CANDLESTICK CHARTS

Beginner’s Course
By: Colibri Trader
 Candlestick Charts

u  While everyone is used to seeing the conventional line charts found in
everyday life, the candlestick chart is a chart variant that has been used for
around 300 years and discloses more information than your conventional line
chart. The candlestick is a thin vertical line showing the period's trading
range. A wide bar on the vertical line illustrates the difference between the
open and close.
u  The daily candlestick line contains the currency's value at open, high, low and
close of a specific day. The candlestick has a wide part, which is called the
"real body". This real body represents the range between the open and close
of that day's trading. When the real body is filled in or black, it means the
close was lower than the open. If the real body is empty, it means the
opposite: the close was higher than the open.
 Candlestick Charts

u  Just above and below the real body are the "shadows." Chartists have always
thought of these as the wicks of the candle, and it is the shadows that show
the high and low prices of that day's trading. When the upper shadow (the top
wick) on a down day is short, the open that day was closer to the high of the
day. And a short upper shadow on an up day dictates that the close was near
the high. The relationship between the day's open, high, low and close
determine the look of the daily candlestick.

u  After viewing it, it is easy to see the wealth of information displayed on each
candlestick. At just a glance, you can see where a currency's opening and
closing rates, its high and low, and also whether it closed higher than it
opened. When you see a series of candlesticks, you are able to see another
important concept of charting: the trend.
Long Black Day- Long black day candlestick consists of real body which is much more
longer than it's shadow lines. This indicate the great difference between the open price
and the close price for a trading day. Long black day candlestick show that the open price
is near the high, price closes lower and near the low. The longer the body of the
candlestick is, the more bearish is the signal.

Long White Day- Long white day candlestick consists of real body which is much more
longer than it's shadow lines. This indicate the great difference between the open price
and the close price for a trading day. Long white day candlestick show that the open price
is near the low, price closes higher and near the high. The longer the body of the
candlestick is, the more bullish is the signal.
Short White Day- In theory, the short white candle cannot make up its mind between a
reversal or continuation of the existing trend. In the real world, it performs as a reversal
52% of the time, which is close to the theoretical indecision.

Short Black Day- The same is valid for the short black day candles. They are showing
hesitance between a bullish and a bearish state.
White Spinning Tops- A type of candlestick formation where the real
body is small despite a wide range of price movement throughout the trading
day. This candle is often regarded as neutral and used to signal indecision
about the future direction of the underlying asset.

Black Spinning Tops- Тhe interpretation here is the same: A type of

candlestick formation where the real body is small despite a wide range of
price movement throughout the trading day. This candle is often regarded as
neutral and used to signal indecision about the future direction of the
underlying asset.
Dragonfly Doji- A type of candlestick pattern that signals indecision among traders. The
pattern is formed when the stock's opening and closing prices are equal and occur at the high
of the day. The long lower shadow suggests that the forces of supply and demand are nearing a
balance and that the direction of the trend may be nearing a major turning point.

Gravestone Doji- A type of candlestick pattern that is formed when the opening and
closing price of the underlying asset are equal and occur at the low of the day. The long upper
shadow suggests that the day's buying buying pressure was countered by the sellers and that
the forces of supply and demand are nearing a balance. This pattern is commonly used to
suggest that the direction of the trend maybe be nearing a major turning point.

Long-Legged Doji- A type of candlestick formation where the opening and closing
prices are nearly equal despite a lot of price movement throughout the trading day. This
candlestick is often used to signal indecision about the future direction of the underlying
asset.
 Individual Candlesticks

u  Inthe few slides below, we are going

to review the individual candlestick
chart
Try to find as many of the candles as possible
in the charts below EUR/USD Daily
USD/JPY Daily
 PART II
Candlestick Patterns
 HARAMI

u  Harami- A candlestick that forms within the real body of the previous candlestick is in
harami position. Harami means ‘pregnant’ in Japanese and the second candlestick is
nestled inside the first. The first candlestick usually has a large real body and the
second a smaller real body than the first. The shadows (high/low) of the second
candlestick do not have to be contained within the first, though it's preferable if they
are. Doji and spinning tops have small real bodies and can form in the harami position
as well.
 HAMMER

u  Hammer- it signals a reversal after a downtrend - control has shifted from
sellers to buyers. The shadow should be at least twice the height of the body.
If it occurs after an up trend, it is called a 'hanging man' and is a bearish
signal. A gravestone is identified by open and close near the bottom of the
trading range. This is really the converse of a hammer and signals a reversal
when it occurs after an up-trend.
 DARK CLOUD

u  Dark Cloud- it is a pattern encountered after an up-trend and is a reversal

signal warning of "rainy days" ahead. A bearish reversal pattern that continues
the uptrend with a long white body. The next day opens at a new high then
closes below the midpoint of the body of the first day.
 PIERCING LINE

u  The Piercing Line- it is the opposite of the Dark Cloud pattern and is
a reversal signal if it appears after a downtrend. The first day, in a
downtrend, is a long black day. The next day opens at a new low,
then closes above the midpoint of the body of the first day.
 ENGULFING

u  Engulfing patterns consist of two bodies without any shadows and where the
second body 'engulfs' the first. These signals are only significant after a
prolonged trend
 MORNING STARS

Stars
Stars are made up of a long body followed by a short body with a much smaller shadow (trading range).
The bodies of the two must not overlap, though the shadows may.
u  Morning Star
The Morning Star pattern is a bullish reversal signal after a downtrend. The first bar has a long black
body, the second body gaps down from the first (the shadows may still overlap) and may be filled or
hollow. This is followed by a long white body, which closes in the top half of the body of the first bar.
 EVENING STAR

u  Evening Star Pattern

The Evening star pattern is opposite to Morning Star and is a reversal signal at
the end of an up-trend. Evening stars is a three-candle pattern that comes after
a rally. The first candle has a tall white real body, the second has a small real
body that gaps higher to form a star, and the third is a black candle that closes
well into the first session’s white real body.
 DOJI STAR

u  Doji Star

A Doji Star formation is weaker than the Morning or Evening Star - the doji
represents indecision. With a Shooting Star the body on the second bar must be
near the low - at the bottom end of the trading range. The upper shadow must
be longer. This is also a weaker reversal signal after a trend. Both of these
patterns require confirmation - by the next bar closing below halfway on the first
bar.
 RISING/FALLING THREE METHODS

u  Rising and Falling Three Methods

The Rising Method consists of two strong white lines bracketing three or four
small declining black lines. The final white line forms a new closing high. The
pattern is definitely bullish. The bearish Falling Method is bracketed by strong
black bars, the second black bar forming a new closing low.
 PART III

SUPPORT AND RESISTANCE AND

CANDLESTICKS
 WHAT IS SUPPORT

u  Although  it  is  a  rela.vely  simple  to  understand  concept,  most  of  the  traders  are  using  
it  in  different  ways  and  find  it  difficult  to  apply.  That  is  why,  I  do  consider  it  important  
to  be  covered,  since  I  am  probably  using  it  in  a  different  way  than  many  other  traders.  
I  will  go  in  more  details  in  the  later  chapters,  where  I  would  reveal  my  trading  
methodology.  In  the  next  slides,  you  will  find  an  explana.on  of  support  and  resistance  
with  real  life  examples.  
NIKKEI 225

SUPPORT
 SUPPORT CONTINUED

u  In  the  chart  above,  you  can  see  a  mul.-­‐month  support-­‐level  marked  by  the  price  
touching  the  same  level  on  the  chart.  In  this  case,  the  support  level  is  located  at  
13,900.  We  can  see  that  the  price  did  come  close  to  this  level  and  re-­‐bounced  at  least  
four  .mes  
 SUPPORT CONTINUED

u  Support  is  a  level,  at  which  demand  is  strong  enough  to  prevent  price  from  declining  
further.  That  means  that  around  this  support  level  sellers  are  less  hesitant  to  con.nue  
selling  and  buyers  take  control  over  price.  This  level  is  seen  by  market  par.cipants  as  
an  equilibrium  level,  where  money  is  exchanging  hands.  Thus,  support  can  be  
established  with  previous  reac.on  lows.  Traders  know  that  technical  analysis  is  not  a  
precise  science  and  thus  experience  comes  handy  when  projec.ng  support  levels.  
 WHAT IS RESISTANCE

u  The  resistance  level  is  established  by  using  the  previous  reac.on  highs.  The  concept  of  
resistance  is  exactly  the  opposite  of  the  support  concept.  Resistance  level  is  a  level  at  
which,  buyers  are  more  hesitant  to  con.nue  buying  and  sellers  come  in  to  push  the  
price  down.  In  the  FTSE  example  below,  you  can  see  a  mul.-­‐month  resistance  level.  
There  are  at  least  7  .mes  when  the  price  is  reaching  to  the  level  of  6,900.  It  is  located  
just  below  the  7,000  psychological  barrier.  
RESISTANCE
 RESISTANCE CONTINUED

u  It  is  a  place  of  equilibrium,  where  money  is  exchanging  hands.  Demand  at  such  levels  is  
not  enough  and  that  is  why  price  starts  declining.  For  how  I  use  resistance,  you  will  
learn  more  in  the  trading  strategy  part.  Let’s  have  another  look  at  the  example  above  
before  we  con.nue  with  the  next  concept.  
 HAPPY TRADING

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