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1 Basic Candlesticks
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Basic Candlesticks
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Disclaimer
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1. What is Technical Analysis?
2. History of Candlesticks
3. How to Read Candlesticks
4. Candlestick Patterns
Contents
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What is Technical Analysis?
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▪ A method of evaluating securities by analysing statisticsgenerated by market activity (e.g. past prices and volume).
▪ Technical analysts do not attempt to measure a security'sintrinsic value, but instead use charts and other tools toidentify patterns that can suggest future activity.
▪ Technical analysts believe that the historical performance ofstocks and markets are indications of future performance.
What is Technical Analysis?
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It is crucial to keep in mind that Technical
Analysis is not an exact science.
Rather, Technical Analysis deals with
probability distributions.
What is Technical Analysis?
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▪ Market Action Discounts Everything
▪ Prices move in Trends
▪ History tends to repeat itself
What is Technical Analysis?
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1. Market Action Discounts Everything
▪ Cornerstone of Technical Analysis
▪ The technical analyst believes that anything can possibly
affect the price and is actually reflected in the price of that
market
▪ Anything can be political, psychological or natural
disasters, etc.
What is Technical Analysis?
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2. Prices move in Trends
▪ The concept of Trend is essential to Technical Analysis
▪ Believe that market prices do exhibit Trends
▪ Purpose of charting price action is to identify Trends
What is Technical Analysis?
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3 Basic Trends of the Market
Uptrend Downtrend Sideways
▪ Uptrend has a pattern of rising peaks and troughs
▪ Downtrend has a pattern of lower peaks and troughs
▪ Sideways has a pattern of horizontal peaks and troughs
What is Technical Analysis?
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Uptrend has a pattern of rising
peaks and troughs
What is Technical Analysis?
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Downtrend has a pattern of
lower peaks and troughs
What is Technical Analysis?
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Sideways has a pattern of
horizontal peaks and troughs
What is Technical Analysis?
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3. History tends to repeat itself
▪ The study of Human psychology
▪ Chart patterns reflect Bullish / Bearish psychology of the
market
▪ Key to understanding the future lies in the study of the
past or that “The future is just a repetition of the past”
What is Technical Analysis?
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Candlesticks
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• Candlesticks are a type of charting technique
• Other techniques include Bar Charts and Line Charts
• Candlestick charts are used in Technical Analysis to
deduce trends and predict price movements
Introduction
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17Advantage of Candlestick Chart
• Easy to understand – offer a much more appealing chart
• Information displayed is easily interpreted and analysed
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18History of Candlesticks
• Developed by the Japanese for rice trading in
16th century
• Popularised by Steve Nison after his publication of
“Japanese Candlestick Charting Techniques” in 1991
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19How to Read Candlesticks
High
Close
Low
Hollow Body
Lower Shadow
Upper Shadow
Open
Price: Close above Open
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20How to Read Candlesticks
Price: Close below Open
High
Open
Low
Filled Body
Close
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21Candlestick Chart
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22Rising Window
Gap
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23Rising Window
• Bullish sign
• Opens above Previous Period’s High
• Remains above Previous Period’s High for Entire Period
• Closes above Previous High
Gap
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24Rising Window
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25Rising Window
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26Falling Window
Gap
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27Falling Window
• Bearish sign
• Opens below Previous Period’s Low
• Remains below Previous Period’s Low for Entire Period
• Closes below Previous Low
Gap
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28Falling Window
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29Falling Window
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30Doji
Price: Close = Open
High
Low
Close/Open
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31Doji
• Neutral pattern
• No real body
• Indecision signal
• Requires prior trend and future confirmation to determine
type of signal
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32Doji
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33Doji
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34Spinning Top
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35Spinning Top
• Signal indecision
• Small bodies
• Upper and lower shadows exceed length of the body
• Upper and lower shadows of approximately equal length
• Require confirmation
Length of Body
Lower Shadow
Upper Shadow
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36Spinning Top
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37Spinning Top
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38Spinning Top
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39Doji and Spinning Top
Similarities
• Represent indecision
• Warn of reversal after strong move
• Rely on confirmation
Differences
• Doji has no body
• Spinning top always has long legs and small body
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40Umbrella Group or “karakasa”
• Definition: small real body (open, close range small)
• Shadows > 2 times the length of real body
• Colour is not important
• Location is important; their names are given based on location
• There are only 4 patterns in umbrella group
• There are single candlestick reversal patterns
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41Hammer
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42Hammer
• Bullish reversal pattern
• Single candle with long lower shadow and small real body
• Forms after a decline
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body
• Confirmation is required
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43Hammer
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44Hammer
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45Hammer
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46Hanging Man
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47Hanging Man
• Bearish reversal pattern
• Single candle with long lower shadow and small real body
• Forms after an advance
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body
• Confirmation is required
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48Hanging Man
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49Inverted Hammer
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50Inverted Hammer
• Bullish reversal pattern
• Single candle with long upper shadow and small real body
• Forms after a decline
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body
• Confirmation is required
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51Inverted Hammer
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52Shooting Star
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53Shooting Star
• Bearish reversal pattern
• Single candle with long upper shadow and small real body
• Forms after an advance
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body
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54Shooting Star
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55Shooting Star
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56Case Study
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57Case Study
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58Case Study
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59Quiz
What is the candlestick shown on the right?
A.Shooting Star
B.Morning Star
C.Inverted Hammer
D.Hammer✔ (forms after downtrend)
✔ (forms after uptrend)
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60Quiz
What is the candlestick shown on the right?
A.Shooting Star
B.Hanging Man
C.Inverted Hammer
D.Hammer
✔ (forms after uptrend)
✔ (forms after downtrend)
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Thank you
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