low range. The upper shadow must be at least twice the height of the real body Meaning The long upper shadow gives a clue that those who were short on the candle s open or close took some heat holding the position. They would likely suffer a loss if the market reverses after the inverted hammer. Criteria This pattern needs confirmation the next session. Is the opposite of Hanging Man candle

20 Identify this candlestick signal (based on the same lows)

21 Tweezer Bottom Context Two candles back to back with matching lows The second candle line should show that bearishness is lessening Meaning Since both candles have the same lows, it is an indication that support could be starting to develop. Criteria Both candles do not need to be the exact same lows To be more important, the second candle should have either a long lower shadow, and/or small real body Opposite of Tweezers Top

22 Identify this candlestick signal

23 Bullish Harami Context Should occur in a downtrend or at least a retracement The first candle is a higher than average long bearish body The second real body must be relatively small and within prior real body i.e. an inside body but not necessarily an inside candle Meaning The first bearish body shows the bears control. The harami afterwards shows the bears are losing momentum. Criteria Both real bodies can be the same color The higher the harami closes into the first real body, the better the pattern The body of the harami should be 25% or less the size of the previous candle s body Opposite of Bearish Harami

24 Identify this candlestick signal

25 Bullish Counterattack Context The market needs to be in a downtrend prior to the pattern On the open, this candle initially gaps below the low or close of the prior candle but it closes at prior close Meaning On the second session s open, it seems like the markets weakness is continuing. At the close of the second candle though, it s about the same as the close of the first candle so the selling could be declining. Criteria The close of both candles do not have to be exactly the same Opposite of Bearish Counterattack Line

26 Identify this candlestick signal

27 Piercing Pattern Context The market needs to be in a downtrend prior to the pattern The opens needs to be at or below the low (or close) of the previous candle The bullish candle needs to close deeply into prior black real body Meaning The bearishishness of the bearish body are offset by the ability of the bulls on the next session to push prices deeply into the black candle s real body. Criteria The bullish candle has to close at least 50% into the prior real body Opposite of Dark Cloud Cover

28 Identify this candlestick signal

29 Bullish Engulfing Pattern Context There needs to be a down trend prior to this two candle pattern occurring since there needs to be a trend to reverse. Bullish body needs to wrap around the preceding bearish body Meaning The first candle s body being smaller than the second candle indicates that the bears may be losing momentum. Then the extended tall white candle proves the bulls have gained the upper hand. Once the candle closes it shows that a reversal from the previous day has occurred Criteria The first candle of the pattern could be a doji The first bearish body should be small relative to the bullish body Opposite of Bearish Engulfing Pattern

30 Identify this candlestick signal

31 Rising Window Context There is no overlap between the current session s low and the prior session s high Meaning A gap up shows how strongly one sided the market is in favor of the bulls. Criteria The entire rising window is a potential zone of support The rising window s support would be broken on a close under the bottom of the window Opposite of Falling Window

32 Bearish Candlestick Signals

33 Identify this candlestick signal

34 Shooting Star Context Market in up trend Real body can be black or white Small real body at, or near, bottom of session Upper shadow at least twice height of the real body Meaning Visually displays a session which the market rallied, and then failed to hold those higher levels Criteria Very small lower shadow acceptable Opposite of Hammer

35 Identify this candlestick signal

36 Hanging Man Context Market in a uptrend Real Body White or Black Small real body at, or near, top of session s range. Lower shadow at least 2x height real body Meaning Those who bought on the hanging man session s open or close bought at new highs for the move, thus making them nervous. Criteria Must come after a significant rally Because of the bullish very long lower shadow, this signal needs bearish confirmation the next session. Opposite of Inverted Hammer

37 Identify this candlestick signal (based on the same highs)

38 Tweezer Top Context Two candles with matching highs Second candle must reflect bull s drive is easing (i.e. a doji, shooting star, etc.) Meaning With the first and second candles failing at same highs we are getting clues of a slackening of demand. Criteria Both candles need not be exactly the same highs To be more important, the second candle line should have either a long upper shadow, and/or small real body Forex nuance has the open of the second candle at, or within a few pips, of the close of the first candle Opposite of Tweezers Bottom

39 Identify this candlestick signal

40 Bearish Harami Context Market in up trend First candle is an unusually long white real body Second real body is relatively small and within prior real body Meaning After a bull move, the long white real body s vitality is followed by the small real body s uncertainty. Criteria Both real bodies can be the same color The more deeply the second real body closes into the first real body, the better the signals Forex nuance has the open of the second candle at, or within a few pips, of the close of the first candle Opposite of Bullish Harami

41 Identify this candlestick signal

42 Bearish Counterattack Context Market is an up trend Second candle opens above prior session s high (or close), then closes at prior close Meaning As good as things look at the second session s open, the unchanged close compared to the first candle is cause for concern. Criteria Closes do not have to be exactly the same Extremely rare in the forex market Opposite of Bullish Counterattack Line

43 Identify this candlestick signal

44 Dark Cloud Cover Context Market in up trend Opens above prior high (or close) Black candle closes well into prior long white candle Meaning The tall white candle relays the bulls are in complete control. But the second session s weak close into the white candle s real body means the tide has turned. Criteria Close of black candle has to close at least at half way into tall white candle s real body Forex nuance has the open of the second candle at, or within a few pips, of the close of the prior candle Opposite of Piercing Pattern

45 Identify this candlestick signal

46 Bearish Engulfing Pattern Context Market in up trend Black real body wraps around preceding small white real body Meaning The long black candle that wraps around the white candle reflects how the bears have wrested control of the market from the bulls. Criteria First real body should be small compared to black real body First candle of the pattern can be a doji Forex nuance has the open of the second candle at, or within a few pips, of the close of the first candle Opposite of Bullish Engulfing Pattern

47 Identify this candlestick signal

48 Bear Separating Context Trend not important Black candle that opens at, or below open of prior white real body, and then closes under white candle s open Meaning Control has now shifted from the bulls to the bears. Criteria Remember risk/reward since a substantial move has already occurred If open of black candle is within prior white candle, it is a Bear Sash This pattern is extremely rare in the forex market Opposite of Bull Separating Line

49 Identify this candlestick signal

50 Falling Window Context There is no trading between current session s high and prior session s low Meaning The gap down echoes how strongly one-sided the market is in favor of the bears. Criteria The whole falling window is a potential zone of resistance The Falling Window s resistance is broken on a close above the top of the window Opposite of the Rising Window This pattern is rare in the forex market

51 TOS Candle Scans Bearish Candle Patterns: Bullish Candle Patterns:

52 Markettamer.com Links Coaching - $5 trial that re-bills for $49 per month: Live Trading Room - $28 trial, that re-bills for $189 per month :