Candlesticks: What they are and how to use them? NUS Investment Society Global Macro Department Gideon Wong & Devin Nathanael GM Research Analyst
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.
Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?
www.tradingview.com
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
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)
Bulls vs Bears
Buyers vs Sellers
Anatomy of a Candlestick Upper Shadow/Tail Real Body Lower Shadow/Tail
Reading Candlesticks
Tutorial 1 USD2.00 Low High USD1.50 Open USD1.00 USD2.50 Close
Tutorial 2 USD1.25 High Low USD1.50 Open USD2.25 USD1.00 Close
Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?
Candlestick Patterns
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
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
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
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
Hammer Characteristics Open High/Close Formed during downtrend (Bearish) Buyers able to over the strong Selling Pressure Signals a Bullish Reversal Low
Hanging Man Characteristics Open/High Formed during Uptrend (Bullish) Close Selling Pressure beginning to accumulate Signals a Bearish Reversal Low
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
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
Bullish Engulfing Characteristics Bearish Candle immediately followed by larger Bullish Candle Buyers overpowered Sellers Signals strong Buying Pressure High Probability of Upward Move
Bearish Engulfing Characteristics Bullish Candle followed immediately by larger Bearish Candle Sellers overpowered Buyers Signals strong Selling Pressure High Probability of Downward Move
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
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
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
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
Overview What are Candlesticks? Basic Candlestick Patterns How to use Candlesticks in trading?
Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS
Type of trades Long = Profit when the price rises Sell : 0.36 Profit : 0.09 Buy : 0.27
Short = Profit when the price falls Sell : 0.30 Profit : 0.03 Buy : 0.27
Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS
Trend : General Movement of price within a period of time Application Up-Trend Down-Trend : Go Long : Go Short
Support : Price which stock prices, historically, have difficulty falling through it. How to Draw Mark the lows Connect the lows Extrapolate the support line
Support : Price which stock prices, historically, have difficulty falling through it. How to Use Enter a trade at the support
Resistance : Price which stock prices, historically, have difficulty rises through it. How to Draw Mark the highs Connect the highs Extrapolate the resistance line
Resistance : Price which stock prices, historically, have difficulty rises through it. How to Use Exit a trade at the resistance
Trading The Candlestick LONG VS SHORT TREND, SUPPORT & RESISTANCE USING THE PATTERNS
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
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
Hammer Failure
Shooting Star Failure
Bearish and Bullish Engulfing Failure
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
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
REVERSAL ZONE : The area where there is high chance of trend reversal - 1 - Identify - 2 - Wait & Confirm - 3 - Enter the trade
IDENTIFY INDICATOR What does this indicate? Buyers overtake sellers or vice versa There is a change in market trend/momentum
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
WAIT AND CONFIRM
ENTER A TRADE
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
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
RANGING STRATEGY : The area where price moves aimlessly - 1 - Identify an aimless market - 2 - Wait & Confirm - 3 - Enter the trade according to the trend
IDENTIFY INDICATOR What does this indicate? Market is uncertain No one is winning because nobody is fighting Everyone is waiting for a new momentum
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
WAIT AND CONFIRM
ENTER A TRADE
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
TRUTH ABOUT CANDLESTICKS P R A C T I S E 4
Thank You