Candlestick Trading for Maximum Profits

Forex Candlesticks Made Easy

Candlesticks Made Easy is a distilled, concentrated Blueprint with information you can use Today to generate your own trading Profits It comes complete with Step-BY-Step screenshots showing you exactly how to find the the best times to enter and exit the market. Inside you will learn: How to tell whether the market is going to reverse, or is merely going through a temporary correction. The 2 biggest and most common mistakes made by retail traders and what you must do to avoid the money trap. How two seemingly identical candlesticks can tell you completely different stories about the market traders who dont understand this concept will be tricked again and again without knowing why! More here...

Forex Candlesticks Made Easy Overview

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Highly Recommended

The writer has done a thorough research even about the obscure and minor details related to the subject area. And also facts weren’t just dumped, but presented in an interesting manner.

Purchasing this book was one of the best decisions I have made, since it is worth every penny I invested on it. I highly recommend this to everyone out there.

Working with Candlestick Patterns

The components of a candlestick may be the bones of candlestick charting, but candlestick patterns are the heart and soul. Patterns appear on candlestick charts as simple, single-stick occurrences or complex, multi-stick Candlestick patterns indicate when prevailing trends reverse or when they continue. Both types of patterns are very useful because they tell you when to get into a trade, when to get out of a trade, when a trade you're in may make no sense, and even when to hang onto a trade you're already in. Check out Chapters 5 through 10 for more info on identifying and trading on a wide variety of candlestick patterns.

Making Technical Analysis Part of Your Candlestick Charting Strategy

A stunning amount of mathematical ingenuity is applied to security trading analysis. The options for technical analysis can be as simple as the average of a few days of closing prices and as complex as applying calculus to price action to indicate the momentum of prices. The possibilities are endless, and you shouldn't be shy about including some of them in your trading strategy alongside candlestick charts. Take the time to get familiar with an array of technical indicators to make you a more versatile trader and enrich your work with candlestick charts. For example, it's great when you spot a candlestick pattern indicating that it's time to buy, and at the same time, your favorite technical indicator is also flashing a buy signal. Combining trading tools helps build your confidence and can help you quickly determine when a trade isn't going to work out, allowing you to exit with minimal losses. I explore several different types of technical indicators in Chapter 11 and clue you in...

Getting to Know Candlestick Charts

Considering the advantages of candlestick charting Examining a few potential candlestick problems ver wonder why a trader or investor would choose candlestick charts over other types of charts when analyzing price action of investments or markets Well, this chapter provides some answers. In order to be one of the successful few who beats the market and other market participants, you should strive to develop a competitive advantage or some unique insight, commonly referred to as your edge, that you believe most market participants aren't using or considering. I can't say that using candlestick charting provides an edge by itself and it does come with a couple of potential problems. But when combined with recurring patterns and other technical indicators, you can find your edge In this chapter, I cover candlestick charts the good and the bad and I review a handful of alternative charting methods. But in the end, you understand why candlestick charting is the way to go Brief history of...

Bar Vs Candlestick Charts

Below are a three month bar chart and a three month candlestick chart for IBM. See if you can spot any differences in the data series. Hard to spot the difference That's because there isn't any. Both the bar chart and the candlestick chart contain exactly the same information, only it's presented to the trader in different form. Both the bar chart and the candle chart contain the same data the high for the period (the day), the low, the open and the close. In a candlestick chart, however, the names are changed. The difference between the open and the close is called the real body. The amount the stock went higher beyond the real body is called the upper shadow. The amount it went lower is called the lower shadow. If the candle is clear or white it means the opening was lower than the high and the stock went up. If the candle is colored then the stock went down. This information is shown below

Building a Base of Candlestick Chart Knowledge

Understanding the basic components of candlestick charts Working with additional information on candlestick charts ro take full advantage of candlestick charts, you must understand how they're constructed. From the basic pieces of information used to generate a candlestick to the various additions and extra pieces of data that can be tacked onto a chart, you need to know just what you're looking at before you can make wise trading decisions. You need to be familiar with candlestick nuts and bolts before delving into their interpretations and uses. In this chapter, I offer a solid foundation of candlestick know-how. I start with the data that goes into constructing individual candlesticks. Although candlesticks can represent the action of a security over a wide variety of time periods, the basic information used to build them is the same. I also cover the other pieces of data that are commonly included on a candlestick chart added features that enhance the usefulness and readability...

Considering Additional Information Included on Candlestick Charts

In addition to the basic information (described in the earlier sections of this chapter), most candlestick charts automatically include many other pieces of data. This added data allows you to quickly digest how the stock has traded in the past and gives you some fundamental activity, such as dates of earnings releases or dividend payments, which may also appear on charts. In this section, I clue you in on a few pieces of information that may be included on your candlestick charts.

Bar Charts versus Candlestick Charts

Of the two chart types, many would argue that candlestick charts are the preferred type for trading. They give similar information when one is looking at a single time period, but more important, they visually signal other clues about the market when one is viewing a larger time frame. There are important things to note about the differences between bar charts and candlestick charts (see Figure 3-5) It's usually easier for beginners to work with candlestick charts.

Turning to the Web for Candlestick Charting Resources

Like so many other areas of life, trading and technical analysis have been greatly impacted by the Internet over the past few years. You can visit multiple Web sites where you can get low-cost or even free financial information, and, of course, candlestick charts are included. A quick Internet search on candlestick charts produces more results than you'll know what to do with. In this section, I cover a handful of the best Web sites you can use to view candlestick charts, showing you how to create charts on these sites and pointing out other various features you can find there. Each of the sites mentioned are excellent for obtaining free charts but also have a plethora of other information you can use to help you make better trading and investing decisions.

Trading Candlestick Charts

Candlestick Patterns Trading Candlestick Patterns The chart above illustrates various Candlestick patterns from the S& P 500 Futures 610 tick chart. Various Candlestick patterns have been marked in the chart above and explained as follows 1). A Doji pattern to suggest indecision in the prior direction. 2). A Dark Cloud to signal a potential end of trend. (Also see Hammer pattern prior to the Dark Cloud). 3). Another Doji to signal indecision. 4). A Piercing line followed by a strong trend reversal bar. 5). A Bullish Engulfing pattern to confirm a strong trend ahead. 6). A Gravestone Doji. 7). A Doji bar to suggest an imminent trend reversal in the next few bars. 8). An inverted Hammer at the top to signal the end of uptrend and strong downtrend to follow. Three Line Price Break (3LPB) charts define the underlying trend and are considered as an adjunct to the candlestick charts. 3LPB charts display a series of vertical boxes or candles that are based on price changes. The 3LPB...

Candlestick Chart Patterns

Candlestick chart patterns visualize accelerations and slowdown in trends or indicate trend reversals. Candlestick charts work with the same OHLC (opening, high, low, close) data as regular bar charts. The only difference is that a key-reversal-day on a bar chart, for example, can be easier to identify by looking for a hammer or a doji candlestick formation. Candlestick charts are popular because they identify the momentum in a price move on every price bar by comparing the opening price with the closing price and showing black and white candlesticks, depending on whether the opening is higher or lower than the closing price. Candlestick charts are very good trading tools by themselves, but they also combine well with other trading tools.

Basics of Working with Candlestick Chart Patterns

The following candlestick chart patterns occur frequently and combine well with Fibonacci trading tools. Our goal is to be practice-oriented to show what works, is easy to understand, and is useful for all traders. The few candlestick patterns we show here represent probably 80 percent of all valid patterns in real-time everyday trading and can be easily integrated with other strategies.

Candle Charts and Top Reversal Patterns

Candlestick charting is an extremely pronounced and effective method for tracking and examining the four most important price points the open, the high, the low, and the close. Using candlestick charting helps me visually to better compare current price activity in relation to past price points of interest. The advantage of using candlestick charting in place of bar charting is that you can use the same techniques and analysis that you do with bar charts and have the diversity and unique signals that candlesticks generate. As you learn this method of charting, you will come to see how it is a great barometer of human emotion, namely, fear and greed. In addition, this is a simple, yet certainly more specialized format of charting. It has gained in popularity in the United States and is currently followed by more and more analysts. My first book covered most of the top formations, and I want to review what I believe are the more frequent and reliable patterns. This chapter will show...

Generating Trading Signals Based on Candlestick Patterns

A candlestick chart pattern is called a hammer if it has a long shadow and a small body (black or white) that is very close to the high of the day. At the end of a downtrend, the hammer is considered a bullish reversal signal (see Figure 4.23). The corresponding candlestick chart pattern of a hanging man is a hammer at the end of an uptrend. We sell on the occurrence of this

Adding a trendline to an Excel candlestick chart

Another function you can enjoy when using Microsoft Excel for charting is the trendline function. It's found in the same area as moving averages (see the preceding section), so if you can add a moving average, you can easily add a trendline. A trendline is a line that indicates the direction of a trend either higher or lower. The line is usually drawn based on the lows (in the case of an uptrend) or the highs (based on a downtrend) of the price action in the trend. For more information on trendlines and how to interpret them with candlestick charts, turn to Chapter 11. A basic Excel candlestick chart with a trendline added. A basic Excel candlestick chart with a trendline added.

Sell Indicators and Bearish Reversal Candlestick Patterns

Using the relative strength index and candlestick patterns for your short trades Shorting with combinations of the stochastic indicator and bearish candlestick patterns Technical indicators are useful in many trading situations, and as I describe in the other chapters in Part IV, you can use them in tandem with candlestick patterns to conduct some outstanding trades. In this chapter, I fill you in on how to combine a couple of common technical indicators with bearish candlestick patterns to help you make wise decisions about short trades.

Shorting with the RSl and Bearish Candlestick Patterns

When combined with candlestick patterns, the RSI can provide an even stronger indication of when the situation is ripe for executing short trades or selling on long positions. In this section, I discuss the ways in which you can combine your candlestick charts with the RSI to make some clever, profitable trades.

Combining Moving Averages and Bullish Trending Candlestick Patterns

In basic terms, a moving average is the average of the closing prices of a security over a certain period of time. Moving averages can be helpful when you're looking to confirm a trend, so you can rely on them to boost your confidence in the trading decisions you make based on bullish-trending candlestick patterns.

Combining Technical Indicators and Bearish Trending Candlestick Patterns

Using trendlines in tandem with bearish-trending candlestick patterns Trading with a combination of moving averages and bearish-trending candlestick patterns n this chapter, I explore the ways you can use trendlines and moving averages with bearish-trending candlestick patterns to uncover promising trading opportunities. Those two versatile types of technical analysis methods are great for detecting downtrends, and when you pair them with bearish-trending candlestick patterns, it can be much easier for you to pick the best spots for entering short selling trades. And as if that weren't enough, you can also use that potent combination to determine when it's time to cover your short position and (hopefully) pocket a profit.

Putting Trendlines Together with Bearish Trending Candlestick Patterns for Selling and Confirmation

Trendlines are one of the most straightforward technical indicators. If an uptrend is in place, a trendline has a positive slope. If a downtrend is the order of the day (or week or month), a trendline has a negative slope. This concept sounds simplistic, but it can be hugely helpful when you're trying to determine a market's trend. If that trend turns out to be down, you can use a downward-sloping trendline alongside bearish-trending candlestick patterns to inform your short trading decisions.

Generating candlestick charts on CNBCcom

Here's how to take advantage of CNBC.com's free candlestick charting offerings The chart is refreshed, and a candlestick chart appears in place of the line chart. After taking all these steps, you should end up with a candlestick chart like the one shown in Figure 4-3. A candlestick chart created on CNBC.com. A candlestick chart created on CNBC.com.

Adding a moving average to an Excel candlestick chart

If you're interested in dressing up your Excel candlestick charts with some added information, moving averages are a good place to start. A moving average is the average of the closing prices for today and looking back a certain number of days. For instance, a five-day moving average would be the closing today added up along with all the closing prices of the previous four days with that total divided by 5. The process is easy, and the result gives you that much more room to analyze and interpret. (Flip to Chapter 11 for more on moving averages.) 1. With your candlestick chart sheet open in Excel (see preceding section), select Chart on the menu bar, and a drop-down menu box opens. A basic candlestick chart created using Microsoft Excel. A basic candlestick chart created using Microsoft Excel. A basic candlestick chart with a five-period moving average created in Excel. A basic candlestick chart with a five-period moving average created in Excel. A basic candlestick chart with a...

Using the moving average and bullishtrending candlestick patterns to pick long exits and determine stop levels

Another example of how to combine moving averages with bullish candlestick patterns comes in the form of Figure 14-8, a chart of the futures contract that trades based on the level of the United States ten-year Treasury notes. This chart has a great uptrend that can lead to a very appealing entry and exit if a trader makes the right moves. The added check offered by the combination of two moving averages is one of the primary reasons I use more than one moving average with my candlestick charts whenever possible.

Building an Excel candlestick chart

Now it's time to build a candlestick chart To the right of this box appear four chart choices click the top right one, which looks like a little candlestick chart. A new sheet with a candlestick chart has been added to your spreadsheet Congratulations You're now the proud owner of an Excel candlestick chart. Feel free to right-click the chart to view all the options available for your tinkering pleasure. For example, when you right-click one of the black candles, a Format Down Bars box opens, and you can change the color of all down bars (bars for days when the close was lower than the open). The opportunities for modification on Excel candlestick charts are many and varied. Although Excel's candlestick charting is a very nice feature, it doesn't allow for much flexibility. If you want to change time frames, for instance, you may need to completely rebuild your chart. But you can add in some additional information to make your charts more functional. How Read on through the rest of...

Adding volume data to an Excel candlestick chart

Volume Chart Excel

The most difficult type of add-on for Excel candlestick charts is a volume chart. There are a lot of additional steps involved with this operation, and if it gets to be too taxing, you may want to leave the volume charts to the free online charting services described earlier in this chapter or the charting packages discussed at the end of the chapter. Now you can make a chart with volume The steps are very similar to creating the basic Excel candlestick chart A basic Excel candlestick chart with volume before final adjustments. A basic Excel candlestick chart with volume before final adjustments.

Pip Range Bar Or Candlestick Charts

Constant ranges are used to define the bars or candles. Usually, you can find ranges of 8, 10, 15, 20, and 30 pips. A new bar is opened as soon as that range has been covered and the price opens higher or lower, starting a new range with the same pip value. You can apply to these charts the same indicators you would on normal bar or candlestick charts.

Reasons Why Candlestick Charts Are So Popular Today

Candalstick Blog

Here are six reasons why candlestick charts are so popular amongst professional traders 1 Leading Indicator - They have the a& lity to show reversal signals earlier than Western charting techniques. As such candlestick charts are a true leading indicator of market action. They regularly identify potential moves before they become apparent with Western technical tools. Many Japanese candlestick patterns are not found in Western chart technicjjes. Versatile - Candlestick charts are versatile in that they can be used alone or in combination with Wfestem technical tools. They are unlike point-and-figure charts, which cannot be used alongside other Western technical indicators. Candlesticks use the same price data as bar charts yet the candlestick technique better promotes the ability to recognise complex pattern groups and predict the next possible outcome based on them. . Can be applied to any time-dimension - Candlestick charting techniques can be 4 adapted fox either short car leng...

Fibonacci Retracement 618 Percent and Candlestick Patterns

Fibonacci Retracement Patterns

The trading signals in Figure 6.2, as combinations of Fibonacci price corrections and candlestick chart patterns, are based on a simple set of parameters Entry rule based on candlestick chart patterns after the Fibonacci correction level 61.8 percent is reached. The main reason for the improved outcome of the simulation is the change in the entry rule from entering the market immediately on reaching the Fibonacci correction target to waiting for a candlestick pattern that confirms the trend direction.

Creating candlestick charts on Big Chartscom

BigCharts.com is easy to navigate, and with just a few clicks you can generate terrific charts. To create a candlestick chart, take the following steps 6. Click the orange Draw Chart button, and a candlestick chart should appear in seconds. If you follow these steps, you should end up with a candlestick chart similar to the one shown in Figure 4-2. After you've mastered setting up a basic candlestick chart on BigCharts.com, I suggest playing around with the various buttons and drop-down menus that appear on the left side of the page. You can choose from several technical indicators and a wide range of time frames, and you can increase or decrease the size of your chart. A candlestick chart created on BigCharts. com. A candlestick chart created on BigCharts. com.

Using moving averages with bullishtrending candlestick patterns to confirm trends

If you haven't yet made your way through my discussion of technical indicators in Chapter 11 or you need a refresher, the first rule of thumb with using moving averages as trend indicators is if a security's price is above the moving average, an uptrend is in place. With that in mind, take a gander at my first example of combining moving averages with bullish-trending candlestick patterns. A chart of YUM featuring a couple of bullish-trending candlestick patterns and ten-day moving average that confirm an uptrend. A chart of YUM featuring a couple of bullish-trending candlestick patterns and ten-day moving average that confirm an uptrend. The trend reversal signal shows up rather quickly, and before I move on to the next example, I want to point out just where the uptrend in Figure 14-5 starts reversing. I didn't highlight it on the chart, but if you look closely, you can spy a bearish reversal candlestick pattern at the top of the uptrend. It's a three outside down pattern, and it's...

Buying with the Stochastic Indicator and a Buttish Reversal Candlestick Pattern

Stochastic Patterns Trading

The stochastic indicator is another very useful indicator for detecting overbought or oversold security conditions. It has two components the slow and the fast stochastic. When the fast is under the slow, there's a downtrend in place, and when the fast is higher than the slow, there's an uptrend. The slow and fast stochastic indicators oscillate between 0 and 100 and have fairly complex look back periods, much like the RSI. (See Buying with the RSI and Bullish Reversal Candlestick Patterns earlier in this chapter for more info on RSI.) You can use the trend reversal signals that stochastic indicators provide in combination with candlestick patterns to pick outstanding entry points for your trades. And you can also utilize stochastic indicators to select exit points just keep an eye out for when the slow and fast stochastics cross. Allow me to elaborate in the following sections.

Picking long exits and determining stop levels with trendlines and bullishtrending candlestick patterns

Entry And Exit Candlestick Patterns

A chart of QQQQ where a bullish-trending candlestick pattern and a bullish trendline indicate an entry and exit point. A chart of QQQQ where a bullish-trending candlestick pattern and a bullish trendline indicate an entry and exit point. Another entry and exit with a trendline and bullish pattern I provide one more example of how you can use a trendline alongside a bullish candlestick pattern to pick an exit level in Figure 14-4. The chart in this figure is for the stock of General Electric (GE). At this point it's pretty difficult to get away from GE if you're living in the developed part of the world. You may be wondering how it's possible to use a trendline as an exit stop level because it moves every day. That's a valid concern Unlike the set points associated with candlestick patterns, a trendline's level on a chart changes daily. You can deal with that challenge in one of two ways A bullish candlestick pattern and a trendline point to an A bullish candlestick pattern and a...

Bearish trendlines and candlestick patterns leading to short entries and exits

Trendlines are useful not only for determining the ideal time to get into a short trade but also for figuring out when to exit. This section focuses on the ways you can evaluate trendlines alongside bearish-trending candlestick patterns to pick the best time to cover a short. Shorting and covering using a trendline combined with a candlestick pattern The candlestick pattern highlighted on the chart in Figure 15-3 is the bearish-thrusting line pattern, and it pops up in the midst of a pretty significant downtrend. The trendline is established based on the peak of the last bullish trend and the high a few days later. If you're looking for an illustration of the nature of the downtrend, this trendline fits the bill, and the stock price stays under this trendline for some time. Exiting one trade doesn't mean that you have to stop working with a particular security for any period of time. If you're in a trade and riding a prevailing trend, and you spot a trend reversal candlestick pattern,...

Using moving averages and bearishtrending candlestick patterns to pick short exits and select stop levels

Moving averages can be a huge help when you combine them with bearish-trending candlestick patterns to pick short trade entry points, but you can also use that dynamic duo to help you determine stop levels and exit points I wrap up this chapter with a couple of examples that show you how to do just that.

Creating Candlestick Charts Using Microsoft Excel

Microsoft Excel is an excellent tool for running all sorts of financial analyses. One of the great features of Excel is its charting tool, and, of course, that tool includes candlestick charts as one of its choices. In this section, I explain the process for creating a candlestick chart with Excel, from finding and entering the data to building the chart. I even clue you in on a few ways to add some additional information to your Excel candlestick charts, including moving averages, trendlines, and volume data.

Structure of Candlestick Charts

Candlestick charts are based on the same market data as regular bar charts but present that data in a different way. The components of candlestick charts are the opening price level, the closing price level, the high price, and the low price of any data compression rate, be it weekly, daily or intraday data. Figure 3.12 shows the composition of a candlestick. The relationship between the open price level and the close price level forms the body of the candlestick chart. If the close is below the opening, the body is black. If the close is above the opening, the body is white. The opening and closing price of every data compression weekly, daily, or intraday is, therefore, important for analysts who use candlestick charts. In Figure 3.13, we compare a bar chart and a candlestick chart based on the same open, high, low, and close data.

Buy Indicators and Bullish Reversal Candlestick Patterns

Using stochastic indicators and candlestick patterns for profitable long trading rhis chapter clues you in on the ways in which you can begin combining your trading tools to make your trades even more efficient and profitable. More specifically, the strategies I describe in the next few pages help you understand how you can use two buy indicators (the relative strength index RSI and stochastics) in tandem with bullish trend reversal candlestick patterns to pick the best times and situations for entering and exiting long trades. I've found the two technical indicators I discuss in this chapter to be reliable and relatively easy to combine with candlestick patterns. However, please don't think for a second that the RSI and stochastic indicators are the only ones that work well with candlesticks. There are several others, and I strongly encourage you to research those indicators and find some that work best with your personal trading style.

Using Technical Indicators Alongside Bullish Trending Candlestick Patterns

Combining trendlines with bullish-trending candlestick patterns Making profitable trades with moving averages and bullish-trending candlestick patterns ou can combine candlestick patterns effectively with a variety of technical indicators to produce information that helps you decide when to put on and get out of trades. Like candlestick patterns, many technical indicators tell you when a trend is about to reverse, but several others can let you know that a prevailing trend continues. These indicators are powerful weapons that can add to the versatility of your trading arsenal. If you understand how to use technical indicators in tandem with bullish-trending candlestick patterns, it's easier for you to spot situations where buying to enter a long position is a wise move. And you can also use technical indicators to confirm market or individual security predictions that you've made based on candlestick patterns. Using Trendlines and Bullish-Trending Candlestick Patterns for Buying and...

Creating a candlestick chart on Yahoo Finance

Using Yahoo Finance to build a candlestick chart is a breeze. All you need is a computer with an Internet connection. To generate a chart, work your way through the following steps The scale of a candlestick chart can be either linear or logarithmic in the way its pricing data is displayed. A linear chart displays prices without any adjustments. A logarithmic chart adjusts data in order to better depict performance in an investment (long-term) scenario. Logarithmic charts make sense for long-term investing, but aren't very useful on, say, a daily chart of stock prices that's used for trading. It's as simple as that After you've completed these easy steps, you should see a beautiful candlestick chart that looks very similar to Figure 4-1. A candlestick chart created on Yahoo Finance. I encourage you to play around with these until your hand is cramped. There's no better way to master the ins and outs of charts than manipulating them and looking at as many as you can. You can also flip...

Realizing the advantages of candlestick charting

You'd be hard pressed to find someone who's more enthusiastic about candlestick charting than yours truly. I can go on and on about the advantages that candlesticks afford. If you want to read more of my gushing about the many great advantages of candlestick charting, turn to Chapter 2, but here are my top reasons il One of the best features of candlestick charting in general is the visual appeal and readability. You can glance at a candlestick chart and quickly gain an understanding of what's going on with the price of a security. You can also tell whether sellers or buyers have dominated a given day, and get a sense of how the price is trending. i Also, even after reading up on the most rudimentary of candlestick basics, you can easily spot the opening and closing price for a security on a candlestick chart. These price levels can be very important areas of support and resistance from day to day, and knowing where they are can be extremely helpful, especially for short-term traders....

Recognizing the Many Benefits of Candlestick Charting

Trading, investing, and charting styles are plentiful. You can spend hours debating what type of approach to the markets is the best. For me, and for a growing number of other traders, the benefits of a candlestick chart versus other types of charts aren't really debatable. Let me tell you why.

Admitting the Potential Candlestick Charting Risks

After more than 15 years of using candlestick charts to inform my trading decisions, I can honestly say that I have a difficult time coming up with any substantial arguments for using other common types of charts over candlestick. In the interest of fairness, however, and to help you realize the truly versatile and useful nature of candlesticks, I offer a couple of minor potential chinks in the candlestick chart's armor 1 They don't work in the very short term. Candlestick charts are an excellent display of price action, but for some extremely short-term trading strategies, the patterns that reveal themselves on a daily candlestick chart may not develop on the much shorter time frame five minutes or less, for example. I like to think of candlestick charts as a visual representation of the battle between the bulls and bears, which is played out in the price action of a stock. That battle takes some time to play out, so patterns on a very short-term chart may not produce signals that...

Working with Simple Candlestick Patterns

Part II features descriptions and explanations of some of the most basic and common candlestick patterns. The simplest candlestick patterns involve just one day or one period of price data, and you can find information on those patterns in Chapters 5 and 6. Two-stick candlestick patterns are one step up from those basic patterns, but just a single step up in complexity can provide quite a bit of additional information and versatility. Some extremely helpful two-stick candlestick patterns pop up frequently on candlestick charts, and if you want to really capitalize on candlesticks in your trading strategy, you need to know how to identify and trade them. Don't worry I've got you covered in Chapters 7 and 8, which wrap up Part II.

Getting Familiar with Candlestick Charting and Technical Analysis

In the first part of this book, I introduce candlestick charting and some other basic charting concepts. You may be wondering what advantages candlesticks have over other types of charts. Believe me, the rewards are plenty, and you can read all about them in Chapter 2. Want to know what price data elements are combined to generate a candlestick That's all contained in Chapter 3, along with some information on how to embrace the other types of data that you may run into when reviewing candlestick charts. And in the last chapter of Part I, I also let you know how to tap into a variety of free and for-purchase electronic resources for charting, which are critical in today's high-tech trading environment. I even include a low-tech alternative how to draw charts yourself.

Candlestick Charts

Japanese rice traders invented Candlestick charting methods in the 1600's. Candlesticks show a visual representation of traders' emotions where as bar charts or western charts emphasize a focused approach on closing prices. Candlestick charts have a real-body (Open to Close) and shadows (Upper, Lower) showing intra-bar price relations between the key price values. In Candlestick charts, if a price closes higher than the open price then the Candlestick would be plotted Green suggesting bullish, and if the price closes lower than the open, the Candlestick would be Red, suggesting a bearish condition. The market sentiment is measured by the real-body length and its color. The bigger the real-body the bigger the sentiment and the smaller the real-body the smaller the sentiment which conveys indecision. Candlestick charts offer a unique advantage over bar charts or line charts since they offer an excellent visual representation of the relationships with prior Candlestick bars. This...

Candlestick Charting

The first recorded futures transactions occurred in the 1700s in the Japanese rice markets, where Munehisa Homma amassed a fortune trading the market. His system included the study of price action, the psychology of the market, and the seasonality of the weather. Candlestick charts evolved from Homma's system and are the subject of this chapter. This section covers the fundamentals of candlestick charting and explains how to utilize candle charts to analyze, enter, and exit trades. The main advantage that candlestick charting provides over bar charting is that the candlestick provides immediate visual recognition of the open, the high, the low, and the close. Many traders who employ candlestick charting techniques set their charting software so that the candlesticks are one color for a lower close than the open (such as red or black as shown in Figure 3.1) and another color for a higher close than the open (such as green or white as shown in Figure 3.2). For the purpose of this book,...

Candlestick Patterns

Here have boon many books written about candlestick patterns sev Just get to know the basic patterns, and get really good at spotting them. Other than that, don't read too much into candlestick patterns. Just a handful of patterns cover 99 percent of what happens in the real world. A candlestick chart shows each candle as a color-coded rectanglo (called the candle body) representing the range of trading between the open price and closing price of the period.

Conventions Used in This Book

I make an effort to use as many examples as possible in the text, and each and every example I present is one that I found while searching through actual charts. I did that to show you not only how common it is to come across these candlestick patterns in everyday trading, but also how eminently possible it is to use them in live trades. They're out there, and they're waiting for you to harness their power Also, with each new candlestick pattern that I introduce, I present at least one case where it succeeds in producing a useful signal and one where it produces a dud. Candlesticks are terrific, but they're not perfect, and recognizing the failure of a signal is just as important as picking up on a valid signal.

Where to Go from Here

To figure out which area of this book to dive into first, think hard about what facet of candlestick charting you want to understand. Want to get grounded in the basics, or polish up on a few candlestick fundamentals that you may have forgotten since you read that online article about candlestick charting months ago Check out the next page, on which Part I begins. If you want to get cracking and find out about a few real candlestick patterns and how they can tell you what a market or security is going to do next, I suggest that you flip to one of the chapters in Parts II or III. I cover many candlestick pattern examples in those chapters more than enough to give you plenty to look for as you pore over charts on the Web or on a charting software package.

Getting a feel for your options for charting

When it comes to alternatives to candlestick charting, the three main charting contenders are as follows 1 Bar charts These are much more useful than line charts and are the most common, but they're not as versatile as candlestick charts. 1 Point and figure charts These are tried-and-true charting methods, and they're great for recognizing support and resistance levels, but they're far less dynamic than candlestick charts. Each one of these charting methods can be used effectively to ratchet up the effectiveness of your trading strategy, but they pale in comparison to candlestick charts for a number of reasons, a few of which I describe in the next section.

Seeing into the future sort of

The goal of charting and technical analysis isn't to see what's happened in the past, but to attempt to predict the future. Basically, if you can predict the future for a majority of the time, you should be able to profit nicely through wise investing and trading. Because candlestick charts are chock-full of info, they aid a trader as she works to predict and profit from future price moves. For example, a trader may study old candlestick charts and notice that when a security's closing price is much higher than its opening price, it seems to open higher the next day a situation commonly referred to as a gap opening. That trader can buy the security on the close of the day and place an order to sell the next day, thus making a profit. Figure 2-3 provides a clear visual example of a gap opening. Just by studying past price action on old candlestick charts, the trader in this section's example is able to predict a small piece of the future and use it to turn a profit. History does repeat...

Constructing a Candlestick A Core of Four

For any security, each day of trading includes four key components in terms of data opening price, closing price, highest price traded on the day, and lowest price traded on the day. These four pieces of data are needed to construct the individual bars that make up candlestick charts. Several bars, created by using the data from several days or periods, are generated in succession to produce a full candlestick chart. Candlestick charts may be applied to the performance of securities over a variety of time periods. I use them on charts from as short-term as five minutes per bar to as long-term as a week per bar. A five-minute chart may be applied to a day or two of activity, while the weekly chart would be applied to a period of several years. Although those are two vastly different time frames, a candlestick chart is appropriate for both, and candlesticks would work for many different time periods in between.

Using Electronic Resources to Create Full Charts

Taking advantage of free online candlestick charting Using Microsoft Excel to create a candlestick chart Considering a few charting software packages J fter you're armed with an understanding of why candlestick charts are W so useful and what it takes to create a candlestick, you're ready to spread your wings and do some charting. You can take the appropriate data and build a chart in many different ways, and in this chapter I provide you with some insight on the easiest and least expensive ways to do just that. I begin the chapter with the easiest method, which is to let a candlestick-friendly Web site do the heavy lifting. And the sites I describe will do it all for free, if you're willing to put up with a few banner ads (a small price to pay for some very handy services). After taking a look at some free online options for candlestick charting, I present the basics of creating candlesticks using Microsoft Excel. Candlestick charting has caught on so quickly that it's now a...

Using Yahoo Finance for charting trading and investing

If you're looking for a free, user-friendly Web site that's packed with useful information, steer your Internet browser to the finance section of Yahoo This dynamic site offers many features that greatly enhance your charting experience, including the ability to download free data that you can manipulate however you want. And just like all good charting packages, Yahoo makes candlestick charting available to all users.

Checking out Yahoo Finances other useful features

In the blue box on the left of the page, you can find many sources of data and other handy functions. Among them is a unique feature that Yahoo provides for accessing historical daily opening, high, low, and closing price data, with volume information that you can download into Microsoft Excel using the Historical Price choice. (Skip ahead to Creating Candlestick Charts Using Microsoft Excel later in this chapter for more info on how to work with candlesticks in Excel.)

Using a couple of other great and free features of Big Chartscom

On the page where you can view the candlestick charts you generate, look just above the chart to find several choices for more information. One click gives you access to news, other industry members or competitors, market advisor commentary, analysts' opinions, SEC filings, insider activity, as well as recent annual reports and company profiles.

Remembering a few key points when selecting charting software

When deliberating on which charting package may be right for you, you need to consider several key factors. First and foremost, make sure the software has the ability to display candlestick charts. This book is full of reasons why candlestick charting is a superior way to display price data, and there's really no reason to waste time or money with a package that isn't candlestick friendly. Some of the other factors you'll want to consider are price, data (where it comes from, what it costs, and so on), and applicability to the type of security you're trading. All are covered in this section.

Trading the Fibonacci Levels Introduction

The Fibonacci levels are a very powerful tool in trading forex. They can be traded in isolation or in combination with other signals, for example candlesticks, indicators or chart patterns. In this book we will use confirmation signals for entry and exit points. (Chart Patterns and Candlestick Patterns are covered in more detail in Guide to Prof able Forex Day Trading which is available from www.forextechniques.com).

The Bullish White Marubozu

The Japanese names given to certain candlestick patterns or individual candlesticks can reveal important characteristics. Loosely translated, maru-bozu means bald or little hair. These single-stick patterns earned their name because they don't have much of a wick on either end of the candlestick. The sticks are bald

The Bullish Dragonfly Doji

The doji is a type of candlestick pattern with variations and is created when the open and close are equal, so there's essentially no stick on the candlestick. Dojis are almost all wick. Take a look at Figure 5-8, which includes a few different types of dojis. As you can see, a doji looks more like a cross or a t than a pattern on a candlestick chart.

Seeing a failed confirmation

You may be asking, Why look at a signal that ends up not being a signal at all This won't be the last candlestick pattern that requires some sort of confirmation on the opening or even the closing of the day after the pattern appears, so it's worth getting used to the concept. And you can also rely on similar confirmations when trading on some of the patterns I cover in previous chapters of this book. Instead of buying a close on a bullish signal, you can wait until the next day and buy the opening if it appears to be going in the same direction of the signal or doesn't negate the previous day's signal.

Understanding Bearish Reversal Patterns

I'm definitely biased toward bearish reversal patterns. I've always been a bit of a countertrend trader, and because many candlestick patterns signal trend reversals, I've always found plenty to use in my trading. But trading in anticipation of trend reversals isn't always a cakewalk. In fact, it almost put me out of the business during the strong bullish markets that have become known as the dot.com bubble. I managed to keep from going broke during that period, and I learned some expensive lessons about money management and using stops that I include in my explanations throughout this chapter.

Fibonacci Convergence or Confluence

Fibonacci Extensions Confluence

In the chart above, we have a classic ABCD pattern where the entry point is at point C, a 76.4 retracement and a Morning Star Candlestick Pattern. The point C was at 76.4 and not 61.8 (76.4 is popular on the GBPUSD), but by waiting for the candlestick pattern i.e. the Morning Star we found conf rmation of the reversal and a good trade to point D the 161.8 projection.

Getting the Hang of Bullish Three Stick Patterns

The addition of three-stick candlestick patterns to your trading arsenal makes your trading strategies more complicated, more interesting, and hopefully, more profitable. In this chapter, I cover some of the bullish three-stick patterns that you can use to make effective and efficient trades.

The three inside down pattern

Splitting hairs on candlestick pattern formation can cost you a profitable trade. Just because there's a very small price difference that seems to disqualify a pattern, don't be too quick to disregard the formation altogether. The psychology behind the pattern that almost panned out is the same as what drives a by-the-book pattern, and you may be able to make a successful trade, if you aren't harshly strict with your pattern evaluations.

Using other types of moving averages What have you done for me lately

Why would a trader want to explore more complex moving averages Well, the major advantage one of these more complicated moving averages has over the simple moving average is that it's better at revealing a change in trend more quickly. Being able to detect trend changes faster helps to make you a more agile trader. Also, traders (especially short-term traders), have very short memories. Ask me what the market did yesterday, and I'm pretty sure I can give you a quick answer. Ask me what it did two Fridays ago, and I would be quickly pulling up a chart (a candlestick chart, of course ) to get you an answer. Because a short-term trader places more emphasis on more recent price action, using a charting method that does the same typically works better for shorter term styles of trading. Weighted and exponential moving averages both emphasize recent price action, and the only substantial difference between the two is the method of calculation.

Examining the Relative Strength Index

Another attractive feature of RSIs is they include levels that indicate when a security is considered overbought or oversold. When the security reaches one of these levels, a savvy trader should be on his toes, waiting for a corresponding change in the trend of the RSI, or even better, some sort of revealing bullish or bearish candlestick pattern that lets him know it's time to buy or sell.

Cashing In on Stochastics

Another useful indicator with an extremely clumsy name is the stochastic oscillator. This momentum indicator considers the current closing price of a security in relation to a high-low range of prices over a set number of look-back periods. This oscillator can be very useful when used in tandem with your candlestick charts. And in addition to its usefulness as an indicator of momentum, the stochastic oscillator may also be used as an overbought or oversold indicator when readings are at extreme levels 30 percent for oversold and 70 percent for overbought (see the section on RSI earlier in this chapter).

Short trades and trend confirmation with trendlines and bearish patterns

Candlestick Confirmation Entry

Selecting the most appropriate time to get into a short trade can be a trying task. Timing is critical, and any decision-making help can be a real blessing. Luckily for you, considering trendlines and bearish-trending candlestick patterns together can provide just that type of help. I show you what I mean in this section with a couple of real-world examples. A short trade example with a bearish trendline and candlestick pattern An ALTR chart where a few bearish-trending candlestick patterns and a very long bearish trendline reveal a short trade entry. An ALTR chart where a few bearish-trending candlestick patterns and a very long bearish trendline reveal a short trade entry. One more example of how you can combine a bearish trendline and a bearish-trending candlestick pattern is on display in Figure 15-2. This diagram is a chart of Motorola Inc. (MOT). Originally a maker of radios and an innovator in the creation of the car radio, it's now known mostly for its cell phones. A chart of...

Picking short entry points

Picking the best entry point for a short can be a difficult undertaking, but using the stochastic indicator as a supplement to your candlestick patterns can make the task much easier. For a prime example of how the stochastic indicator can be used with a bearish candlestick pattern to pick a short entry, take a look at Figure 13-5. In the figure, you see a chart of Convergys Corporation (CVG), a provider of specialized software solutions for business customers. Its headquarters is in Cincinnati, Ohio, and Cincinnati's airport code is CVG. Coincidence Nah, probably not. As you can see, the stock's price action is pretty bullish for a few days, and the result is a stochastic indicator reading over 80. The three inside down candlestick pattern forms shortly after the indicators reach this overbought level. Feel free to flip back to Chapter 10 for more information on the three inside down candlestick pattern. A bearish candlestick pattern and the stochastic indicator reveal a short entry...

Using the RSI to help pick short entry and exit points

Entry And Exit Candlestick Patterns

You can combine the RSI with your candlestick patterns to pick wise entry points for a short trade. But that's not the whole story. You can also use that same combination of trading tools to indicate when you should exit a short. Figure 13-3 presents a situation in which a combination of the RSI and a bearish candlestick pattern can show you when to get in and out of a short position. The chart is for Peabody Energy (BTU), a mining company that focuses on coal production. The bearish candlestick pattern in Figure 13-3 starts to develop after several up days in a row. Along with this strength in the stock's price, the RSI rises to a level over 70 (overbought). The three outside down pattern then appears, with a black candle on the second day that's an outside day relative to the first day. The pattern is completed with a down day on the third day. (To understand the inner workings of the three outside down pattern, check out Chapter 10.) The uptrend is reversing to a downtrend, so the...

Using the stochastic indicator to help pick a long entry point

You can use the stochastic indicator to determine a good time to buy a stock if you watch for instances where the slow and fast levels both trade below the oversold level of 20, and then the fast stochastic crosses over or goes higher than the slow stochastic. I've always felt confident in the stochastic indicator because of that feature even though the levels are technically oversold, it's not truly a buy signal until the trend starts to move just a little bit higher. And it's even more comforting when you combine it with a bullish reversal candlestick pattern. You can see what I mean in Figure 12-5. The stochastic indicator and a bullish reversal candlestick pattern signaling a buy on a chart of JCI. The stochastic indicator and a bullish reversal candlestick pattern signaling a buy on a chart of JCI.

The downside tasuki gap pattern

Tasuki Gap

Figure 10-27 is a fun example of the downside tasuki gap. If you've read through any of the other examples in this chapter, then you're probably expecting an outright pattern failure, but in this case an exit signal shows up before the pattern fizzles out. An astute user of candlestick patterns may have caught this signal before the trend changed and taken a profit instead of being stopped out for a loss. One more thing to look for in Figure 10-27 I highlight an outside up day a bullish reversal pattern that precedes a change to an uptrend. A wise candlestick pattern user would use that as an exit signal or even a chance to put on a long position. On the flip side, a short who isn't looking out for candlestick patterns wouldn't see the writing on the wall and would probably be stopped out in the next few days as prices exceed the pattern's highs.

You can spot bears and butts quickly

Knowing a security's closing price relative to its opening price during a certain period is vital information. Candlestick charts allow you to quickly identify the days when a closing price is above an opening price and vice versa. Figure 2-2 is a great example of bearish and bullish days on a candlestick chart. Although the two candlesticks are the same size and shape, you can tell the difference between a bear and a bull

Understanding Candlestick Components

You can't trade and invest effectively by using candlestick charts unless you understand candlestick patterns, and you may have a very hard time understanding those patterns if you aren't familiar with basic candlestick construction. Candlestick charting starts with the knowledge of what it takes to make a candlestick and how changes in that basic information impact a candlestick's appearance and what it means. For starters, you need to know what goes into creating a candlestick's wick (the thin vertical line) and its candle (the thick part in the middle). Why is this so important Candlestick charts quickly clue you in on the type of buying and selling that's been going on during a given period and where it may occur again. In many cases, the buyers continue to buy and the sellers continue to sell during subsequent periods or if the price reaches a level that has spurred them to action in the past.

Using the RSI to help pick long exits

For example, suppose you took a long position on a stock when you saw that its RSI was oversold, and as a result you're sitting on what could turn out to be a handsome profit. But then the RSI changes course, and soon it's into the overbought level. What should you do You may have a trading rule in place that tells you that it's time to exit the trade without considering other options. But you may also take a slightly more liberal tack and simply keep a close eye out for trend breaks or reversal patterns. You can play out the situation in several ways, and if you can combine the technical indicator with your knowledge of candlestick patterns, you stand a much better chance of exiting the trade at the most opportune moment. For short-term long trades involving the RSI, I begin to look for an exit point when the RSI trades over 50. Until that level is reached, I stick to the stop level prescribed by the candlestick pattern I used to enter the trade. After the RSI reaches 50, I start to...

How This Book Is Organized

I've organized Candlestick Charting For Dummies into five parts. Each part offers a different set of information and skills that you can take away to incorporate in your personal trading strategy. You get a feel for candlestick basics or understand some simple candlestick patterns and how to trade based on them. You tackle some more complicated patterns and figure out how it's possible to use candlesticks in tandem with other popular technical indicators. The possibilities for candlestick charts are many and varied, and I do my best to touch on a wide range of their uses and benefits.

Seeing is believing Candlesticks are easy to read

Figure 2-1 gives you a basic idea of why candlesticks are easier to read, but it doesn't really provide a full picture of why they're also much better at helping traders to visually interpret price action (how the stock or market traded during the day relative to the opening price), which is an essential skill for successful trading. Take a look at Figure 2-1, which takes a couple of weeks' worth of trading data and displays it using traditional bar charts and candlestick charts, respectively. Notice the dramatic difference between the bar chart and the candlestick chart. By comparing them, you can clearly interpret what's occurred from day to day, including the openings, closings, and how they change from day to day. The candlestick chart is a superior way to interpret the price action from day to day when compared to a bar chart. Don't worry I cover how to read candlestick charts extensively in several other chapters, but even in this simplistic example you can see that knowing...

Understanding Charting and Where Candlesticks Fit In

Taking a look at options for charting and why candlesticks are superior Making sense of candlestick construction Exploring the wide variety of candlestick patterns Using technical analysis alongside your candlestick charts Understanding a few trading and investing basics Access to markets once meant placing orders through a broker, and now it's little more than a couple of mouse clicks away. Commission rates are dramatically lower, and access to market information is now in many cases free. Getting into securities trading is now easier than it ever has been, and the result is a whole generation of investors and traders that handle their finances without professional help. Technology allows these people to enjoy many new types of market information, and one of the best tools available is candlestick charting. Candlestick charting methods have been around for hundreds of years, but candlesticks have caught on over the past decade or so as a charting standard in the United States. I've...

Combining three moving averages

Knowing the type of market you're dealing with is key to using many candlestick patterns correctly, so you may need to use three moving averages. That's especially true for longer term trading. The more certain you can be about a trend, the more likely you are to properly identify and trade effectively on a bullish or bearish candlestick pattern.

The bearish squeeze alert pattern

After you've figured out how to spot the various forms that the bearish squeeze alert can take, consider how to use it for trading. To get started, take a look at the chart in Figure 10-17. The chart shows the price action for the stock of the investment bank JP Morgan Chase (JPM). The stock has close ties to the market, and the company has operations in just about every facet of the financial world. JPM is also one of the oldest banks in America, dating back to 1823. That probably seems like a long time, but remember that candlestick charting was around several hundred years before J.P. Morgan hung out his shingle.

The bullish squeeze alert pattern

Squeeze Pattern

MER I love this pattern's versatility, and it owes that attractive trait to the presence of a triangle. Regardless of how they're formed, I've found that triangles usually lead to some volatile moves. Keep on the lookout for triangles as you scan your candlestick charts. A triangle formed on a chart shows that prices are coiling together and will soon be ready to spring in one direction or the other.

Combining Patterns and Indicators

I begin Part IV with Chapter 11, which offers a more in-depth discussion of several other technical indicators. It's useful for any trader to understand a variety of indicators because you can use them alone, to confirm your candlestick signals, and in combination with candlestick patterns. Although candlestick patterns alone have proven to be reliable trading tools, using them in combination with other indicators can greatly enhance their ability to predict the future direction of a market or a stock. In the rest of Part IV, I take some simple and complex patterns and combine them with pure technical indicators to show you how coupling the two techniques can lead to profitable trading. The chapters in this part are chock-full of fascinating real-world examples from a variety of markets and industries.

Points and confirm trends

Because trendlines are so useful for trend confirmation, you can trade with confidence when you combine bullish trendlines with bullish candlestick patterns. That tandem can help you decide when to stick with a position or initiate a new one. It's pretty obvious where a trendline should be drawn on a chart, but sometimes you may question its placement. Don't stress about it too much, because as a trend goes along and changes, you can always alter the trendline accordingly. I present a couple of examples of how you can combine a positive trendline and bullish-trending candlestick patterns in this section. trending candlestick patterns and trending candlestick patterns and In the midst of the established uptrend, another bullish neck line pattern appears. It's a bit above the trendline, and it shows up after the trend has been in place for quite awhile, so buying to get into a long position may not be the best move. It's like a stale green traffic light You know it's going to turn soon....

Finding the data for your chart

Before you can create an Excel candlestick chart, you need to compile the right data. There are multiple sources for data, and a quick Internet search can turn up dozens of options, some of which I explore earlier in this chapter. (See Turning to the Web for Candlestick Charting Resources.) Of those options, I typically use Yahoo Finance for its ease of use, and that's the source I proceed with in this section. (See the section Using Yahoo Finance for charting, trading, and investing.) Congratulations You now have the data needed to create a candlestick chart using Microsoft Excel Now you just need to make a couple of minor modifications to the data and then create a chart. You're almost there

Using the RSI to help pick a long entry point

A three inside up reversal pattern appears after a couple of bearish days, during a short-lived downtrend. (Check out Chapter 9 for more on the three inside up pattern.) The RSI helps confirm that the candlestick pattern is sound because the RSI closes under 30 on the pattern's first day. That means that the stock is oversold if the standard oversold level 30 is being used, and bullish buyers will soon be on the scene to drive up the price of the stock. On the AMAT chart in Figure 12-1, the trend definitely reverses on the three inside up pattern combined with an RSI reading under 30. The result is an uptrend that lasts for a few weeks but never quite reaches the overbought level. If you watch a stock and see a bullish trend reversal candlestick pattern that coincides with an oversold reading on the stock's RSI, buy and look for an uptrend to dominate the chart soon. A bullish three outside up pattern (refer to Chapter 9 for details) appears on this chart at a time when the RSI closes...

Picking short entry points with the RSI and candlesticks

Candlestick Patterns Entry Exit

When using the RSI combined with a candlestick pattern to pick a good time to enter a short position, you want to see an RSI reading over 70 (or your personal overbought level) that coincides with the formation of a bearish candlestick pattern. If you have your eye on a chart and you see those two things come together, get your short pants on (That's just a figure of speech, of course I encourage everyone to wear pants of an appropriate length while trading.) What better way to master these scenarios than to see them on a chart, so please take a gander at Figure 13-1. This example is a situation when you can combine the RSI with a bearish reversal candlestick pattern to figure out when to put on a short. The chart in Figure 13-1 is of the stock for Masco (MAS), a manufacturer and distributor of home improvement and building products. With fundamental exposure like that, it's an excellent stock to trade when the economic outlook is in question. The RSI in Figure 13-1 goes into the...

Contents at a Glance

Chapter 2 Getting to Know Candlestick Chapter 3 Building a Base of Candlestick Chart Part JJ Working with Simple Candlestick Patterns 71 Candlestick Chapter 12 Buy Indicators and Bullish Reversal Candlestick Patterns 267 Chapter 13 Sell Indicators and Bearish Reversal Candlestick Patterns 279 Candlestick Chapter 15 Combining Technical Indicators and Bearish-Trending Candlestick

In this part

don't know of any traders or investors who've taken the time to fully understand candlestick charting and then not used the techniques in their trades. After you've taken the time to grasp candlestick basics, it's tough to deny their advantages over other types of charts, and the profits can certainly speak for themselves. But the basics must come first, and that's what Part I is all about. I begin this part by setting candlesticks in context with several other types of charts, so you can get a feel for candlestick benefits. After that, I explain the price action and signals that candlestick charts generate, and I show you how a candlestick is constructed and what its variations can mean. To close Part I, you look at the range of electronic resources available for candlestick charting, which you can exploit with just a few clicks of your mouse.

Simple patterns

Some candlestick patterns are very simple A single candlestick on a chart can serve as a candlestick pattern. A single candlestick that signifies time to buy or sell is very appealing to traders who are just starting to work with candlestick charts because after you understand the basics of candlestick construction, you can immediately start identifying simple patterns and using them to make more informed trading decisions. Flip to Chapters 5 and 6 for several great examples of how just one candlestick can tell you what a security's price is going to do in the immediate future. I also consider double-stick candlestick patterns as simple patterns, and you can explore several varieties in Chapters 7 and 8.

Complex patterns

When a candlestick pattern includes three periods' worth of price action (three candlesticks), I consider it a complex pattern. Many complex candlestick patterns require specific price activity over the course of three days for the pattern to be considered valid, and I discuss a range of them in Chapters 9 and 10. Complex candlestick patterns can be frustrating at times because you may watch with anticipation as a pattern develops nicely for the first two days only to fizzle out on the third. Complex candlestick patterns are more rare than their simple counterparts, but they can be worth the wait. Because the conditions and criteria for a complex pattern are so specific, it's more likely that the signals they offer will be good ones.

Bar charts

A traditional bar chart contains bars that represent price action from period to period. Each bar is basically a vertical line that shows the difference between the high and the low of the period. The top of the bar is the high and the bottom is the low. The distance between the two is similar to the wick of a candle on a candlestick chart. (The wick is discussed more in Chapter 1.) The finishing touch on a bar chart is a little notch on the left of the bar that's made to mark where the security closed. Figure 2-6 is a single bar that normally appears on a bar chart. Bar charts have been the industry standard for some time, but are quickly being replaced by candlestick charts. When the Wall Street Journal starts using a new charting convention (as it has with candlestick charts), the convention is considered to be the industry standard.

Chart Patterns

Chart Patterns are patterns which occur in trading charts that help traders predict the probable direction the currency pair is likely to move. Chart patterns may form over any timeframe from a coupe of hours to even years. Japanese Candlestick patterns also provide a reliable insight as to where the immediate direction of the currency pair may head. Firstly, we will look at chart patterns then candlestick patterns. Sketches have been provided to illustrate the patterns and in a following section a number of real forex charts have been included. Japanese Candlestick Patterns

Drawing trendlines

Although different trendlines drawn on the same chart may differ a bit, you'll usually find that at least the direction of the trendlines are the same. Trendlines can trend up, down, or not at all. For simplicity's sake, Figure 11-1 has an obvious up (bullish) trend. (I say it's obvious, but I wonder how many of my colleagues will insist I'm wrong ) After you determine that a trend is bullish, you may consider it with a bullish candlestick pattern and look to buy. On the other hand, if you witness a bearish candlestick pattern, you may be inclined to ignore it, or at least to take caution before implementing a sell signal. Taking trendline direction into consideration helps you determine the status of the market. Understanding the market helps you use the most appropriate candlestick pattern one that makes your trading decisions more effective and profitable. Trendlines can be subjective, but there's no easier or quicker way to define a trend.

Using the bands

Bollinger bands make for great overbought or oversold indicators. Broadly speaking, when the price of a security is higher than the upper Bollinger band on a chart, you're in a sell area, and when the price is lower than the lower Bollinger band, you're in buy territory. As you can see in Figure 11-11, there are plenty of buy and sell opportunities using these bands. But not every one of those opportunities is worth acting on immediately, so combining them with your handy candlestick charts can be an ideal way to minimize risk and separate the great signals from the mediocre ones.

Reading an RSI chart

As with many technical indicators, RSIs are much easier to digest in chart form. In Figure 11-9, the lower chart is a daily six-month long chart on Intel, (symbol INTC). The top section of the chart is a basic candlestick chart depicting the price action in Intel stock from July to December 2007. Numerous bullish and bearish candlestick formations are charted on this chart, but for now, just focus on the RSI component. Divergences are the key to using the RSI, and a divergence combined with a corresponding candlestick pattern that matches the direction of the divergence can provide you with a profitable trade signal. The simplicity may sound too good to be true, and of course, it is. Using the RSI by strictly buying when it hits 30 or selling when it hits 70 is a disastrous strategy. It does make for a good rule of thumb, however, when you consider it alongside a signal from a candlestick pattern or a divergent move in the RSI relative to the price chart. Combining a divergent RSI...

Table of Contents

Part I Getting Familiar with Candlestick Charting Part II Working with Simple Candlestick Patterns 4 Realizing the advantages of candlestick charting 10 Working with Candlestick Candlestick Charting Chapter 2 Getting to Know Candlestick Charts 17 Recognizing the Many Benefits of Candlestick Charting 18 Admitting the Potential Candlestick Charting Comparing Candlestick Charts with Alternative Charting Methods 26 Chapter 3 Building a Base of Candlestick Chart Knowledge 31 Considering Additional Information Included on Candlestick Charts 39 Turning to the Web for Candlestick Charting Resources 50 Using Reuters.com for candlestick Creating Candlestick Charts Using Microsoft Building an Excel candlestick Adding a moving average to an Excel candlestick chart 60 Adding a trendline to an Excel candlestick chart 63 Adding volume data to an Excel candlestick chart 64 Part U Working with Simple Candlestick Patterns 71 Chapter 11 Using Technical Indicators to Complement Your Candlestick Charts...

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Many low-cost charting software packages are available for download for your candlestick charting endeavors, and I could probably write a whole book about them, but for this chapter, I've chosen three of the most popular offerings. All three of these have a core group of users that argue the merits of their chosen software, but it's best for you to consider what each package offers and choose the one that best suits your needs.

Harness The Power Of Leverage

Derstanding of how these two components exploit the impact of supply and demand in the marketplace, combined with a stronger understanding of how indicators work, especially when combining candle charts and pivot analysis, you will soon discover a powerful trading method to incorporate in the forex market.

Building Investor Emotional Intelligence

A premise of this book is that an added benefit of alternative charting is that it gives an edge to the trader in detecting emotional phases in the market. When we view charts in this context, each chart type provides different abilities to extract or detect which emotion dominated the price action. The candlestick chart (Figure 1.1) provides a snapshot of bullish versus bearish sentiment. A white candle shows that the bullish sentiment prevailed, and a black candle showed that bearish emotions dominated. The line chart presents boundaries of resistance and support. Price action that comes close to the line, probes it, or breaks it reveals a state of change in the emotional stage of the market. Price break charts provide unique insight on the temperament of the market because price breaks display only a break or reversal of a trend, they are key indicators of a shift in the emotional stage of the market. One may see point and figure charts, which generate columns of Xs and 0s, as...

Perfect Market for Technical Analysis

Currencies rarely spend much time in tight trading ranges and have the tendency to develop strong trends. Over 80 of volume is speculative in nature as a result, the market frequently overshoots and then corrects itself A technically trained trader can easily identify new trends and breakouts, which provide multiple opportunities to enter and exit positions. Charts and indicators are used by all professional FX market traders and candle charts are available on most charting packages In addition, the most commonly used indicators such as Fibonacci Retracements. Stochastics, MACD. Moving Averages. RSI and support resistance levels have proven valid in many instances. In the NZD USD chart below, it is clear that Fibonacci Retracements. Moving Averages and Stochastics have at one point or another given successful trading signals For example, the 62 retracement level has served as support for the NZD USD from the beginning of September 2002 to the end of September 2002

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