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Candlesticks

Brian Cox
5/21/06
The Essentials
The greatest advantage to using candle
on your charts, instead of bars is that
single candle lines and multiple
candle patterns offer more reliable,
earlier and more effective reversal
singles

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The Essentials
 Invented by the Japanese. Used first
in the 1870s with the opening of the
Japanese stock market.
 Can be used with the weekly, daily
and 5 minute charts.
 Candlesticks do not give price targets
and need a close to confirm candle
signal

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The Essentials
 Before placing a trade based on a
candle signal:
 other technical signals should be
considered
 Consider the risk / reward of the trade.
 Candle charts are best used as a tool
not a system.

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Construction
Upper Shadow

White: Black / red:

Open low Open high
and close and close
higher Real body lower

Lower Shadow
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Construction
Upper Shadow
High = 37 High = 37
Close = 35 Open = 35

White: Black / red:

Open low Open high
and close Real body and close
higher lower

Open = 30 Close = 30

low = 29 low = 29
Lower Shadow
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Construction Review
 The rectangular portion of the
candlestick is called the real body.
 The thin line extending above the real
body is called the upper shadow.
 The upper shadow of a black candle
represents the range between the
high and the session’s price.

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Construction Review
 The lower shadow of a white real
body candlestick represents the range
between the session’s open and low.
 The black real body means that the
close was lower than the opening.
 The white real body means that the
close was higher than the opening.

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Basic Market Strategies
 Candles play a powerful role in early
reversal signals.
 Candle lines and patters confirm
support and resistance.

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Basic Market Strategies
Candles come in many different shapes

Spinning Tops High Wave Candles

Tends to indicate indecision Tends to indicate confusion

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Basic Market Strategies
Spotting reversals

Hammer Hanging man Shooting Star

following a following an following an
down trend up trend up trend
Bullish signal Possible Bearish Bearish signal
signal
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Real Bodies can be black or white
Basic Market Strategies Review
 A long lower shadow on a daily charts
shows the market bouncing off from
the lows of the day.
 The spinning top is another name for
a small real body.
 The real body of a spinning top can
be black or white.
 A wave candle must have long upper
and lower shadows
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Basic Market Strategies Review
 A spinning top indicates indecision.
 A wave candle indicates confusion.
 A hammer occurs in a downtrend.
 A hammer can be white or black.
 A hanging man occurs in an up trend.
 The confirmation for the hanging man
is a close under the hanging man’s
close
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Basic Market Strategies Review
 A shooting star occurs during an up
trend.
 A shooting star is considered bearish

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The Dangerous Doji
 The doji can signal a significant trend
shift or reversal.
 A doji forms when the opening and
closing price are the same.
 There are bearish and bullish doji.
 Are valuable for calling the market
tops (especially after a long white
candle).

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The Dangerous Doji

Long-legged Doji Dragonfly Doji Gravestone Doji

Market in Balance Possible Bullish Bearish signal

Rally could be signal
losing steam

The doji is more influential when it is a rare occurrence.

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The Dangerous Doji

Northern doji Southern doji

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The Dangerous Doji Review
 A doji forms when the open and close
are the same.
 A doji signals that the bears and bulls
are in stalemate.
 The dragonfly doji, the high of the
session represents the open, high and
close.
 The doji in a rally is sometimes a sell
signal.
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The Dangerous Doji Review
 A doji in an uptrend is called a
northern doji.
 The northern doji is most effective
when the market is overbought and
the doji appears at a resistance area.

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Long Real Bodies (Belt-Hold)
 Candles with extended real bodies
can also display strong signals

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Belt-hold signs
Bullish belt-hold Bearish belt-hold

Resistance

Support

Bullish belt hold is white near support and bearish is black near
resistance
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The Dangerous Doji Review
 The bullish belt-hold; following a
downtrend will starts low near
resistance and raises up and closes
out higher
 The bearish belt-hold; following a
uptrend will start high near resistance
and closes out lower.

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The Belt hold Review
 The bearish belt hold becomes more
signification as it nears resistance.
 The longer the height of the belt-hold
candle, the more important the signal
it gives.
 On the chart, we draw the support
line from the bottom of the lower
shadow.

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The Belt hold Review
 The smaller the real body, the less
force the move behind the move.
 A series of long lower shadows as the
market is descending shows that the
market is descending reluctantly.
 On the chart, we draw the support
line from the bottom of the lower
shadow.

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The Belt hold Review

If the trend is mostly higher, caution is warranted due to long

upper shadows

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The Power of Candle Patterns
 Candle charts are most powerful
when two or more candle lines
combine in a candle pattern.
 A dark cloud cover pattern is a
bearish signal consisting of a two-
candle patter that indicates a top
reversal.

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The Power of Candle Patterns

White real body that closes Follows a strong white body

within the back body, session. The second session
perferably more than 1/2 of opens above and closed below
black body lenght the center of the white body.
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The Power of Candle Patterns

White real body opens Black body opens higher

lower and closes higher and closes lower than the
than the black body (the
white body (the bears
bulls have taken over!)
have taken over)

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The Power of Candle Patterns
Review
 As the second session of a piercing
pattern pushes more and more
deeply into the first candle, it may
become a bullish engulfing pattern.
 The opposite pattern to the dark
cloud cover is the piercing pattern.
 A piercing pattern is to a bullish
engulfing pattern as a dark cloud
cover is to a bullish engulfing pattern.
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The Power of Candle Patterns
Review
 A bullish engulfing pattern occurs
when at second session’s white real
body raps around the prior session’s
black body
 If an extremely large white candle
completes a bullish engulfing pattern
you should buy or sell based on the
risk reward profile.

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 Candle Patterns Review

Lets see an actual set of candle stick

patterns

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Candlesticks
What would you
Do now?

End of Part I

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Candlesticks
What would you
Do now?

End of Part I

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Candlesticks
What
does this
indicate?

End of Part I

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Candlesticks
What is this
called? (bearish
or bullish)

End of Part I

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Candlesticks

End of Part I

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Candlesticks
Is it time to buy?

End of Part I

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Candlesticks
What will you
do now?

End of Part I

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 What is the
name of this?

Candlesticks

End of Part I

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Candlesticks

Buy? Sell?

End of Part I

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Candlesticks

What is this
called?

End of Part I

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Candlesticks
What is
the
direction?

End of Part I

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 Strong Resistance

Candlesticks

End of Part I

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Candle Sticks

End of Part I

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