Candlestick Charting Explained: Timeless Techniques for Trading Stocks andFuturesBOOK DETAILPaperback: 560 pages Publisher: McGraw-Hill; 3 edition (April 17, 2006) Language: English ISBN-10: 007146154XISBN-13: 978-0071461542 Product Dimensions: 7.3 x 1.2 x 9.1 inches Shipping Weight: 2.5 pounds (View shipping ratesand policies) Customer Reviews: 4.4 out of 5 stars89 customer ratingsBook DescriptionMaster this powerful trading system and identify the best trades Inside this book you will discover candlestick charting,one of the most popular tools in technical analysis. Candlestick Charting Explained features updated charts and analysis aswell as new material on integrating Western charting analysis with Japanese candlestick analysis, grouping candlesticksinto families, detecting and avoiding false signals, and more.
Candlestick charting explained pdf
Inside this book you will discover candlestick charting, one of the most popular tools in technical analysis. Candlestick Charting Explained features updated charts and analysis as well as new material on integrating Western charting analysis with Japanese candlestick analysis, grouping candlesticks into families, detecting and avoiding false signals, and more.
The abandoned baby candlestick pattern is a three bar reversal pattern. It is similar to the morning and evening star formations and is a very reliable reversal signal when it occurs after a sharp rise or drop.
In the above candlestick charting example, notice how the abandoned baby top comes in after a strong uptrend. This leaves the bulls trapped at the top of the formation with very little time to exit their winning positions, especially if they were buying at the top.
Congratulations! You are now familiar with the structure and characteristics of the abandoned baby candlestick pattern. Now it is time to apply trading techniques to the strategy with real market examples.
The chart begins with a price decrease, marked with the red arrow. At the end of the price decrease, we see a candle gapping down. This should be a signal for us that a potential abandoned baby candlestick pattern might occur on the chart.
Since the bullish and the bearish abandoned baby candlestick patterns are considered very reliable, we will invest 20% of our buying power. So, we invest $20,000 in a long trade based on an abandoned baby signal.
For newer traders, even reading candlestick charts can seem like an insurmountable learning curve. There appears no rhyme or reason, and no end to the amount of price and volume data being thrown your way.
As the father of candlestick charting, Honma recognized the impact of human emotion on markets. Thus, he devised a system of charting that gave him an edge in understanding the ebb and flow of these emotions and their effect on rice future prices.
In recent history, Steve Nison is widely considered the foremost expert on Japanese candlestick methods. After all, he wrote the book that catapulted candlestick charting to the forefront of modern market trading systems.
The Hanging Man is a candlestick that is most effective after an extended rally in stock prices. The story behind this candle tells us that there were extensive sellers in the formation of the candle, signified by the long wick.
This visual representation of those 4 data points has been in use in Japan, going back hundreds of years, unknown to the western world. It is widely recognized that this changed through the work of Steve Nison, with his book that came out in 1991 called Japanese Candlestick Charting Techniques. Here he described and named individual candlesticks (one day) and candlestick patterns (multi-day) that are still in use today.
Here Greg Morris emphasizes something that is often forgotten, but so basic. To have a reversal candlestick pattern (either up or down), you have to look at the previous trend! After all, how can you have a reversal if there is nothing to reverse from! To have a continuation candlestick pattern (either up or down), the pattern has to occur within the trend.
There you have it, the next 260 pages, with the table for each candlestick pattern, then a commentary on each one, along with the rules of recognition and the psychology and scenario behind each pattern!
Certainly an eye opener, for sure, since the Hammer is one of the most commonly talked about patterns, with tons of traders making decisions after seeing the hammer to either buy or sell short after the occurrence. Most of the candlestick patterns listed have very slight win rates or even negative win rates.There are some with some eye-popping win rates though, such as Matching Low. That is a 2 day pattern where the close was exactly the same as the close the day before. Unchanged. The first day of the pattern starts with a long down day. The stock closed lower, basically. The second day, the stock opened higher than the close, but again, closed at the exact same price.
Different candlestick patterns are not good or bad, they are just patterns that one can look at to make a decision about whether to make a trade. They each have a unique underlying psychology behind them. That is the key point to understand here. They are not good or bad, they are simply showing you the underlying activity behind the price action.
Is there fear? Is there greed? Behind each candlestick pattern, whether 1 minute candles, 5 minutes, 1 day or weekly candlesticks, they represent a summation of human emotion. Consider again that we have 4 data points, an open, high, low and a close.
That might be the underlying human emotion contained in that one candlestick. Is it good or a bad signal though? Maybe. Maybe not. It has such a low win rate though, why would anyone take that signal anymore.
Look at how that hammer occurred at a key support level. There are buyers there, no doubt. The price does not sink below that blue support line. The hammer has taken on greater significance because it occurred at a key support level. If you had a continuation candlestick pattern at that exact point, I would stay away. It has the potential to knife right through support.
This is covered in Chapter Eight, Candle Pattern Performance on page 351 on the 3rd edition. Here again Greg Morris is combining candlestick patterns with other information. Two opinions are basically better than one. When both opinions match, you have a better chance of success.
Then he analyzes the performance of the candlestick trades that are triggered only after the indicator trigger is primed. Each indicator is analyzed on its own. Then candlesticks are analyzed with a different indicator in the two-step method above.
However, a dedicated chapter, focusing on the psychology behind the greed and fear drivers would really add to this book. After all, that is the key to candlesticks: they are a visible representation of the human emotions behind short-term price action.
Candlestick charts are no longer a nebulous, mysterious form of alchemy that many used to think they represented almost 20 years ago. Candlesticks are now used within every major charting and trading service.
Understanding what candlestick patterns are telling you, will go a long way towards helping you make the right trading decisions. Candlestick Charting Explained is more subjective than other books that make general statements.
As its name implies, CandleVolume charts merge volume into candlesticks. This allows chartists to analyze both price action and volume with one look at the price chart. CandleVolume charts are similar to EquiVolume charts, but offer more information because candlesticks are used instead of high-low boxes. This means chartists can see the open and close for each period, as well as the high and the low. CandleVolume charts can be used just like normal charts. Chartists can look for candlestick patterns as well as classical chart patterns, such as triangles and wedges, to generate signals.
A CandleVolume candlestick consists of five components: open, high, low, close and volume. As with normal candlesticks, the open and close form the body of the candlestick, while the high and low form the upper and lower shadows. Volume determines the width of the candlestick. Wide candlesticks form when volume is high, while narrow candlesticks form when volume is low. The example below shows basic black and white (filled and hollow) candlesticks based on CandleVolume. Wide and hollow candlesticks form when the close is well above the open and volume is high. Wide and filled candlesticks form when the close is well below the open and volume is high. Narrow candlesticks form when volume is relatively low.
When calculating CandleVolume charts, note that volume is normalized to show it as a percentage of the look-back period. For a four-month daily chart, each day's volume would be divided by total volume for the look-back period (four months). As such, the width of each box represents the percentage of total volume for the look-back period. Big volume days take up more space on the X-axis (horizontal) than low volume days. With varying width, this means the date axis is usually not uniform on CandleVolume charts. Some weeks will extend longer because of wide candlesticks, while others will be shorter because of narrow candlesticks. The first chart below shows Pfizer (PFE) with normal candlesticks and a normal X-axis. The second chart shows how CandleVolume changes the X-axis because volume was much higher in June than in prior months.
CandleVolume charts can be used to validate candlestick reversal patterns. A candlestick reversal pattern on high volume carries more weight than a candlestick reversal pattern on low volume. The first chart below shows Transocean (RIG) forming a wide hammer in mid-April. The second chart shows RIG forming a wide bearish engulfing in mid-May. The third chart shows price action after these patterns.
Volume is an important part of chart analysis, especially where it concerns validating support and resistance breaks. An upside breakout on high volume is more bullish than a breakout on low volume because volume is fuel. An upside breakout on high volume shows strong demand that is less likely to fade away. The chart below shows Google (GOOG) with a CandleVolume chart ending on April 19th. Notice how the stock broke above resistance with a wide hollow candlestick. This shows high volume (strong demand) on the breakout. The second chart shows what happened next. Not all setups pay off quite this well, but CandleVolume can help separate the pretenders from the contenders. 2ff7e9595c
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