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Candlestick Charting
Essentials and Beyond
Spotting the Early Reversal Signals
Steve Nison, CMTPresident: Candlecharts.com
Web site: www. candlecharts.comE-mail: [email protected]: 732.254.8660
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““Japan's Candlesticks Light Traders' PathJapan's Candlesticks Light Traders' Path””-- Wall Street Journal Wall Street Journal
““Whether you day trade or hold positions Whether you day trade or hold positions candlesticks are a mustcandlesticks are a must”” -- Investors LibraryInvestors Library
““Candlesticks: A New Light in Technical Candlesticks: A New Light in Technical AnalysisAnalysis”” -- BarronBarron’’ss
Candlesticks in the NewsCandlesticks in the News
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“To learn about the market, ask the market. Only then can you become a detestable market demon.”
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Construction of candle linesConstruction of candle linesIndividual candle linesIndividual candle linesCandle patternsCandle patternsThe Best of the East and West The Best of the East and West Money ManagementMoney ManagementPractice ChartsPractice ChartsNison Trading PrinciplesNison Trading Principles
OverviewOverview
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Our trading challenges are:• Entering trades too late• When to Exit• Not enough time to do analysis• Quickly recognizing candlestick signals• Correctly using candlesticks
– When to pull trigger– When to ignore
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Candlecharts.comHelping Clients Spot Market Turns Before the Competition
The Trading Triad®
Candle Charts Western
Money Management
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openopen closeclose
openopen
Real Body
high
low
Shadow
Real Bodies / Shadows Doji
Constructing the Candlestick Line
closeclose
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session open high low close1 23 26 21 25
2 26 28 23 27
3 23 27 22 224 25 28 22 25
5 27 27 25 25
Drawing Candle Lines
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session open high low close1 23 26 21 25
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Drawing Candle Lines
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Bulls vs. BearsBulls vs. Bears
Who’s in control?
The Real Body is the Essence of the Price Movement
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Small Real BodiesSmall Real Bodies(spinning tops)
Prior trend is losing force
Implication
Small real body – color not important
Criteria
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29May
6 13 20 28 3June
37.837.938.038.138.238.338.438.538.638.738.838.939.039.139.239.339.439.539.639.739.839.940.040.140.240.340.440.540.640.740.840.9
NORTH FORK BANCOn this bar chart, in the circled zone the market looks healthy as it makes mostly higher highs and is maintaining the highs. As such, no appears reason for concern.
What is the bar chart saying?What is the bar chart saying?
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29May
6 13 20 28 3June
37.837.938.038.138.238.338.438.538.638.738.838.939.039.139.239.339.439.539.639.739.839.940.040.140.240.340.440.540.640.740.840.9
NORTH FORK BANCThis is the same chart, but with candles. Note how the small real bodies hint that the bulls have lost control. As such, by using the insights of the candles, we see there is a reason for concern.
What is the candlestick chart saying?What is the candlestick chart saying?
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WhoWho’’s in control s in control during this ascent?during this ascent?
What is this What is this candle line candle line hinting?hinting?
Spinning TopSpinning Top
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Criteria: Open and close are the same
Implication: Market is “tired”
Doji
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DojiDoji
The red arrows show the bulls have complete control. The doji alters the trend.
Doji
Spinning top
Spinning top
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Because the candlestick chart uses the same data as a bar chart (open, high, low and close), all bar charting techniques can be used on a candlestick chart.
Nison Trading Principle
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Candles shine at preserving capitalCandles shine at preserving capital
A tall white candle pierces resistance in early March. The doji next session hinted the bulls had lost full of the market (note: it does not mean that the bears has taken control).
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Doji Confirms Resistance Doji Confirms Resistance
No reversal signals yet
How about now?
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Candlesticks do not give price targets.
Nison Trading Principle
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Candles and Price TargetsCandles and Price Targets
This doji takes on extra significance because it confirms a resistance level
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When not to use dojiWhen not to use doji
11 18 25 1April
8 1521.5
22.0
22.5
23.0
23.5
24.0
24.5
25.0
25.5
26.0
26.5
27.0
27.5OMNICARE INC
This stock has so many doji that they have little market implication
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Spinning top and dojiSpinning top and doji
If a spinning top is small enough we can view it as a doji
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Northern doji call market tops better than southern doji call bottoms.
Nison Trading Principle
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Northern and Southern DojiNorthern and Southern Doji
A doji in an uptrend is a “Northern Doji”
A doji in a downtrend is a Southern Doji”
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Northern and Southern DojiNorthern and Southern Doji
Northern
Southern
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Candles in ContextCandles in Context
Southern doji, but why would you pay attention to it?
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Doji in box rangeDoji in box range
There is no trend to reverse with this doji– thus we ignore it.
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Trading Tactics Trading Tactics -- DojiDojiAnalyze these doji in the context of what happened before. Are any of
these a more likely reversal and why?
A B CQuestion
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15 22 29 5August
12 19 26 3September
9 16 23
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
20.5HEIDRICK STRUGG
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Doji Overview Doji Overview –– Analyze Each Doji in Context of TrendAnalyze Each Doji in Context of Trend
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Shadows
Remember: location and size of the shadow should be considered when analyzing the market psychology.
Implication: Bearish long upper shadow offsets “rallying strength.” Bullish long lower shadows hints bears losing force.
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Bullish shadows confirming supportBullish shadows confirming support
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Long lower shadows confirm support Long lower shadows confirm support
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On this 5 minute chart this group of long upper shadows confirming that the bulls’ drive is stalling at the prior pivot high
Resistance
Bearish shadowsBearish shadows
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Convergence of Bullish ShadowsConvergence of Bullish Shadows
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8 22eptember
29 13October
27 10 24November
1 15December
29 122001
19 2 16February
23 9March
16 30 13April
20 4May
18 1June
15 29 13July
20 3 17August
24 7 21September
5O
910111213141516171819202122232425262728293031323334353637383940414243444546474849PACIFICARE HLTH (15.0500, 16.5400, 14.8600, 16.1200, +1.11000)
Bearish Shadows as resistanceBearish Shadows as resistance
A market “rising in agony”
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Hammer
black or whiteCriteria:• Small real body at, or near top, of range• Lower shadow at least 2x real body• Market in down trend
Implication: ‘Groping for a bottom”
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Hammer as supportHammer as support
It is common for the market to retest a hammer. This will help expand on a base.
Will often retest lower
shadow
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Hammer and failure to hold new lowsHammer and failure to hold new lows
Failure to hold new lowsFailure to hold new lows
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SnapSnap
Crack and SnapCrack and Snap
CrackCrack
Target
StopBuy
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Hammer and Crack/SnapHammer and Crack/Snap
Hammer and failure to hold new lows46
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Crack and Snap on more than one sessionCrack and Snap on more than one session
11 12 15 16 17 18 19 22 23 24 25 26 29 30 31 1 2August
5 6 7 8 9 12 13 14
10.911.011.111.211.311.411.511.611.711.811.912.012.112.212.312.412.512.612.712.812.913.013.113.213.313.413.513.613.713.813.914.014.114.214.314.414.514.614.714.814.915.015.115.215.3
CISCO SYSTEMS
Support area shown at arrowsCracked support
On this session the bulls have regained control
Target area
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Crack/Snap with more than one sessionCrack/Snap with more than one session
Crack
snap
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The more signals - either candles or Western or a combination of both – converge at the same level, the more likely a reversal
Nison Trading Principle
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Hammer confirms support Hammer confirms support
Hammer and bullish shadows
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Hammer confirming supportHammer confirming support
Hammer confirmed support area
Here the hammer confirms supportHere the hammer confirms support
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Hammer as supportHammer as support
Spinning tops reflect bulls’ strength waning
A close under the lows of the hammer would void hammer's bullish forecast
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HammersHammers
14 22 28March
6 13 20 2742.543.043.544.044.545.045.546.046.547.047.548.048.549.049.550.050.551.051.552.052.553.053.554.054.555.055.556.056.557.057.558.058.559.059.560.0
WAL-MART STORES
Of candle lines A through E which are hammers and why?
A
B
C
DE
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Even a “perfect” candle signal does not equal a good trade!
YOU MUST ALWAYS JUDGE THE POTENTIAL TRADE’S
RISK-REWARD
Nison Trading Principle
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Hammer as SupportHammer as Support
Closed under hammer
supportsupport
hammer
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Risk/RewardRisk/Reward
If you buy on the hammer’s close ask “What is my stop and what is my target”?
Close
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Risk/rewardRisk/reward
Hammer confirmed on closeHammer confirmed on close
Reward
RiskRisk
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Which three prices of the session are on the high?
What happened during the session, by session’s end?
Dragonfly Doji
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Shooting Star
black or white
Criteria:• Small real body at, or near bottom, of range• Upper shadow at least 2x real body• Market in an up trend
Implication: ‘Signaling Trouble Overhead”
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Shooting Star / HammerShooting Star / Hammer
Hammer Hammer
Shooting StarShooting Star
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Dual Shooting StarsDual Shooting Stars
Shooting stars at Shooting stars at arrows at arrows at resistance area resistance area shows the market shows the market is rejecting those is rejecting those higher levelshigher levels
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Shooting Star as resistanceShooting Star as resistance
Shooting Star
Doji confirms shooting star’s resistance
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How NOT to use candlesticks How NOT to use candlesticks
Oh my goodness! The market rallied after the shooting star!
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Which three prices of the session are on the low?
What happened during the session, by session’s end?
Gravestone Doji
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Gravestone DojiGravestone Doji
Gravestone reinforces resistanceGravestone reinforces resistance
No reversal signalsNo reversal signals
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Gravestone dojiGravestone doji
15 22 29May
6 13 20 28 3June
10
27.5
28.0
28.5
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30.5
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31.5
32.0
32.5
33.099 CENTS STORES
The small The small gravestone doji gravestone doji was the first sign was the first sign of troubleof trouble
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Shooting star and failure to maintain new highsShooting star and failure to maintain new highs
Shooting star and failure to hold new highs
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SnapSnap
Crack and SnapCrack and Snap
CrackCrack
Target
StopBuy
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SellSell
Falling off the RoofFalling off the Roof
Target
Stop
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Falling Off the Roof on one sessionFalling Off the Roof on one session
Makes new Makes new high, then falls high, then falls to hold itto hold it
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Falling Off the Roof more than one sessionFalling Off the Roof more than one session
breakout
Falling off the roof
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Hammer and Hanging Man Lines
Hammer
Hanging Man
bottom reversal
top reversal
white or black
white or black
The difference between these is the preceding trend
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Hanging Man
Hammer
Hammer and Hanging Man Hammer and Hanging Man
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““If it appears from below, If it appears from below, buy. If it appears from buy. If it appears from above then sell.above then sell.””
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Hanging ManHanging Man-- confirmedconfirmedThe close the session after the hanging man confirmed its potential bearish implications
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The stock went from higher highs to the same highs. This in combination with the hanging man (which was confirmed) sent out warning signals.
Hanging ManHanging Man
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Long Black Real Body as Resistance
2nd resistance
1st resistance
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Center of Long White Candle as Support Center of Long White Candle as Support
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Center long black real bodyCenter long black real bodyS&P
middle long black real body
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Middle of Long Black Real BodyMiddle of Long Black Real Body
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Using Single Candlestick LinesUsing Single Candlestick Lines
Shrinking real bodies hint bears’ losing momentum. Tall white then shows bulls’ take control. What else also hints bear’s losing force here?
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Using the Size of Real Bodies to Gauge ForceUsing the Size of Real Bodies to Gauge Force
The shrinking size of the real bodies hint the bulls are losing force
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Convergence of Candles Define SupportConvergence of Candles Define Support
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Engulfing PatternsEngulfing Patterns
BearishBearishEngulfing Engulfing PatternPattern
BullishBullishEngulfingEngulfingPatternPattern
Criteria:• Black real body wraps around preceding white real body• Market in up trend
Implication: ‘Bulls have been constrained”
Criteria:• White real body wraps around preceding black real body• Market in down trend
•Implication: Market bottoming out
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Convergence of signals reinforce support Convergence of signals reinforce support
Two hammers reinforce support areaTwo hammers reinforce support area Bullish engulfing pattern further underscores support
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Crack and Snap and Bullish Engulfing Pattern Crack and Snap and Bullish Engulfing Pattern
Support zone
Bullish engulfing pattern as extra confirmation
Snaps back over broken support
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Bullish engulfing pattern as support Bullish engulfing pattern as support
16 23 30October
7 14 21
7.47.57.67.77.87.98.08.18.28.38.48.58.68.78.88.99.09.19.29.39.49.59.69.79.89.9
10.010.110.210.3ORACLE
One of most powerful aspects of the bullish engulfing pattern is their use as support.
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Bullish engulfing pattern confirms supportBullish engulfing pattern confirms support
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Shooting Star and bearish engulfing pattern Shooting Star and bearish engulfing pattern
Shooting StarBearish engulfing Bearish engulfing pattern confirms pattern confirms resistance set by resistance set by shooting star shooting star
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Bearish Engulfing Pattern as ResistanceBearish Engulfing Pattern as Resistance
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Bearish engulfing pattern Bearish engulfing pattern Before this bearish engulfing pattern the doji and shooting stars proved bull’s advance was being curbed
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Bearish engulfing pattern confirming resistanceBearish engulfing pattern confirming resistance
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Bearish Engulfing Pattern as ResistanceBearish Engulfing Pattern as Resistance
Bearish Engulfing Bearish Engulfing Pattern 1Pattern 1
Bearish Engulfing Bearish Engulfing Pattern 2Pattern 2
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Bearish Engulfing Pattern compared to Outside ReversalBearish Engulfing Pattern compared to Outside Reversal
Hammer Hammer
Bearish Bearish Engulfing Engulfing PatternPattern
Outside Outside reversalreversal
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Trading Tactics Trading Tactics -- Bullish Engulfing PatternBullish Engulfing Pattern1) Highlight the bullish engulfing
pattern
2) What was the low of the pattern and at what price was it completed?
3) Assuming a resistance area in mid-late Dec. at the long upper shadows would you buy on this bullish engulfing pattern?
4) What is the principle that this example highlights?
Question
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Dark Cloud CoverDark Cloud CoverCriteria:• Opens above prior high (or close) • Closes as long black real body• Close well into prior long white candle • Market moving north
Implication: “Advance is exhausting itself”
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Dark Cloud CoverDark Cloud Cover
Bulls have been constrained
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Dark Cloud Cover as ResistanceDark Cloud Cover as Resistance
Dark cloud cover reinforces zone of resistance
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Dark Cloud Cover with confirmationDark Cloud Cover with confirmation
Since this black candle didn’t get more than halfway into the white real body, we can wait for confirmation the next session
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Dark Cloud Cover and Risk/RewardDark Cloud Cover and Risk/Reward
PatternCompleted
Here
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Convergence of cluesConvergence of clues
This dark cloud cover as resistance
Bearish engulfing pattern
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Piercing Pattern
Criteria:• Market moving south• Opens below prior low (or close) • Closes as long white real body• Close more than halfway into prior black candle
Implication: “hint that the decline is exhausting itself”
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Piercing PatternPiercing Pattern
Piercing pattern Piercing pattern
Not a piercing pattern
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Piercing Patterns and confluencePiercing Patterns and confluence
1 2 3
1 and 3 are Piercing Patterns
2 is a bullish engulfing pattern
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Piercing PatternPiercing Pattern
Piercing Pattern
confirmed support
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Piercing Pattern and Negative SelectionPiercing Pattern and Negative Selection
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HaramiHarami
white or black
white or black
Criteria:• First candle is unusually long• Second real body within prior real body• Second real body can be black or white
Implication: ‘Change in flow of market”
Bearish
Bullish112
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22 29August
5 12 19 26 3September
9
66.066.567.067.568.068.569.069.570.070.571.071.572.072.573.073.574.074.575.075.576.076.577.077.578.078.579.079.580.080.581.081.582.082.583.0IBM
Support defined by a bullish engulfing pattern
Harami
Bearish HaramiBearish Harami
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Bearish harami confirms resistanceBearish harami confirms resistance
BullsBulls’’ in control in control but at resistancebut at resistance
Harami confirms Harami confirms bullsbulls’’ drive is stalling drive is stalling at resistance at resistance
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Bullish Harami Bullish Harami
Harami Pattern
Bearish engulfing pattern
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Practice ChartPractice Chart
1 2 3
4
5
On this intraday chart detail the reversals at 1,2,3 and 4. What was a resistance area at 5 (hint— for 5 look at long black candle)
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Question
Question
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Morning StarMorning Star
white or black
Criteria:Criteria:•• Market in down trend Market in down trend ••First candle long blackFirst candle long black•• Second real body (spinning top, Second real body (spinning top, black or white) doesnblack or white) doesn’’t overlap first t overlap first sessionsession’’s real bodys real body•• Third candle (white) closes deeply Third candle (white) closes deeply in first black real body in first black real body
Implication: Bulls are taking controlImplication: Bulls are taking control
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Morning StarMorning Star
While the ideal morning star has none of the real bodies touching, we could still view it as a morning star even if the last two real bodies overlap slightly– as is the case here.
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Morning Star Morning Star
Morning Star
Support areaPiercing Pattern
Doji show market is “tired”
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Morning StarMorning Star
The doji should not be used to sell since the market had just given a bottom reversal signal and was not overextended
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Evening StarEvening Starwhite or black
1
2
3
Criteria:• Market in an up trend •First candle is long white • Second real body (black or white spinning top) doesn’t overlap first session’s real body• Third candle (black) closes deeply in first white real body
Implication: Bears are taking control
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Evening Star and Risk/ RewardEvening Star and Risk/ Reward
24 1July
8 15 22 29 5August
12 19 26 3 9September
16 2
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
HEIDRICK STRUGG
Evening Star completed here. This is likely a poor risk/reward for a short sale.
This doji confirms the resistance area set by the evening star and as such may offer a better r/r.
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Candles in ContextCandles in Context
Evening Star
Morning Star
Would you buy here?
How about here?
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Entering and Exiting
1) What pattern is A,B,C?
2) When would you sell short and why
3) What is your stop, target?
AA CC
BB
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WindowsWindows
RisingWindow
Falling Window
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Go in the direction of Go in the direction of the windowthe window
Corrections stop at Corrections stop at the windowthe window
WindowsWindows
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A rising window is A rising window is supportsupport
Corrections stop at the windowCorrections stop at the window
Support Support ZoneZone
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Rising windowRising window
WindowWindow’’s zone of supports zone of support
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Large rising windowLarge rising window
Bottom of rising window as the major support
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A falling window is A falling window is resistanceresistance
Corrections stop at the windowCorrections stop at the window
Resistance Resistance ZoneZone
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Falling window with extra confirmationFalling window with extra confirmation
The The spinning spinning
tops helped tops helped confirm the confirm the importance importance
of the of the falling falling
windowwindow’’s s resistanceresistance
Falling Falling windowwindow
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Large Falling WindowLarge Falling Window
The top of The top of the falling the falling window is window is the major the major resistanceresistance
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Closed under the windowClosed under the window’’s support s support
Breaks the rising Breaks the rising windowwindow‘‘s s
support areasupport area
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Confluence of CandlesConfluence of Candles
1) Why did the market stall at area A?2) Why did it rally from area B?3) What two reasons did the market fail at C?
B
A
C
Question
Question
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Negative SelectionNegative Selection
27 30 1 2October
3 4 7 8 9 10 11 14 15 16 17 18 21 22 23 24 25 28 29 30
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
PHILIP MORRIS
Rising window
In spite of this bearish session and the failure at resistance (at dotted line) would you sell?
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Trading Tactics – practice
1. What pattern is highlighted?
2. When would you sell short based on this pattern? Hint-there are two times to sell short
Question
Question
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Candlecharts.comWestern ToolsWestern Tools
Optimizes and confirmsOptimizes and confirms
Price targetsPrice targets
Widely FollowedWidely Followed
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Technicals and unexpected newsTechnicals and unexpected newsBullish surprise and the rally stopped at resistance
Bearish news and the market stabilized at support
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East and WestEast and West
These dual hammers were extra significant since they also confirmed a support level
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East and WestEast and West
1) Who1) Who’’s in control s in control during this ascent?during this ascent?
2) What is this 2) What is this candle line candle line hinting?hinting?
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East and WestEast and West
For Bull Flag pattern take height of move before the consolidation and add that to the bottom of the box range
Doji as signal to exit
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Western TA/Candles for targetsWestern TA/Candles for targets
5November
12 19 26 3December
10 17 24 312002
7 14
18.0
18.5
19.0
19.5
20.0
20.5
21.0
21.5
22.0
22.5
23.0
23.5
24.0
24.5
25.0UNIBANCO GDR (20.9000, 21.4600, 20.7000, 21.4000, +0.55000)
B) Sell short at bearish engulfing pattern’s resistance level with a target to Harami
Harami
A) Buy at Harami with target to resistance at bearish engulfing pattern
Bearish Engulfing Pattern
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Change of PolarityChange of Polarity
SupportSupportSupportSupport
Resistance
ResistanceResistance
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This old resistance
area
Turns into new
support
Resistance converts into new supportResistance converts into new support
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Candle signals must be evaluated and acted upon within the market’s context
Nison Trading Principle
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Candles in ContextCandles in Context
Doji and Shooting Star
hammerhammer
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hammer
dojidojiShooting starShooting star
Prior Prior resistance resistance becomes becomes new new supportsupport
Candles in ContextCandles in Context
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Change of Polarity Change of Polarity
support support
Resistance
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Volume Confirms SignalVolume Confirms Signal
High Volume Hammer
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VolumeVolume
Blue arrows hint at selling climax sessions, but needed higher close to confirm. Got this with a hammer.
Note high volume window
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Subjectivity and Volume Subjectivity and Volume
Rising window
When window’s support was pierced so slightly (5 cents) we could wait for next opening to confirm – especially with such a high volume window (which is often solid support).
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High Volume Falling WindowHigh Volume Falling Window
8 15 22 29May
6 13 20 28 3June
10 17
40005000600070008000
x1000
Volume
35.5
36.0
36.5
37.0
37.5
38.0
38.5
39.0
39.5
40.0
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
44.5
45.0
45.5AMER EXPRESS CO
The volume spike on the falling window increases the significance of this resistance
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Importance of VolumeImportance of Volume
Higher volume on white candle compared to black on this bullish engulfing pattern magnifies the likelihood of a reversal
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High Volume DojiHigh Volume Doji
This high volume “long-legged” doji shows that as hard as the bulls try to push the market, the bears have enough force to absorb this demand.
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Volume ConfirmationVolume Confirmation
The arrow points to a “Snap and Crack”. What does volume do to increase or decrease the likelihood of this technique working?
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Trading Tactics Trading Tactics -- East and WestEast and WestAt the arrow we see a doji.
1) What is the volume on this doji telling us about the supply/demand situation?2) What 2 candlestick signals in August (at A) give clues that there was support at the doji?3) Although the doji was holding a support area, what happened on the day of the doji that
would keep the short term trend down? Based on this, what would we need to see to give bullish confirmation of that support area? Q
uestionQ
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A
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Simple Moving Average
Formula: Add price (usually close) for N periods/ N periods
Example: 20 day moving average of close: add total of last 20 day’s closing prices and divide by 20.
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Example of 5 day m.a.
Sept. 26-30125/5=$25
$32Sept. 30
Sept.25-29116/5=$23.20
$29Sept. 29
Sept. 24-28107/5=$21.40
$22Sept. 28$21Sept. 27$21Sept. 26$23Sept. 25$20Sept. 24
Last 5 days/5= 5 day m.a.Closing PriceDate
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Moving Averages Moving Averages –– the shorter the more it the shorter the more it ““hugshugs”” pricesprices
5 day
30 day
50 day
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Moving Average as Support/ResistanceMoving Average as Support/Resistance
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East and WestEast and West
Spinning top help confirm support at this moving average
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Candles in Context Candles in Context –– Moving AveragesMoving Averages
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Bollinger BandsBollinger Bands
5 12November
19 26 3 10December
17 24 31 72002
14 22 28 4 11February
19 25 4March
11 18 25 1April
8 15 22 29 6May
13 20 2738.0
38.5
39.0
39.5
40.0
40.5
41.0
41.5
42.0
42.5
43.0
43.5
44.0
44.5
45.0
45.5
46.0
46.5
47.0
47.5
48.0
48.5COSTCO WHOLESAL
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Hammer Hammer –– slide 1 of 2slide 1 of 2
Hammer is a plus
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East and West East and West –– slide 2 of 2slide 2 of 2
Hammer at bottom end of Bollinger Band is even better!
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East and WestEast and West
This evening star pattern emerged at the top end of the Bollinger Band resistance
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Subjectivity and Candle ChartsSubjectivity and Candle Charts
4rch
11 18 25 1April
8 15 22 29May
6 13 20 28
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112OIL SERVICEThe ideal shooting star has little, or
no, lower shadow. In this example is the lower shadow too long? Viewing this signal within context of top end of BB we can view it as significant as an “ideal” shooting star
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Oscillators Oscillators
Separate from priceSeparate from price
Best in lateral marketsBest in lateral markets
Includes Includes stochasticsstochastics, MACD, , MACD,
RSI, price oscillator, etc.RSI, price oscillator, etc.
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ApplicationsApplications
Momentum: Momentum: force of trendforce of trend
Overbought/Oversold:Overbought/Oversold:
DivergenceDivergence
too far too fast?too far too fast?
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Positive DivergencePositive Divergence Negative DivergenceNegative Divergence
PricePrice
OscillatorOscillator
22
11 22
11
OscillatorOscillator
PricePrice
1122
11 22
DivergenceDivergence
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Price OscillatorFormula:
short term moving average – long term moving average
Example: 10 day moving average = $23 30 day moving average = $31
Price oscillator = $23-$31= -8 If 10 and 30 day moving averages are the same Price Oscillator = 0
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Bearish DivergenceBearish Divergence
29 30 1May
2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 28 29 30 31 3June
4 5 6 7
-1
0
1
2Price Oscillator
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0MOBILE TELESYS ADR
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Bearish divergence with candle confirmationBearish divergence with candle confirmation
29 30 1May
2 3 6 7 8 9 10 13 14 15 16 17 20 21 22 23 24 28 29 30 31 3June
4 5 6 7
-1
0
1
2Price Oscillator
30.5
31.0
31.5
32.0
32.5
33.0
33.5
34.0
34.5
35.0MOBILE TELESYS ADRDoji and shooting star warning of trouble overhead
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Relative Strength Index
Formula: = 100 – (100/1+RS)
Where RS = average of N day’s up closesaverage of N day’s down closes
Example: If total up points (close to close) over 14 days was $28 and total down points for 14 days was $14:Average up = 28/14=$2 and Average down 14/14=$1.
So, RS= 2/1=2 and RSI = 100 – (100/1+2)=100-33.33 = 66.67%
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Oscillators Oscillators –– Bearish DivergenceBearish Divergence
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Bullish Divergence confirmed with candlesBullish Divergence confirmed with candles
Hammer and bullish divergence
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Be careful about oscillators in strong trendsBe careful about oscillators in strong trends
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StochasticsFormula for %K:
today’s close-lowest close in N periodshighest high in N periods-lowest low in N periods
100 *
Example: for 14 day %K, today’s close is 41, if highest high was 46 and lowest low was 38, for %K we have:%K = 41-38/46-38 *100= 37.5%
This means today’s close was 37.5% relative to the entire range of last 14 sessions.
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Hammer and crossover with Hammer and crossover with stochasticsstochastics
Note how the hammer gave the reversal signal a day before the bullish crossover
Hammer
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Bearish Crossover Bearish Crossover w/stochasticsw/stochastics confirmed by candlesconfirmed by candles
Bullish engulfing pattern and %K crossing under %D line from overbought reading in oscillator
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OscillatorOscillator-- Stochastic with CandlesStochastic with Candles
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2
1
Oscillators Oscillators –– Bearish DivergenceBearish Divergence
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Oversold?Oversold?-- slide 1 of 2slide 1 of 2
On this daily chart it looks
oversold
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Oversold now? Oversold now? --slide 2 of 2slide 2 of 2
This intraday chart gives another perspective
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Head and ShouldersHead and Shoulders
NecklineNeckline
Left ShoulderLeft ShoulderRightRightShoulderShoulder
HeadHead
Head and Shoulders Top
Sell signal
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Three Buddha Pattern
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neckline
Interview
Head and Shoulder top
Lows from dual bullish engulfing patternsLows from dual bullish engulfing patterns
TASC Magazine Interview TASC Magazine Interview -- Jan. 24, 2003 S&P at 860Jan. 24, 2003 S&P at 860
“… the heads and shoulders top on the S&P gives a target to the July-October bullish engulfing patterns near 775. A close over 870 would void this.”
Target zoneTarget zone
Hammer
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Bloomberg TV Interview - July 28, 2003 S&P at 996
hammerhammer
Doji Doji Shooting star Shooting star
Prior Prior resistance resistance becomes new becomes new supportsupport
Interview
“Major support near 960. My upside target is 1160”
target
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Prior Prior resistance resistance becomes new becomes new supportsupport
Target zone forecasted in July 03
Bearish Engulfing Pattern
Evening Star Interview
“ I am looking for major resistance at 1160 to 1175”
Bloomberg TV Interview – Jan. 26, 2004 S&P at 1140
Weekly Chart
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““Falling off Falling off the roofthe roof””
Bearish Bearish Engulfing Engulfing PatternPattern
Interview
“ I am looking for major resistance at 1160 to 1175”
Bloomberg TV Interview – Jan. 26, 2004 S&P at 1140
Daily Chart
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Price = Knowledge Price = Knowledge
Why Candlestick Charts?
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Doji after Tall White Doji after Tall White
This doji takes on extra importance because it confirms market is stalling within a resistance zone
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Outmaneuver Outmaneuver your your competitioncompetition
Why Candlestick Charts?
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Early Reversal Signals Early Reversal Signals
Crack
snap
Morning Star
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Fosters ObjectivityFosters Objectivity
Why Candlestick Charts?
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Although this market is Although this market is descending, the long descending, the long lower shadows offsets lower shadows offsets some of the negative some of the negative outlookoutlook
Long Lower (Bullish) ShadowsLong Lower (Bullish) Shadows
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Insights into Insights into market psychology market psychology
Why Candlestick Charts?
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Criteria: Open and close are the same
Implication: Market is “tired”
Doji
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25 day moving average
Close under m.a. support area but note how we got an earlier reversal with the gravestone
FMNA Bond PricesFMNA Bond PricesGravestone doji
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New high close but ???New high close but ???
Doji is a warning!
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PPrice = Knowledge rice = Knowledge RRisk Managementisk ManagementOOutmaneuver your competitionutmaneuver your competitionFFosters Objectivityosters ObjectivityIInsights into market psychology nsights into market psychology TTimingimingSStay alive tay alive
Why Candlestick Charts?
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Seize trading opportunities before Seize trading opportunities before they become apparent to othersthey become apparent to others
Information is Power! Learn how to Information is Power! Learn how to avoid losing trades avoid losing trades
Pinpoint turning signals with razor Pinpoint turning signals with razor sharp accuracy sharp accuracy
Achieve PEAKTrading performance!
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Interactive Session
Answers
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Rally may just be starting
Market notoverextended
Resistance confirmed by doji
A B C
Analyze these doji in the context of what happened before. Are any of these a more likely reversal and why?
Answ
erA
nswer
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Trading Tactics Trading Tactics -- DojiDoji
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Doji Overview Doji Overview –– Analyze Each Doji in Context of TrendAnalyze Each Doji in Context of Trend
15 22 29 5August
12 19 26 3September
9 16 23
13.5
14.0
14.5
15.0
15.5
16.0
16.5
17.0
17.5
18.0
18.5
19.0
19.5
20.0
20.5HEIDRICK STRUGG
1
2
3
4 5
6
1- Southern doji: downtrend should continue.2- In a “box” range: no trend to reverse.3- Southern doji: however it is confirming a support level and thus takes on more significance.4- Northern doji: rally running out of steam.5 - Southern doji- downtrend still in force6- Doji in a box range
Answ
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HammersHammers
14 22 28March
6 13 20 2742.543.043.544.044.545.045.546.046.547.047.548.048.549.049.550.050.551.051.552.052.553.053.554.054.555.055.556.056.557.057.558.058.559.059.560.0
WAL-MART STORES
Which of these are hammers and why?
Only B was a hammer.
Lower shadow not long enough and C,D and E didn’t come after a downtrend
A
B
C
DE
Answ
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Trading Tactics Trading Tactics -- Bullish Engulfing PatternBullish Engulfing Pattern
1) Highlight the bullish engulfing pattern. - See 1
2) What was the low of the pattern and at what price was it completed? - 13 ½ and 17 ¾
3) Assuming a resistance area in mid-late Dec. at the long upper shadows would you buy on this bullish engulfing pattern? - No- it would be a bad risk/reward
4) What is the principle that this example highlights? - Not every candle signal should be a buy or sell.
1
Resistance Zone
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Answ
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nswer
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Practice ChartPractice Chart
1 2 34
5
On this intraday chart detail the reversals at 1,2,3 and 4. What was a resistance area at 5 (hint—look at long
black candle)
1) bearish engulfing pattern2) shooting star3)harami4)bearish engulfing pattern5) center long black
[email protected] 732.254.8660 USA
Answ
erA
nswer
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1) When would you sell short, at A,B or C
Answer- At C. Not B because it is a new high close for move
2) Why
Answer- “Falling off the roof” and evening star. Because of falling off the roof can consider selling on open
3) What is your stop, target?
Answer- Stop is above high of B and target is low of move before late Oct. rally.
AACC
BB
Target
Entering and Exiting
Answ
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Confluence of CandlesConfluence of Candles
1) Falling window and two harami at A2) Bullish Engulfing Pattern at B3) Shooting Star at falling window at C
B
A
C
Answ
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nswer
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Trading Tactics – practice
1. What pattern is highlighted? Bearish engulfing pattern2. When would you sell short based on this pattern? Because of the rising window we would not sell on the completion of this pattern. As such we could sell on (a) the resistance at the highs of the bearish engulfing pattern, or (b) on a break under the windows support.
Rising window’s support
Potential selling levels
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1) The high volume reflects heavy supply, but the doji proves that demand is strong enough to absorb this supply.
2) A hammer followed the next day by a bullish engulfing pattern. 3) While the high volume doji was a plus, that session also formed a falling window
and as such we needed a close over that window to turn more bullish.
Hammer and
Bullish Engulfing
Pattern
Window
Trading Tactics Trading Tactics -- East and WestEast and West
Answ
erA
nswer
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A
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232
New tactics and New tactics and strategies revealed only strategies revealed only here!here!
Advanced Candle Charting Techniques
Geared to those familiar Geared to those familiar with candlestick basicswith candlestick basics
For more details about this For more details about this DVD Workshop visit DVD Workshop visit www.candlecharts.comwww.candlecharts.com
Steve will personally Steve will personally answer questions answer questions
without time limit on without time limit on any topic on this DVDany topic on this DVD
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Slide 233
Secrets to Becoming a Samurai Trader Secrets to Becoming a Samurai Trader ––Advanced Candlestick Charting Advanced Candlestick Charting
New refinements and enhancements using doji, engulfing New refinements and enhancements using doji, engulfing patterns and many other signals for high success trading patterns and many other signals for high success trading with candle charts with candle charts See when to ignore a candle signalSee when to ignore a candle signalSpecial section on intraday trading including how to use Special section on intraday trading including how to use candles differently on intraday charts, using different time candles differently on intraday charts, using different time frames to increase trading success frames to increase trading success The Checkmate PrincipleThe Checkmate PrincipleUncover the one rule every candlestick trader ignores at Uncover the one rule every candlestick trader ignores at their own peril their own peril Learn the six principles every candlestick trader must Learn the six principles every candlestick trader must know know Uncloak new uses for the most potent candle pattern Uncloak new uses for the most potent candle pattern -- the the windowwindowInteractive practice sessionsInteractive practice sessionsEffective money management concepts to maximize the Effective money management concepts to maximize the effectiveness of candle charts effectiveness of candle charts
234
For details on SteveFor details on Steve’’s DVD s DVD Workshop Workshop Advanced Candlestick Advanced Candlestick Charting TechniquesCharting Techniques go to go to www.candlecharts.comwww.candlecharts.com
Sign up for SteveSign up for Steve’’s FREEs FREEbibi--weekly newsletter at weekly newsletter at www.candlecharts.comwww.candlecharts.com
235
IndexPage # Topic
1 – Introduction and Construction11 – Spinning Tops16 – Doji34 – Shadows 41 – Hammer, Crack and Snap and Dragonfly Doji60 – Shooting Star, Gravestone Doji and Falling off the Roof74 – Hanging Man79 – Center Long White/Long Black 88 – Engulfing Pattern100 –Dark Cloud Cover107– Piercing Pattern112 – Harami119 – Morning and Evening Stars132– Windows145– Candles and Western tools: confirmation, Change of Polarity, Volume, Moving Averages, and oscillators202 – Steve’s market forecasts207 – The PROFIT principle and Overview of day 2 session 221- Answers to Quiz and Interactive Charts