STEVE NISON'S a u U 0 u Candlecharts.

com

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Steve Nison's Candlestick Companion A desktop candlestick reference guide

Important Caveats

THIS GLOSSARY IS DESIGNED TO BE USED AS A REFERENCE ONLY AFTER YOU HAVE TAKEN MR. NISON'S LIVE OR WEB BASED SEMINARS OR HAVE VIEWED HIS DVD WORKSHOPS. This is because Mr. Nison's training covers criticallrading factors such as risk/reward, candlestick confirmation, when to ignore a signal, etc. These and other factors are not addressed in Steve Nison Candlestick Companion. As such do not trade on just the information is this visual guide.

Although this reference guide does not include all the patterns, it does have the most common and important signals. The patterns are separated by bullish and bearish. The order is based on the number of candlestick lines in the pattern.

Note: There are other so-called "candlestick experts" who make no reference to where they found their information about candlesticks. Even more worrisome for you as a trader is that they are inventing their own candlestick signals without any historical basis. The true

candlestick patterns in this desktop glossary have been refined by generations of use. .

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"He who is well prepared has won half the battle" - Japanese Proverb

The training, advisory and commentary services available from Candlecharts.com are tried and true weapons that are continually proven on the battlefields of world markets every day. Noted candlestick expert Steve Nison provides customized technical advisory and on-site seminar services to top-tier institutional firms including market makers, hedge funds and money managers.

While recognized as THE authority on candlestick charts, Nison is also an expert on Western technical analysis with over 30 years real world experience. As such, our products and services incorporate the best ai-both Eastern and Western technical trading techniques which will let you spot turning signals before your competition, help preserve capital, and improve market timing.

A partial list of Candlecharts.com products includes daily market commentaries, Nison MarketScan™, DVD workshops, and web based education. A complete list is on the back cover.

We invite you to visit Candlecharts.com to sign up for a free bi-weekly newsletter, view Mr. Nison's seminar schedule and to discover all the tools designed to help you Trade Smarter, Trade Safer, Trade BetterTM.

Expertise You Can Trust

Steve Nison, CMT, President and Founder of Candlecharts. com is uniquely qualified to take advantage of his dynamic candle charting techniques.

As the very first to reveal candlestick charts to the Western Hemisphere, he is acknowledged as the leading authority on the subject. Mr. Nison is the author of three books including "Japanese Candlestick Charting Techniques." Sales of over 100,000 copies, in nine languages, have made these books the "bibles of candlestick analysis" around the world.

Mr. Nison has appeared numerous times on CNBC and his groundbreaking work has been highlighted in the Wall Street Journal, Barron's, Institutional Investor, and many other publications around the world.

As a renowned and sought after speaker, Nison has trained professionals in 18 countries from almost every major investment firm on how to apply - and profit from -these methods.

Mr. Nison has spoken, by request, before the World Bank and the Federal Reserve, He has taught at numerous universities, and major stock and commodity exchanges.

Constructing the Candlestick Line

high

-....

Shadow ---.

Candlestick (also called candle) charts can be used in stocks, futures, and any other market that has an open, high, low and close. And they can be used in all time frames.

The Real Body isthe open and close range of the session. If the close is lower than the open, the Real Body is black. The Real Body is white if the dose is higher than the open. The thin lines.above and below the real body are called the Shadows. The peak of the Upper Shadow is the session's high and the bottom of the Lower Shadow is the low of the session. Note that the candlestick line uses the same data as a bar chart (the open, high, low, and close). Thus, all Western charting techniques can be integrated with candle chart analysis,

Ci0$8 -

Real Body

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Bullish Signals

Doji during decline (Southern Doji)

!

Criteria:

• Market in a down trend

• A session in which the opening and closing prices are the same

t

Market Implication: Prior bear trend could be losing momentum.

Support: Not used as support.

Psvchology: With the same open/close we get a visual clue Ihat there is a balance between supply and demand.

Nison Insights:

• If a small real body is almost a Doji it can be viewed as a Doji

• Doji often work better at calling top, rather than bottom, reversals

• See also Dragonfly and Gravestone Doji

• Opposite of Northern Doji

Dragonfly Doji

!

Criteria:

• Market in a down trend

• This special doji forms with the open and close at the high of the session

T _

/

Support

Market Implication: Bears may be losing command.

Support: The low of this candle line. Psychology: Very long lower shadow and close at the high of the session means that after an initial selloff bulls then took control. Nison Insights:

• Related to the Hammer insofar as both bottom reversals have very long lower shadows and closes at or near session's high

• Opposite of Gravestone Doji

Small Real Bodies (Spinning Tops) in Decline

!

Criteria:

A small real body is called a "Spinning Top"

Market Implication: Bear lorce losing momentum.

Support: Not used for support unless there are three or more with the same lows.

Psychology: Small real body displays that there is a tug of war between supply and demand, with neither in full control.

Nison Insights:

• Real body can be either white or black

• The more spinning tops, the more the trend has gone from down to neutral

• Caution: Spinning tops, while changing the trend to less bearish, could just be a lull that relieves an oversold condition

Hammer

L'-- White or black <;

Support

Criteria:

• Market in down trend

• Small real body at, or near, top of range

• Lower shadow at least two times the size of the real body

1

Market Implication: Bottom reversal. Support: The low of the Hammer. Psychology: Long lower shadow and close at or near session highs shows the market is rejecting lower levels.

Nison Insights:

• Market will often retest lower shadow

• Very small upper shadow is acceplable

• Opposite of Shooting Star

Inverted Hammer

Criteria:

Has the same criteria as the Shooting Star (see Shooting Star). However, this line appears after a decline whereas a Shoaling Star emerges

during an up trend

Long Lower (Bullish) Shadows

Criteria:

• Two or more sessions with long lower shadows

• The bottoms of all these lower shadows are at, or near, the same level

Market Implication: Potential bottom reversal. Support: Not used as support.

Psychology: Those who sold short on the inverted hammer's session's open or close bought at new low for the move, thus making them nervous.

Nison Insights:

• Must come after a significant decline

• Because of the bearish shape of the line (the very long upper shadow) we do nol view this as meaningful reversal signal

• Opposite of Hanging Man

Market Implication: Trend turning less negative.

Support: One long lower shadow is not used lor support, but a group of bullish shadows near the same lows would be.

Psychology: The extended lower shadows near the same lows mean the market is rejecting those lower levels.

Nison Insights:

• The greater the number of long lower shadow candles near the same lows, the more significant that support

• Opposite of Long Upper (Bearish) Shadows

Tweezers Bottom

Bullish Counterattack

Criteria:

• Two or more candles with matching lows

• Either both or Ihe second candle line must reflect bear's drive is easing

Market Implication: Bottom reversal.

Support: Bottom of matching lows. Psychology: With both candles having same lows we are getting a hint of slackening of selling force.

Nlson Insights:

• Both candles need not be exactly the same lows

• The second candle must have either a long lower shadow and/or small real body

• Opposite of Tweezers Top

Bullish Harami

Criteria:

• Market in down trend

• First candle is an unusually long black real body

• Second real body within prior real body

Criteria:

• Market in down trend

• Second candle gaps below prior low (or close) at the open, then closes at prior close

Market Implication: Bottom reversal. Support: Not used as a support.

Psychology: The first long black real body reflects the bears' control. The small real body then reflects the bears are losing momentum. Nison Insights:

• Both real bodies can be the same color

• The more deeply the second real body closes into the first real body the better the signal

• Opposite of Bearish Harami

Market Implication: Bottom reversal. Support: The low of the second candle. Psychology: On the second session's open the market is weak, but the unchanged close at sessions' end could mean the decline is exhausting itself.

Nison Insights:

• Closes do not have 10 be exactly the same

• Both real bodies should be long

• Opposite of Bearish Counterattack Line

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Bullish Signals

Piercing Pattern

Criteria:

• Market in down trend

• Opens below prior low (or close)

• White candle closes deeply into prior black real body

Market Implication: Bottom reversal.

Support: The lowest low of the two candlestick lines.

Psychology: The bearish implications of the black real body are offset by the ability of the bulls to push prices deeply into the black candie's real body the next session.

Nison Insights:

• The second session has to close at least halfway into the prior real body

• Black real body should be relatively long

• Opposite of Dark Cloud Cover

Bullish Engulfing Pattern

..

SUPPQrt

Criteria:

• Markel in down trend

• White real body wraps around preceding small black real body

Market Implication: Bottom reversal. Support: The lowest low of the two candle lines.

Psychology: First small real body small clue bears losing momentum. Then the extended tall white candle proves bulls have gained the upper hand.

Nison Insights:

• White real body need not wrap around shadows of prior candle

• First black real body should be small compared to white real body

• First real body can be a doji

• Opposite of Bearish Engulfing Pattern

Rising Window

RISing"\. n Window '\.~

'\ - -. > Support zone

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Criteria:

There is no trading between current session's low and prior

session's high

Market Implication: Has bullish implications. Support: The entire rising window with major support at the bottom of the Rising Window. Psychology: The gap up shows how strongly one sided the market is in favor of the bulls. Nison Insights:

• The market may not pull back to the window

• The point at which the Rising Window's support is broken is on a close under the bottom of the window

• Opposite of Falling Window

Morning Star

Tower Bottom

j , Criteria:

~ , • Market in down trend

I • First candle is long black

o • Second real body is small

W""!.'''~. ---, ,"_ • Third candle (white) closes deeply in first black candle

Market Implication: Bottom reversal. Support: The lowest low of the three candle lines.

Psychology: The first black candle shows heavy supply. The small real body shows a diminution of the bearish force. The white candle then proves the bulls have gained the upper hand.

Nison Insights:

• Second small candle can be at the bottom part of the first or third candle's real body

• By the last tall white candle, the market may be overbought

• Opposite of Evening Star

Three Advancing White Soldiers

• Market in down trend

• Three consecutive rising white candles

• Each white candle has a higher close

• Each white candle's opening within or above the prior session's white real body

Market Implication: Sign of strength. Support: Low of the pattern.

Psychology: One white candle that closes at or near the highs is a plus, and when there are three it means the bull's are running the show. Nison Insights:

• There can be no small white real bodies, each has to be relatively long

• There should be little or no upper shadow for each candle

• Opposite of Three Black Crows

Criteria:

• Market in down trend

• After one or more black candies there is a short-term lull

• Then a large white candle emerges

Market Implication: Bottom reversal. Support: Lowest level reached within this pattern (including the lull period).

Psychology: Bears are calling the shots at first. The lull shows bears are losing control. The tall white candle means the bulls are now in control. Nison Insights:

• First candle has to be long black

• Lull can be made up of any candle lines

• The last candle must have an extended white real body

• Opposite of Tower Top

Frying Pan Bottom

! I I_RISlngWlndoW

1" .. 1, ... ,! ..... ,! .... ,1 ... " .... , .... " ..

<, support

Criteria:

• Market in down trend and then moves into a concave pattern

• Pallern is confirmed when market gaps up (l.e., forms a Rising Window)

Record Session Lows

Criteria:

• A lower low is called a record session low

.8-10 record session lows in a short time increases possibility of trend change

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Market Implication: Bottom reversal. Support: Two levels of support:

1) Bottom of Rising Window 2} Pattern low

PsychOlogy: Going from lower lows to higher lows proves bears are losing their foothold. Rising gap then puts bulls in charge.

Nison Insights:

• This pattern is the same as a rounding bottom in Western technicals, except that it also has the added positive signal of a Hisinq Window

• When market is forming concave pattern should have small real bodies,

• Opposite of Dumpling Top

Market Implication: The market is viewed as oversold, but we recommend waiting for a bullish candle or other signal before acting on the record sessions.

Support: Once the market rallies use the lowest low of the pattern. Psychology: The decline with lillie or no lateral action or rally means the market is overextended to the downside.

Nison Insights:

• If the market has a steep rally, or trades sideways for a period, the count has to restart

• 8-10 is only a guideline

• Opposite of Record Session Highs

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Bearish Signals

Market Implication: Top reversal.

Resistance: Top of matching highs. Psychology: With first and second failing at same highs we are gelling clues of a slackening of demand.

Nlson Insights:

• Both candles need not be exactly the same highs

• The second candle line must have either a long upper shadow and/or small real body

• Opposite of Tweezers Bottom

Doji during rally (Northern Doj!)

Criteria:

• Market in up trend

• A session in which the opening and closing prices are the same.

Market Implication: Prior bull trend is losing momentum.

Resistance: The highest high of the Doji and the prior candle line can be used as resistance. Psychology: Shows a balance between supply and demand.

Nlson Insights:

• If a small real body is almost a Doji it can be viewed as a Doji

• Doji usually work better at calling tops than bottoms

• See also Dragonfly and Gravestone Doji

• Opposite of Southern Doji

Gravestone Doji

Criteria:

• Market in up trend

• This special Doji forms with the open and close at the low of the session

Small Real Bodies (Spinning Tops) in a Rally

I •

Market Implication: Market rejecting higher prices.

Resistance: See Doji during a rally. Psychology: Extended upper shadow and close at the low of the session shows after an initial rally, the bears look control.

Nison Insights:

• Opposite of Dragonfly Doji

• Related to the Shooting Star since both have very long upper shadows and closes at or near the session low

Criteria:

A small real body is called a "Spinning Top"

Market Implication: Bull force losing momentum.

Resistance: Not used for resistance unless there are three or more with the same highs. Psychology: Small real body shows there is a tug of war with neither bulls nor bears in full control.

Nison Insights:

• Real body can be either white or black

• The more spinning tops, the more the trend has gone from up to neutral

• Note of caution: One or more spinning tops, while changing the trend to less bullish, could just be a lull that relieves an overbought condition

Shooting Star

....... R.slslan c.

I=":::'k or .,

Cfiteria:

• Market in up trend

• Small real body at, or near, bottom of session

• Upper shadow at least twice height of the real body

Market Implication: Top reversal. Resistance: Shooting Star's high. Psychology: Visually displays a session which the market rallied and then failed to hold those levels.

Nison Insights:

• Real body can be black or white

• Very small lower shadow acceptable

• Opposite of Hammer

Hanging Man

T _whit. or black

Criteria:

Hanging Man has the same criteria as the Hammer (see Hammer). However, this

line appears after a rally whereas a Hammer emerges during a down trend

Market Implication: Potential top reversal. Resistance: Not used as resistance. Psychology: Those who bought on the hang" ing man session's open or close bought at new highs for the move, thus making them nervous. Nison Insights:

• Must come after a significant rally

• Because of the positive shape of the line (the very long lower shadow) we do not view this as meaningful reversal signal

• Opposite of Inverted Hammer

Long Upper (Bearish) Shadows

Criteria:

• Two or more sessions with extended upper shadows

• The highs of all these upper shadows are at, or near, the same level

Market Implication: Trend turning less positive. Resistance: One long upper shadow is not used for resistance, but a group of these bearish shadows near the same highs would be. Psychology: The extended upper shadows

near the same highs shows market rejecting those higher levels.

Nison Insights:

• The greater the number of long upper shadow candles near the same highs, the more significant that resistance

• Opposite of Long Lower (Bullish) Shadows

Tweezers Top

Bearish Counterattack

Criteria:

• Two or more candles with matching highs

• Either both or the second candle line must reflect bull's drive is easing

Bearish Harami

Criteria:

• Market in up trend

• First candle is unusually long white real body

• Second real body within prior real body

Criteria:

• Market is up trend

• Second candle opens above prior session's high (or close), then closes at prior close

Market Implication: Top reversal. Resistance: Not used as a resistance. Psychology: After a bull move, the long white real body's vitality is followed by the small real

body's uncertainty. .

Nison Insights:

• Both real bodies can be the same color

• The more deeply the second real body closes into the first real body the better the signal

• Opposite of Bullish Harami

Market Implication: Top reversal. Resistance: The high of the second candle. Psychology: As good as things look at the second session's open, the unchanged close is then cause for concern.

Nison Insights:

• Closes do not have to be exactly the same

• Both real bodies should be long

• Opposite of Bullish Counterattack Line

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Bearish Signals

Dark Cloud Cover

,

I ~

Criteria:

• Market in up trend

• Opens above prior high (or close)

• Black candle closes well into prior long white candle

Market Implication: Top reversal. Resistance: The highest high ot the two candlestick lines.

Psychology: Tall white candle and gap higher next session relays the bulls are in complete control. But the second session's weak close

means the tide has turned.

Nison Insights:

• Close at black candle has to close at least at half way into tall white candle

• White real body should be relatively long

• apposite of Piercing Pattern

Bearish Engulfing Pattern

~

• Market in up trend

• Black real body wraps around preceding small white real body

Market Implication: Top reversal. Resistance: The highest high of the two candlestick lines.

PsychOlogy: The long black candle reflects how the bears have wrested control of the market from the bulls.

Nison Insights:

• Black real body need not wrap around shadows of prior white candle

• First white real body should be small compared to black real body

• First real body can be a doji

• Opposite of Bullish Engulfing Pattern

Falling Window

~

There is no trading between current session's high and prior session's low

Market Implication: Has bearish implications. Resistance: The entire window with major resistance at the top of the Falling Window. Psychology: The gap down echoes how strongly one-sided the market is in favor of the bears.

Nison Insights:

• The market may not rally to the window

• The Falling Window's resistance is broken on a close above the top of the window

• Opposite of the Rising Window

Evening Star

Tower Top

- ... -----.;:- Critel'la:

• iee -T , ."""'''. Market in up trend

~ • First candle IS long white

• Second real body IS small

• Third candle (black) closes

I deeply In first white real

body

Market Implication: Top reversal. Resistance: The highest high of the three candle lines.

Psychology: The white candle reflects the bullish trend is in force. Next small real body warns momentum is flagging and then black real body confirms the prior rally has stalled. Nison Insights:

• The second small candle can sometimes be at the top section of the first or third candle's real body

• At the last long black candle, the market can be oversold

• Opposite of Morning Star

Three Black Crows

Criteria:

• Market in up trend

• Three consecutive falling black candles

• Each black candle has a lower close

• Each candle's open within or

below the prior black real body

Market Implication: Topping signal. Resistance: High of the pattern.

Psychology: One black candle that closes at or near the lows is a negative. Three shows the bears are running the show.

Nison Insights:

• Market may be oversold since there may havs been a substantial decline by the pattern's completion

• Each black candle has to be long

• There should be little or no lower shadow for each candle

• Opposite of Three Advancing White Soldiers

Resistance

....

r .. ·· .. ······

ij III,

Criteria:

• Market in up trend

• After one or more white candies there is a short-term lull

• Then a large black candle emerges

Market Implication: Top reversal. Resistance: Highest level reached within this pattern (including the lull period). Psychology: Bulls are firs! calling the shots. The lull shows bulls losing force. The black candle proves bears are now in command. Nison Insights:

• First candle has to be long white

• Lull can made up of any candle lines

• The last candle must have an extended black real body

• OPPOSite of Tower Bottom

Dumpling Top I r - r - 'Resistance

I I

J I 1- F~II"" WlII_

Record Session Highs

• Market in up trend

• Market then forms a convex pattern

• Market then gaps down (i.e. torrns a Falling Window)

Criteria:

• A higher high is a record session high

• 8-10 record session highs in a short time increases possibility of trend change

Market Implication: Top reversal. Resistance: Two levels 01 resistance:

1) Top of Falling Window 2) Pattern High

Psychology: Going from higher highs to lower highs displays a loss of upside momentum. The gap down means the bears have grabbed control. Nison Insights:

• This pattern is the same as a rounding top in Western technicals, except that it also has the added bearish signal of a Falling Window

• When market is forming convex pattern should have small real bodies

• Opposite of Frying Pan Bottom

Market Implication: The market is viewed as overbought, but we recommend waiting for a bearish candlestick or other Signal before acting on the record sessions.

Resistance: Once the market retreats use the highest high 01 the pattern. Psychology: The advance with little or no lateral action or price correction means the market is overextended to the upside.

Nison Insights:

• If the market has a steep correction, or trades sideways for a period, the count has to restart

.8-10 is only a guideline

• Opposite of Record Session Lows

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Western Glossary

AID Line - A popular indicator that measures the breath of the stock market advance or decline where the number of advancing issues is compared to the number of the declining issues. The AID line is usually compared to popular index such as the Dow Jones. The market and the AID line should trend in the same direction.

Arms Index - Also called the TRIN mcex, this indicator is a ratio of the average volume of declining stocks divided by the average volume of advancing stocks. Reading below 1.0 indicates more volume m rising stocks. A reading above 1.0 indicates more volume in declining stocks. A 10 day average of the arms index over 1.20 is oversold and under .70 is overbought.

Ascending Triangle - A sideways price pattern where the resistance line is horizontal while the support line is ascending. A break over the resistance area is viewed as bullish. Bar Chart - A graphic representation of price activlty. The high and low 01 the session define the top and bottom of a vertical line. The close lor the period is marked with a short horizontal bar attached to the right of the vertical line. The open is marked with a short horizontal bar attached to the lett of the vertical line. Price is in on the vertical scale. time is on th e horizontal seal e.

Blow-Oils (also called Selling or Buying Climaxes) - A top or bottom reversal. Blow-oils occur after an extended move. Prices sharply and quickly thrust strongly in the direction 01 the preceding trend and then suddenly turns in the opposite direction-usually on high volume.

Bollinger Bands - A popular indicator that plots two bands above the below a 20 period moving averaqa. The bands are usually two standard deviations above and below this 20 period moving average. The top and bollom bands define potential support and resistance areas.

Breakaway Gap - When prices gap away from a Significant technical area (i.e .• a trendline or a congestion zone). Breakout - Overcoming a resistance or support level.

Box Range - The Japanese term for a market in a laterallrading range.

Candlestick (Candle) Charts - A method of charting derived by the Japanese in which the open and close range are represented by rectangle called the real body (black for a close under the open, white for a close over the open). The lines above and below the real body are called shadows. The top of the upper shadow is the session high and the bottom of the lower shadow is the session low.

Change of Polarity - When old support converts to new resistance, or when old resistance converts to new support. Confirmation - When more than One indicator SUbstantiates the action 01 another.

Congestion Zone - Also called a box range. A period 01 lateral price action within a relatively narrow price band .

...

Consolidation· The same as a congestion zone. Consolidation, however. has the implication that the prior trend should resume

Continuation Patterns· A pattern whose implications are for a continuation of the prior trend. A flag, lor instance. is a continuation pattern.

Crack and Snap - When prices break under the support of a horizontal congestion band and then springs back above the "broken support" area. This is bullish and there is a measu red price target to the uppe r end of the congestio n band.

Crossover - When th e laster indicator ClOSS es above (b u Ilis h crossove r) 0 r be low (be arlsh crossove r) th e s lowel indicator. For example, if a 5 day rnovi ng ave rage crosses under a 13 day moving average it is a bearish crossover. Or if the faster %K line in stochasnes crosses above the slower %0. that is a bullish crossover.

Descending Triangle - The opposite of an ascending triangle. This is when the upper resistance line is descending While the lower support line remains horizontal. A close under this pattern is viewed as bearish.

Divergence· When the price and an indicator (such as an oscillator like RSI) move in opposjta directions. For instance. if prices reach new highs and stochasffcs do not, this is a negative divergence and is viewed as bearish II prices establish new lows and stochastics do not this is a positive divergence and is viewed as bullish.

Double Bottom - Price action that resembles the letter W in Which price decline stops at. or near, the same lows. The bullish pattern is completed when the intervening high is closed above.

Double Top· Price action that resembles a M in which price rallies twice stop at. or near, the same highs. The bearish pattern is completed when the intervening low is closed below

Down Gap - When prices gap lower.

Dow Theory - One of lh e oldest tee h n ical th eorles. Its main oom pone nts i ncl u de the ave rages discou nt eve rylh ing. the market is com p rised 01 the trend, prima ry trend has th ree phases and the averages must confirm one another.

Down Trend· A market that is trending lower as shown by a series 01 lower highs and/or lower lows.

Elliott Wave - An approach to market analysis that's based on wave patterns and the Fibonacci number sequence. The classic Elliott wave patterns has 5 waves up called impulse waves and 3 down waves called corrective waves.

Exponential Moving Average - A moving average that is exponentially weighted. Example: for a 9 period EMA. today's close is weighted 20% and yesterday's rna is weighted by the other 80%.

Falling Off The Roof - When prices break above a resistance line from a lateral trading zone and these new highS.fail to hold. Instead prices pull back under the "broken" resistance line. The target is for a retest ot tha lower end of the recent trading zone.

Falling SupPOrt Line· A support line obtained by connecting a series of lower lows.

Fibonacci Numbers· A series of numbers derived by adding the previous number to the current number. The numbers begin 1,1,2.3.5,8,13,31 .... Popular Fibonacci ratios used by technicians include (rounding off) 38%,50% and 62%.

Flags and Pennants- Continuation patterns in which the market has a sharp advance or decline and then there is a correction that looks like a rectangle or a triangle. A close outside of this rectangle or triangle confirms a continuation of the prior move.

Gaps - When there is no price action between two consecutive sessions. For example. a rising gap on a daily chart is when today's low is above yesterday's high. A falling gap is when today's high is below yesterday's low. They are three main gaps. exhaustion. midway, and breakaway. An exhausting gap is a gap that occurs at the end of an important trend. A midway gap, also known as measuring gap, occurs in the middle of the move. A breakaway gap is when the market gaps over a significant resistance area or under a majo r support area.

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,

Western Glossary

Head and Shoulders· A reversal pattern resembling a head (with the highest peak) and Iwo shoulders (lower peaks). II the price penetrates the line that connects the low pomts 01 the head (called the neckline), the pattem is completed. When this pattern appears upside down it is called an inverse head and shoulders.

Inside Session - When the entire session's high-low range is within the prior session's range

Island Tops and Bottoms - A formation at the extremes of the market when prices gap in the direction of the prior trend. Pricss then stay there for one or more sessions, and then gaps in the opposite direction. Prices are thus surrounded by gaps which leaves them isolated like an island

Measured Moves - A price target based on using measurements based on prior price action.

Moving Average - A trend following indicator that is usually used in trending markets. It shows the average value of securities price over a period of time, for example a simple five-day moving average adds the last live days closing prices and divides the total by 5. There are simple, weighted and exponential moving averages.

Moving Average Convergence-Divergence (MACD) Osclilator - A combination of three exponentially smoothed moving averages.

Nec kl i ne . A line con nect i n g the lows of the he ad in a head and s boulders form a tio n or highs of an i nve rse head and sho u Ide rs. A move under th e neck line of a head and s h 0 u Ide rs top is bearish, a move above th e neckl i n e 01 an i nve rs e head and sho u Ide rs n eckl i ne is b u Ilis h.

Negative Divergence - See divergence.

Oscillator· A momentum line that fluctuates around a zero value line (or between 0 and 100). Oscillators can help measure overbought/oversold levels, show negative and positive divergence and they can be used to measure a price move's velocity. Oscillators include RSI, Stochasfics, MACD, etc,

Outside Reversal Session - Also called a key reversal. In an uptrend, this is whe~ prices make a new high lor the move and then closes that session under the prior session's close. In a downtrend, an outside reversal session is when the market makes a new low lor the move and then closes that session above the prior session's close. Overbought - When the market moves up too far, too fast. At this point the market is vulnerable to a downward correction.

Oversold" When the market declines too quickly. The market becomes susceptible to a bounce.

Point and Figure Charting. A method 01 charting that disregards passage of time and displays only changes in prices. A column of XS denotes a rising market and a column of Os reflect the falling market.

Positlye Divergence· See divergence

Price Oscillator - Also called the moving average oscillator. This oscillator subtracts longer-tern moving average lrom the shorter-term moving average.

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Rally· An upward ~ovement of prices

Reaction - A price movement opposite to the prevailing trend.

Relative Strength Index (RSn - An oscillator plotted on a scale between 0 and too. This is an index that compares the relative strength of price advances to price declines over a spec ified pe riod.

Resistance Level - A level where sellers are expected to enter.

Retracement - A price reaction from the prior move in percentage terms. The more common retracernent levels are 38.2%,50% and 61.8%. Reversal Session - A session when a new high is made lor the move and the market then closes under the prior session's close.

Reversa lind icator - See trend reversals.

Rising Resistance Line - A resistance line made by connecting higher highs. Rising Support Line - A support line connecting higher lows.

Seiling Ctlmax - When price push sharply and suddenly lower on heavy volume after an extended decline. If the market reverses from this sharp selloH it is viewed as a selling climax

Sell off - A downward movement of prices

Stochaslics - An oscillator that measures the relative position 01 the closing price as compared to its range over a chosen period. II is comprised 01 the faster moving %K line and the slower moving %D line.

Sw i ng Target - U sing the height of a rally or decline to obta ina price ta rget. Support Level - An area where buyers are expected to enter.

Technical Analvsis - Looking at the history of prices to gauge the markets health and obtain favorable trade opportunities.

Trading Range - When prices are locked between horizontal support and horizontal resistance levels. Also called a congestion zone or box range. Trend - The markets prevalent price direction. There are short term, intermediate term and long term trends.

Trend Reversals· AlsocaJled reversal indicators. This is a misleading term. More appropriate, and more accurate, would be the term "trend change indicator". It means the prior trend should change. It does not mean prices are going to reverse. Prices might reverse after a trend reversal pattern, but they may not. For exampte the trend coutd change from upwards to sideways. As long as the trend changes after a trend reversal pattern appears, that trend reversal worked. Thus if a trend reversal appears during an up trend, and the market then trades sideways the trend reversal pattern was successful.

Trend Line· A line on a chart that connects a series 01 higher highs, or lower lows. At least two points are needed to draw a trend line. The more often it is tested, and the greater the volume on the tests, the more important the trend line.

~ - A gap that pushes prices higher.

Up Trend - A market that is trending higher.

V Bottom or Top - Also called a spike. When prices suddenly reverse direction forming a price pattern that looks like the letter V lor a bottom or an inverted V for atop. Volume - The total of all contracts or shares traded lor a given period.

Weighted Moving Average" A moving average in which each of the previous prices is assigned a weighting factor. Usually the most recent data is the more heavily weighted and thus considered more important.

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