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Candlesticks
Brian Cox
5/21/06
Investools Discussion Group
Helping People Invest Smartly
L a Gr o u p
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The Essentials
The greatest advantage to using candleon your charts, instead of bars is thatsingle candle lines and multiplecandle patterns offer more reliable,earlier and more effective reversalsingles
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The Essentials
Invented by the Japanese. Used firstin the 1870s with the opening of theJapanese stock market.
Can be used with the weekly, dailyand 5 minute charts.
Candlesticks do not give price targets
and need a close to confirm candlesignal
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The Essentials
Before placing a trade based on acandle signal:
other technical signals should beconsidered
Consider the risk / reward of the trade.
Candle charts are best used as a tool
not a system.
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Construction
Real body
Lower Shadow
Upper Shadow
White:Open lowand closehigher
Black / red:Open highand closelower
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Construction
White:Open lowand closehigher
Black / red:Open highand closelower
Open = 30
low = 29
High = 37
Close = 35
Close = 30
low = 29
High = 37
Open = 35
Lower Shadow
Real body
Upper Shadow
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Construction Review
The rectangular portion of thecandlestick is called the real body.
The thin line extending above the realbody is called the upper shadow.
The upper shadow of a black candlerepresents the range between the
high and the sessions price.
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Construction Review
The lower shadow of a white realbody candlestick represents the rangebetween the sessions open and low.
The black real body means that theclose was lower than the opening.
The white real body means that the
close was higher than the opening.
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Basic Market Strategies
Candles play a powerful role in earlyreversal signals.
Candle lines and patters confirmsupport and resistance.
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Basic Market Strategies
Spinning Tops High Wave Candles
Candles come in many different shapes
Tends to indicate indecision Tends to indicate confusion
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Basic Market Strategies
Spotting reversals
Bullish signal
Hammerfollowing adown trend
Possible Bearishsignal
Hanging manfollowing an
up trend
Bearish signal
Shooting Starfollowing an
up trend
Real Bodies can be black or white
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Basic Market Strategies Review
A long lower shadow on a daily chartsshows the market bouncing off fromthe lows of the day.
The spinning top is another name fora small real body.
The real body of a spinning top can
be black or white. A wave candle must have long upper
and lower shadows
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Basic Market Strategies Review
A spinning top indicates indecision.
A wave candle indicates confusion.
A hammer occurs in a downtrend. A hammer can be white or black.
A hanging man occurs in an up trend.
The confirmation for the hanging manis a close under the hanging mansclose
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Basic Market Strategies Review
A shooting star occurs during an uptrend.
A shooting star is considered bearish
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The Dangerous Doji
The doji can signal a significant trendshift or reversal.
A doji forms when the opening andclosing price are the same.
There are bearish and bullish doji.
Are valuable for calling the markettops (especially after a long whitecandle).
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The Dangerous Doji
Market in Balance
Rally could belosing steam
Possible Bullish
signal
Bearish signal
Long-legged Doji Dragonfly Doji Gravestone Doji
The doji is more influential when it is a rare occurrence.
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The Dangerous Doji
Northern doji Southern doji
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The Dangerous Doji Review
A doji forms when the open and closeare the same.
A doji signals that the bears and bulls
are in stalemate. The dragonfly doji, the high of the
session represents the open, high and
close. The doji in a rally is sometimes a sell
signal.
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The Dangerous Doji Review
A doji in an uptrend is called anorthern doji.
The northern doji is most effectivewhen the market is overbought andthe doji appears at a resistance area.
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Long Real Bodies (Belt-Hold)
Candles with extended real bodiescan also display strong signals
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Belt-hold signs
Bullish belt hold is white near support and bearish is blacknearresistance
Support
Resistance
Bearish belt-holdBullish belt-hold
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The Dangerous Doji Review
The bullish belt-hold; following adowntrend will starts low nearresistance and raises up and closesout higher
The bearish belt-hold; following auptrend will start high near resistance
and closes out lower.
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The Belt hold Review
The bearish belt hold becomes moresignification as it nears resistance.
The longer the height of the belt-holdcandle, the more important the signalit gives.
On the chart, we draw the support
line from the bottom of the lowershadow.
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The Belt hold Review
The smaller the real body, the lessforce the move behind the move.
A series of long lower shadows as themarket is descending shows that themarket is descending reluctantly.
On the chart, we draw the support
line from the bottom of the lowershadow.
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The Belt hold Review
If the trend is mostly higher, caution is warranted due to longupper shadows
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The Power of Candle Patterns
Candle charts are most powerfulwhen two or more candle linescombine in a candle pattern.
A dark cloud cover pattern is abearish signal consisting of a two-candle patter that indicates a top
reversal.
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The Power of Candle Patterns
White real body that closeswithin the back body,
perferably more than 1/2 ofblack body lenght
Dark Cloud coverPiercing Pattern
Follows a strong white body
session. The second session
opens above and closed below
the center of the white body.
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The Power of Candle PatternsBearish EngulfingBullish Engulfing
White real body openslower and closes higherthan the black body (the
bulls have taken over!)
Black body opens higherand closes lower than the
white body (the bearshave taken over)
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The Power of Candle PatternsReview
As the second session of a piercingpattern pushes more and moredeeply into the first candle, it may
become a bullish engulfing pattern.
The opposite pattern to the darkcloud cover is the piercing pattern.
A piercing pattern is to a bullishengulfing pattern as a dark cloudcover is to a bullish engulfing pattern.
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The Power of Candle PatternsReview
A bullish engulfing pattern occurswhen at second sessions white realbody raps around the prior sessions
black body
If an extremely large white candlecompletes a bullish engulfing pattern
you should buy or sell based on therisk reward profile.
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Candle Patterns Review
Lets see an actual set of candle stickpatterns
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Candlesticks
End of Part I
What would youDo now?
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Candlesticks
End of Part I
What would youDo now?
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Candlesticks
End of Part I
Whatdoes thisindicate?
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Candlesticks
End of Part I
What is thiscalled? (bearishor bullish)
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Candlesticks
End of Part I
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Candlesticks
End of Part I
Is it time to buy?
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Candlesticks
End of Part I
What will youdo now?
What is the
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Candlesticks
End of Part I
What is thename of this?
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Candlesticks
End of Part I
Buy? Sell?
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Candlesticks
End of Part I
What isthis called?
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Candlesticks
End of Part I
What isthedirection?
Strong Resistance
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Candlesticks
End of Part I
Strong Resistance
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Candle Sticks
End of Part I