Iedinc Candlesticks Part1 Saulseinbergwebinar2011.10.16

8/18/2019 Iedinc Candlesticks Part1 Saulseinbergwebinar2011.10.16

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An Introduction ToCandlesticks – Part 1(Another InvestEd Webinar)

Saul Seinberg Advisory Director

© 2011 Saul Seinberg

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Copyright andPermissions Notice

! This is a copyrighted presentation by SaulSeinberg. Please do not copy or use thispresentation, in whole or in part, without priorwritten consent from Saul. Thank you.

! Use of this presentation, once granted,requires the following copyright notice:

!

“Copyright 2011 Saul Seinberg. All rightsreserved. This material is presented withpermission of the author.”

! Stock charts are courtesy of StockCharts.com



3

Disclaimer

! This presentation is for educational purposes only. Norecommendation to use the techniques described orto invest in the companies discussed is made orintended.

! While the information included in this presentationhas been checked against other sources, there maystill be errors present.

!

It is your responsibility to perform your own due

diligence with respect to use of information in thispresentation.! Any use of the presentation material is at the sole risk

of the user. Neither the presenter nor InvestEd Inc. isresponsible for use of the presentation material.

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Introduction

! It is believed that Candlestick charting was firstintroduced in Japan back in the 1700s

! According to writings from that period, aJapanese rice trader named Homma discovered,that the rice markets were strongly influenced bythe emotions of traders reacting to perceptions ofsupply and demand

! Homma-san observed that emotions would create

significant differences between the fundamentalvalue of rice and its market price



5

Introduction

! This emotionally driven difference between valueand price is as applicable to today’s stock marketas it was to Japan’s rice markets of 300 years ago

! Candlesticks are now used, as they were byHomma-san, to understand and project pricemovement of such items as stocks, commoditiesand currencies attributable to trader emotion

! Steve Nison thinks that candlestick charting was

initially used in the West around 1850! Candlesticks are now extensively used around the

world and particularly online, very often as thedefault type of chart

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Introduction

! Candlestick patterns are thought to have only short tointermediate term effectiveness, unless cancelled byanother pattern, of minutes to perhaps 3 months,based on frame of reference (e.g. – daily, weekly)

! For me, candlestick charting has been helpful indeciding when to buy or sell a stock or ETF and inoption trading where a daily, weekly and limitedmonthly outlook is important

! Although candlestick charting is subjective and

sometimes difficult to understand, with a little study,it can be very useful to investors



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Introduction

! Charting began with line charts, and thengravitated to bar charts, both of which charttypes were offered by subscription based chartingservices or manually drawn by investors

! Line charts used only closing prices

! This proved to be too limiting for many chartistsso they added other key prices to form bar chartsin order to use indicators that relied on four

pricing factors; that is, the open, close, high andlow of a period! Bar charts then became the most popular type of

chart in use until the widespread acceptance ofcandlestick charts

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Introduction

! Bar charts and candlesticks both use thesame data items so the switch from barcharts to candlesticks was relatively easy fortraders, charting publications and ultimatelyonline charting sites

! In addition, key to acceptance of candlesticks,western charting patterns and indicators can

be readily coordinated with a candlestickchart so adoption of candlesticks did notrequire traders to abandon their favoritecharting techniques and indicators



9

Introduction

! Since a bar could represent any discrete timeperiod (minutes, days, weeks, months, years,etc.), the open, close, high and low were for thetime period used

! The open and close for short periods (less than aday) are of lesser importance than on a dailychart

! The personal computer and then the Internetspread the use of line and bar charts significantlybeyond the scope of initial adoption and audience

! Eventually, in the mid-1980s, candlesticksbecame the majority default charting type

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Bar Chart for SUNW

Typical barchart showinghow SUNWdid over 3months in

early 2000; updays shown inblack, downdays in red

A



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Candlestick Chart for

SUNW

Typical candlechartshowing howSUNW didover sameperiod as the

bar chart; updays in white,down days inred or black

A

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Bar vs. Candlestick

Bar vs. candleshowing visualinfo that isderived fromboth types ofcharts

Body

Lower Shadow

UpperShadow

Low

High

Close

Open



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Candlestick Interpretation

! Candlesticks are subjective, but not as much asmost standard patterns in technical analysis

! No “cup and handle” type issues

! A specific candlestick is always identifiable! Candlesticks are contextual

! The meaning of a particular candlestick canchange in importance and predicted effect

depending on where it appears in a price chart! Thus, a given candlestick may have a different

degree of importance and message in thesame chart or a different chart depending onits trend context

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Candlestick Projections

! Understandably, the question “How successfulare candlesticks projections?” is often asked

! Basically, a candlestick pattern is a “short-term” forecast on the direction of theunderlying stock, ETF or index

! The projection associated with a specificcandlestick will change when followed by a

contrary pattern! According to Greg Morris (Candlestick Charting

Explained, pg. 238), for individual stocks, themost successful candlesticks were the Engulfingpatterns, the Hanging Man and the Hammer



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Candlestick Elements

! A candlestick, also called a candle or a candleline, is determined or formed using the open,close, high and low prices of a period

! A candlestick consists of a rectangular (real) bodyand, if they are present, lines above and belowthe body, called shadows

! At StockCharts, an up day (where close is higherthan open) is shown in white or a red outline;

can be clear or another color at other sites! At StockCharts, a down day (where close is lower

than open) is shown in black or red; is usually just black at other sites

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Candlestick Elements

Candlesticksfor closehigher andclose lowerperiods. Aswith bars,period can be

minutes,hours, days,weeks orlonger

Body

Lower Shadow

Upper Shadow



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An Introduction To

Candlesticks – Part 1

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Candlestick Bodies

! The body of a candlestick, depending on the

difference between open and close, can beshort, long or even zero (when open = close)

! Long bodies indicate intense buying or sellingpressure; very positive

! Short bodies, on the other hand, show little orno price movement because buyers and

sellers are uncertain; lack of conviction!

Short bodies often appear in consolidationphases when stock prices are sluggish; supplyand demand mainly in balance



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Candlestick Bodies

! A long white or hollow red candlestick shows

strong buying pressure indicating that pricesadvanced significantly from open to close in asession, buyers were aggressive

! While long white or hollow red candlesticks

are generally bullish, their real world effectdepends on their position within the technicalpicture depicted by their candlestick chart

! After an extended price decline, a long white

or hollow candlestick can mark a potentialturning point or help build a support level

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Candlestick Bodies

! Long black or red candlesticks show strong

selling pressure and indicate that pricesdeclined significantly from their opening valueof a session, sellers were aggressive

! While long black or red candlesticks are

generally bearish, their effect depends ontheir position within the broader technicalpicture depicted by their candlestick chart

! After an extended price climb, a long black or

red candlestick can mark a potential turningpoint or help build a resistance level



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Candlestick Shadows

! The upper and lower shadows on candlesticksprovide important information about pricepsychology during a trading session

! The top of an upper shadows represents thesession highpoint and the bottom of a lowerlower shadow represents the session low

! Candlesticks with short shadows indicate thatmost of the trading action was confined near the

body, near the open and close; little conviction! Candlestick with long shadows show that prices

extended well past the body and away from theopen and the close before retreating

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Candlestick Colors

! In StockCharts, with colors turned on,

! Filled red candles depict “down” periods where

! close is lower than the period’s open, and

! close is lower than the previous period’s close

! Hollow white candles show “up” periods where

! close is higher than the period’s open, and! close is higher than the previous period’s close

! With colors turned off, you will see only filled orblack candles and open or white candles



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Candlestick Colors

! With colors on, filled black candles are"contradictory" candles

! Thus, a solid black candle indicates that itsclosing price is lower than its opening price, buthigher than the prior period’s close; in otherwords, a higher than prior close on a down day

! Hollow red candles are also "contradictory"candles, showing an “up” period, but having aclose that is lower then the prior period’s close

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Candlesticks With Color

F

QSII



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Colors Off Candlesticks

QSII

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Candlestick Colors

! Why is it useful to be visually reminded ofcontradictory candles?

! Focuses user on relationship of this session’s close toclose of prior period

! Emphasizes indecision

! Can signal trend reversal, flashes caution

! Candlestick newcomers could start with colorturned off, consider shortening chart period

! Once acclimated, turn candlestick colors on andlengthen chart period



27

Switching

Candlestick Colors

(1) ToggleCandle Color

On/Off

(2) Then click “Update”

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Candlestick Patterns

! Only one candle line per period! Candlestick patterns can be formed from one or

more single candle lines! Confirmation of a signal is recommended! In some cases, a single candle line can be

confirmed by one or more other candlesticks! Confirmation can also result from a western

technical signal, for example:! Volume spikes

! Relative Strength Indicator (RSI)! Chaikin Money Flow (CMF)

! Change in trendline relationship



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Candlestick Patterns

! There are basically three types of candlestickpatterns

! Bullish reversal patterns

! Bearish reversal patterns! Continuation patterns

! Bullish reversal patterns form within a downtrend! Bearish reversal patterns form within an uptrend

! However, a reversal pattern isn’t valid if there isno trend to reverse!! A continuation pattern means you should expect

more of the same trend

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Continuation Patterns

! Continuation patterns occur less frequently anddon’t get as much attention as reversal patterns

! Reversal patterns occur about 40 times morefrequently than continuation patterns andaccount for about 75% of all candlestick patterns

! While continuation patterns are often ignored,they do require an evaluation of a currentposition to determine if a change is appropriate

! Continuation patterns, as a general rule, signalthat no change is expected in the current trend

! We won’t cover continuation patterns any further



31

Doji

A doji is a candleline that has equalor virtually equalopening and closingprices. Dojis areimportant whenoccurring at the top

or bottom of a trendalthough not asmuch when theyoccur in a trend

Most common candlestick

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Doji

! In its most common form, opening andclosing prices are nearly the same for dojialthough these prices are sometimes equal

! Doji candle lines get a lot of attention eventhough they convey indecision

! By themselves, doji are usually not sufficientto signal a reversal, but always warrant

investigation, especially in an “aging” trend!

While doji are warning signals, they don’tguarantee that price is about to change



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Doji

! The relevance of a doji depends on the precedingtrend or preceding candlesticks; it takes meaningfrom its context

! After an advance or in combination with a longwhite candlestick, a doji signals that buyingpressure may be starting to weaken

! After a decline or in combination with a longblack candlestick, a doji signals that selling

pressure may be starting to diminish! A Doji indicates that the forces of supply and

demand have become more evenly matched andthat a change in trend may be near

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Doji

! Doji candles come in several forms, forexample:! Gravestone! Dragonfly

! Doji candles have no real body or very short

ones!

All doji candles represent indecision althoughthey may each tell a different story dependingwhere they occur in a chart and the size oftheir shadows



Other Doji Candlesticks

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Dragonfly:Sellerscouldn’tkeep pricedown before

sessionclose

Gravestone:Buyerscouldn’tkeep priceup before

sessionclose

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An Introduction To




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Spinning Tops

! Spinning tops also represent indecision! In that sense, they are doji-like (transitional)!

The small real body, whether white or black,indicates there has been little price movementfrom open to close

! The length of the shadows indicate that bothbulls and bears were active during the session

! Even though prices moved significantly higher

and lower in the session, neither buyers orsellers could gain the upper hand so the resultwas a relative standoff for the session

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Spinning Tops

A spinning top isa candle line thathas a small blackor white body incomparison to itsshadows. Nisonsays it is the sizeof the body, notthe shadows,that is important.



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Hammer & Hanging Man

! The Hammer is a bullish reversal pattern that

forms after a price decline!

Hammers can indicate bottoms or supportlevels; buying pressure building

! Volume, especially heavy volume, reinforces

the message of a Hammer!

The Hanging Man is a bearish reversal pattern

that forms following an advance! The Hanging Man candle can indicate a top or

a resistance level! Look for a confirming indicator

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The Hammer andHanging Man arealike except for thenature of theirbodies. They eachhave long lower

shadows and slightto non-existentupper shadows



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In context

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Inverted Hammer &

Shooting Star

! The Inverted Hammer and Shooting Star lookalike, but differ in meaning based on prior priceaction

! The Shooting Star is a bearish reversal signal thatforms after an advance leaves it in the “star”position

! This candlestick forms after prices gap higher onthe open, advance, but then close far off their

highs! Bearish confirmation is needed and can take the

form of a gap down or a long black candle withheavy volume confirmation



43

Inverted Hammer &

Shooting Star

! The Inverted Hammer is a bullish reversalpattern that forms after a price decline

! Inverted Hammers signal a trend reversal orhelp establish a support level

! Bullish confirmation is required to validate anInverted Hammer

! Confirmation can take the form of a gap up ora long white candle formed on heavy volume

44

Inverted Hammer &

Shooting Star

The InvertedHammer andShooting Star arealike except forthe color of theirbodies. They eachhave long upper

shadows andslight to non-existent lowershadows



45

Inverted Hammer &

Shooting Star

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Bullish Engulfing Pattern

! The bullish engulfing pattern is made up of

two candlesticks, the first is a black candlethat’s adjacent to a white candle

! Generally, the larger the white candlestickand the greater the engulfing amount, themore bullish the reversal

! If buyers tighten their grip and stay

committed, bullish confirmation will occur asstrength continues and prices continue to rise



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Bullish Engulfing Pattern

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Bearish Engulfing Pattern

! The bearish engulfing pattern is made up of

two candles, the first is a white candle that’sadjacent to a black candle

! Generally, the larger the black candlestick andthe greater the degree of engulfing, the morebearish the reversal

! If sellers tighten their grip and stay

committed, bearish confirmation will occur asweakness continues and the price drop willpersist



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Bearish Engulfing Pattern

Candlestick Scans

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Using StockCharts

!

StockCharts is a terrific site, even the free portion isworthwhile, both for the charts and the Chart School

! The default chart at StockCharts is called a SmartChart!

The default chart type for the SmartChart isCandlesticks although this can be changed

! Instructions for using a SmartChart can be found athttp://support.stockcharts.com/forums/30077/entries/31220

!

You cannot save charts in the free portion ofStockCharts, but there is a “work-around”

! From any SmartChart, click on “Linkable Version” belowthe chart, bookmark the resulting URL as a template,then change to your stock symbol when you go to URL

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References

!

StockCharts, ChartSchool,http://stockcharts.com/help/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks, in free part of website

!

Getting Started in Candlestick Charting by Tina Logan,Wiley Publishing, 2008

!

Candlestick Charting Explained by Gregory Morris,Irwin Publishing, 1995

! The Candlestick Course, Steve Nison, Wiley Publishing,2003

!

Profitable Candlestick Trading, Stephen Bigalow, WileyTrading, 2002 (later edition available)



Homework

! Homework assignment - copy and click on thefollowing link to bring up a daily AAPLcandlestick chart; http://tinyurl.com/3lf4bc5

! Identify any of the patterns discussed in Part1 of this presentation that are shown in the AAPL chart, do the same for a weekly chart

! A copy of the daily chart is shown in the nextslide

! The homework will be discussed in Part 253

Homework (AAPL Daily Chart)

54



55

An Introduction To


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