Table of Contents

The Candlestick Trading Bible

Candlestick Trading for Maximum Profits

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Introduction 1

About This Book 1

Conventions Used in This Book 2

What You're Not to Read 2

Foolish Assumptions 3

How This Book Is Organized 3

Part I: Getting Familiar with Candlestick Charting and Technical Analysis 3

Part II: Working with Simple Candlestick Patterns 4

Part III: Making the Most of Complex Patterns 4

Part IV: Combining Patterns and Indicators 4

Part V: The Part of Tens 5

Icons Used in This Book 5

Where to Go from Here 6

Part I: Getting Familiar with Candlestick

Charting and Technical Analysis 7

Chapter 1: Understanding Charting and

Where Candlesticks Fit In 9

Considering Charting Methods and the Role of Candlesticks 10

Getting a feel for your options for charting 10

Realizing the advantages of candlestick charting 10

Understanding Candlestick Components 11

Working with Candlestick Patterns 12

Simple patterns 13

Complex patterns 13

Making Technical Analysis Part of Your

Candlestick Charting Strategy 14

Trading Wisely: What You Must Understand

Before Working the Markets 14

Trading can be an expensive endeavor 14

Paper trading costs you nothing but time 15

Developing rules and sticking to them 15

Chapter 2: Getting to Know Candlestick Charts 17

Recognizing the Many Benefits of Candlestick Charting 18

Seeing is believing: Candlesticks are easy to read 19

You can spot bears and bulls quickly 20

Seeing into the future (sort of) 22

Showing price patterns 23

Admitting the Potential Candlestick Charting Risks 25

Comparing Candlestick Charts with Alternative Charting Methods 26

Line charts 27

Bar charts 27

Point and figure charts 29

Chapter 3: Building a Base of Candlestick Chart Knowledge 31

Constructing a Candlestick: A Core of Four 31

Price on the open 32

High and low price for the session 35

Price on the close 38

Considering Additional Information Included on Candlestick Charts 39

Volume 39

Open interest 40

Technical indicators 42

Fundamental information 43

Chapter 4: Using Electronic Resources to Create Full Charts 49

Turning to the Web for Candlestick Charting Resources 50

Using Yahoo! Finance for charting, trading, and investing 50

Working with 52

Charting on 54

Using for candlestick charting 56

Creating Candlestick Charts Using Microsoft Excel 57

Finding the data for your chart 57

Making sure the data is in the correct format 58

Building an Excel candlestick chart 59

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

Exploring Your Charting Package Software Options 66

Remembering a few key points when selecting charting software 67

Considering a few charting package options 69

Part U: Working with Simple Candlestick Patterns 71

Chapter 5: Working with Straightforward Single-Stick Patterns . . .73

The Bullish White Marubozu 74

Understanding long white candles 74

Identifying the three variations of the long white candle 78

The Bullish Dragonfly Doji 80

Recognizing a dragonfly doji 81

Trading based on a dragonfly doji 83

The Bearish Long Black Candle 84

Understanding long black candles 85

Identifying black marubozus 86

Trading based on long black candles 88

The Bearish Gravestone Doji 90

Identifying the gravestone doji 90

Trading based on gravestone dojis 92

Chapter 6: Single-Stick Patterns That Depend on Market Context 95

Understanding Market Environments 96

The three market states 96

Identifying the market trend 96

Delving Into Dojis 98

The long legged doji 98

Other dojis 104

Looking At Other Patterns: Spinning Tops 108

Identifying spinning tops 108

Using spinning tops for profitable trading 109

Discovering More about Belt Holds 112

Spotting belt holds on a chart 113

Buckling down for some belt hold-based trading 113

Deciphering between the Hanging Man and the Hammer 118

Spotting and distinguishing the hanging man and the hammer 118

Trading on the hanging man and the hammer 119

Chapter 7: Working with Bullish Double-Stick Patterns 123

Bullish Reversal Patterns 124

Bullish engulfing pattern 124

Bullish harami 128

Bullish harami cross 130

Bullish inverted hammer 134

Bullish doji star 137

Bullish meeting line 140

Bullish piercing line 142

Bullish Trend-Confirming Patterns 145

Bullish thrusting lines 145

Bullish separating lines 147

Bullish neck lines 150

Chapter 8: Utilizing Bearish Double-Stick Patterns 155

Understanding Bearish Reversal Patterns 155

The bearish engulfing pattern 156

The bearish harami pattern 159

The bearish harami cross pattern 161

The bearish inverted hammer pattern 164

The bearish doji star 167

The bearish meeting line 168

The bearish piercing line or dark cloud cover pattern 172

Making a Profit with Bearish Trend Patterns 174

The bearish thrusting lines 175

The bearish separating lines 178

The bearish neck lines 180

Part HI: Making the Most of Complex Patterns 185

Chapter 9: Getting the Hang of Bullish Three-Stick Patterns 187

Understanding Bullish Three-Stick Trend Reversal Patterns 187

The three inside up pattern 188

The three outside up pattern 191

The three white soldiers pattern 193

The morning star and bullish doji star patterns 196

The bullish abandoned baby pattern 199

The bullish squeeze alert pattern 201

Working with Bullish Three-Stick Trending Patterns 204

The bullish side-by-side white lines pattern 204

The bullish side-by-side black lines pattern 207

The upside tasuki gap pattern 210

The upside gap filled pattern 214

Chapter 10: Trading with Bearish Three-Stick Patterns 217

Understanding Bearish Three-Stick Trend Reversal Patterns 217

The three inside down pattern 218

The three outside down pattern 220

The three black crows pattern 223

The evening star and bearish doji star patterns 226

The bearish abandoned baby pattern 229

The bearish squeeze alert pattern 231

Forecasting Downtrend Continuations 234

The bearish side-by-side black lines pattern 234

The bearish side-by-side white lines pattern 237

The downside tasuki gap pattern 240

The downside gap filled pattern 242

Part IV: Combining Patterns and Indicators 247

Chapter 11: Using Technical Indicators to Complement Your Candlestick Charts 249

Using Trendlines 250

Drawing trendlines 250

Considering trendline direction 251

Taking advantage of automated trendlines 252

Utilizing Moving Averages 253

Selecting appropriate moving average periods 253

Using simple moving averages 253

Using other types of moving averages: What have you done for me lately? 255

Combining two moving averages 258

Combining three moving averages 258

Examining the Relative Strength Index 260

Calculating the RSI 261

Reading an RSI chart 262

Cashing In on Stochastics 263

Grasping the math behind the stochastic oscillator 263

Interpreting the stochastic oscillator 264

Buddying up with Bollinger Bands 265

Creating Bollinger bands 265

Using the bands 266

Chapter 12: Buy Indicators and Bullish Reversal

Candlestick Patterns 267

Buying with the RSI and Bullish Reversal Candlestick Patterns 267

Using the RSI to help pick a long entry point 268

Using the RSI to help pick long exits 270

Buying with the Stochastic Indicator and a Bullish Reversal

Candlestick Pattern 272

Using the stochastic indicator to help pick a long entry point 273 Using the stochastic indicator to help pick long exits 274

Chapter 13: Sell Indicators and Bearish Reversal

Candlestick Patterns 279

Shorting with the RSI and Bearish Candlestick Patterns 279

Picking short entry points with the RSI and candlesticks 280

Using the RSI to help pick short entry and exit points 282

Using the Stochastic Indicator and Bearish Candlestick Patterns for Shorting 285

Picking short entry points 286

Deciding when to get in and out of shorts 288

Chapter 14: Using Technical Indicators Alongside Bullish-Trending Candlestick Patterns 291

Using Trendlines and Bullish-Trending Candlestick Patterns for Buying and Confirmation 292

Using trendlines and bullish-trending candlestick patterns to pick long entry points and confirm trends 292

Picking long exits and determining stop levels with trendlines and bullish-trending candlestick patterns 294

Combining Moving Averages and Bullish-Trending

Candlestick Patterns 297

Using moving averages with bullish-trending candlestick patterns to confirm trends 297

Using the moving average and bullish-trending candlestick patterns to pick long exits and determine stop levels 300

Chapter 15: Combining Technical Indicators and Bearish-Trending Candlestick Patterns 303

Putting Trendlines Together with Bearish-Trending Candlestick

Patterns for Selling and Confirmation 303

Short trades and trend confirmation with trendlines and bearish patterns 304

Bearish trendlines and candlestick patterns leading to short entries and exits 306

Combining Moving Averages and Bearish-Trending Patterns for Short Situations 309

Pinning down short entry points and confirming trends 309

Using moving averages and bearish-trending candlestick patterns to pick short exits and select stop levels 311

Part V: The Part of Tens 315

Chapter 16: Ten Myths about Charting, Trading, and Candlesticks . . .317

There's No Difference between Candlesticks and Bar Charts 317

Market Efficiency Makes It Impossible to Beat the Market over the Long Run 318

Only a Full-time Professional Can Make Money in the Markets 318

Technical Analysis Is Nothing More Than Reading Tea Leaves 319

Charting Is for Short-Term Traders Only 320

You Must Be Rich to Start Trading 320

Trading Is an Easy Way to Get Rich Quick 321

Candlestick Charts Require More Data and Are More Difficult to Create 321

The Trading Game Is Stacked against the Small Trader 321

Selling Short Is for Professional Traders Only 322

Chapter 17: Ten Tips to Remember about Technical Analysis 323

Charts Can Give False Signals 323

People Will Give You a Hard Time 324

There's No Definite Right or Wrong Opinion of a Chart 324

A Single Chart Doesn't Tell a Whole Story 324

Charting Is Part Science, Part Art 325

You Can Overdo It 325

Develop a Backup System 326

Error-Free Data Doesn't Exist 326

No System Is Silly As Long As It Works 326

Past Results Don't Always Predict Future Performance 327

Index 329

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