Candlesticks

Prepared by Dave Forster

April 9, 2016

Topics of Discussion

Who is this guy?

Methods of Technical Analysis
Technical Analysis Inputs
Price vs. Volume
How I approach Charting
How a Candlestick is Constructed
Neutral Candle Patterns
Bullish Candle Patterns
Bearish Candle Patterns
Scanning for Candles

Who Is This Guy Dave Forster

Professional background mostly in programming

I lost my job and I havent been interested in looking for it
Trading for a living full time since 2008
Trading stocks, futures and options
Teach options trading currently
Run a trading room for the past 3 years
Formerly taught options and candlesticks for Steve Nison

Technical Analysis Methods

Technical indicators i.e. MACD, OBV, etc
Technical patterns i.e. head & shoulders,
triangles, etc.
Seasonality or Cyclicality
Drawing Tools i.e. Fibonacci,
Price Action i.e. candlesticks, gaps, etc.
If I wanted to create a technical indicator,
what would inputs to it could I use?

Technical Analysis Inputs

Price
Time
Volume

So between price and volume, which is it

more important to pay attention to?

Price vs. Volume

With regard to some financial products such as an index, its
not tradable so there is no volume.
Black pools and other off-exchange mechanisms make it
harder to tell what the volume is.
Some say that volume drives price but volume can stay low
for quite awhile
Sometimes with a stock it can have a large gap and then a
lot of volume trades on it, was the volume a result of the
gap in price ?
Candles can be used to chart either volume or price
So which is more important price or volume ?

How I approach charting

When I first started trading, I preferred to use technical
indicators, then I moved onto patterns and now I primarily
use price action.
I try to understand how an underlying is behaving does
the underlying like to trend, channel, gap, have clear swing
highs or lows, etc.
I do not use the same technical setup on every underlying
I prefer to tune the technicals to the underlying. i.e. I look
at a number of technicals to find what works best with the
specific underlying I plan on trading
I prefer underlyings that appear to be support and
resistance driven and react predictably with trend lines
Gaps are typically significant to me
Overall Im trying to understand how a stock behaves
I try to focus on the price itself more than anything since its
the biggest factor in whether or not a trade will be
profitable.

Creating a Candlestick Chart

Candlestick (or candle) charts can be used in any market that has
an open, high, low and close.
The context that a candle occurs in is important its effectiveness
i.e. If a reversal candle pattern occurs within a neutral range, its
more difficult to reverse than if there was a prior trend.
The real body (or body) is the open and closing range of the
session. If the close is lower than the open, the body is black. The
body is white (or clear) if the close is higher than the open Black
and white are traditional colors but green is often used for bullish
candles and red for bearish candles)
The lines above and below the real body, are called the shadows
(or wicks). The high of the upper shadow is the sessions high,
and the low of the lower shadow, is the low of the session
Candle patterns can consist of one or more candles
Candle patterns can have bullish, bearish or neutral implications
In some candle patterns the shadows are more important than the
body while in others the body is more important than the shadows

Candlestick Formation

Bullish

Bearish

Neutral
Candlestick
Signals

Identify this candlestick signal

Doji
Context
The opening and closing prices are the same or very close to one
another resulting in little to no body

Meaning
Indicates a balance between buyers and sellers

Criteria
There are specific forms of doji such as the gravestone doji, dragonfly
doji, and the long legged doji but this criteria is a high level description of
all doji
The plural for doji is doji not dojis
Doji usually work better as potential resistance than acting as support
A later candle that is bullish or bearish could act as confirmation that the
balance of sellers and buyers has ended
Doji could be used as a target giving the idea that momentum has ended
rather than as an entry based on a doji only

Identify this candlestick signal

High Wave Candle

Context
Can be used in either up or down trends
Long upper and lower shadows relative to recent candles
The color of the real body is not important but the long shadows are

Meaning
The long shadows indicate that the markets volatility has increased. The
small body indicates that the candle is neutral in direction

Criteria
Ideally the real body would be small and toward the middle of the
sessions range
Shows that volatility has increased but the session overall tended to be
neutral
Can often occur on days where markets are responding to news

Bullish
Candlestick
Signals

Identify this candlestick signal

Hammer
Context

The body can be white or black

The body should be at or close to the sessions high
A downtrend is required prior to the hammer occurring
The lower shadow must be at least twice the height of the body

Meaning
After this last burst of selling, new buying has started. This rejection of
lower prices is indicating a change in balance between bulls and bears.
The net result: lessening of bears confidence of sustainability of lower
price levels (and a reason for bulls to start getting more optimistic).

Criteria
Very small upper shadow acceptable
Bullish counterpart of Shooting Star
As a single candle line, it is same in FX as other markets

Identify this candlestick signal

Inverted Hammer
Context
The underlying needs to be in a downtrend prior to the inverted hammer
The body can be bullish or bearish
There should be a smaller real body at or close to the bottom of the high
to low range.
The upper shadow must be at least twice the height of the real body

Meaning
The long upper shadow gives a clue that those who were short on the
candles open or close took some heat holding the position. They would
likely suffer a loss if the market reverses after the inverted hammer.

Criteria
This pattern needs confirmation the next session.
Is the opposite of Hanging Man candle

Identify this candlestick signal

(based on the same lows)

Tweezer Bottom
Context
Two candles back to back with matching lows
The second candle line should show that bearishness is lessening

Meaning
Since both candles have the same lows, it is an indication that support
could be starting to develop.

Criteria
Both candles do not need to be the exact same lows
To be more important, the second candle should have either a long lower
shadow, and/or small real body
Opposite of Tweezers Top

Identify this candlestick signal

Bullish Harami
Context
Should occur in a downtrend or at least a retracement
The first candle is a higher than average long bearish body
The second real body must be relatively small and within prior real body
i.e. an inside body but not necessarily an inside candle

Meaning
The first bearish body shows the bears control. The harami afterwards
shows the bears are losing momentum.

Criteria
Both real bodies can be the same color
The higher the harami closes into the first real body, the better the
pattern
The body of the harami should be 25% or less the size of the previous
candles body
Opposite of Bearish Harami

Identify this candlestick signal

Bullish Counterattack
Context
The market needs to be in a downtrend prior to the pattern
On the open, this candle initially gaps below the low or close of the prior
candle but it closes at prior close

Meaning
On the second sessions open, it seems like the markets weakness is
continuing. At the close of the second candle though, its about the same as
the close of the first candle so the selling could be declining.

Criteria
The close of both candles do not have to be exactly the same
Opposite of Bearish Counterattack Line

Identify this candlestick signal

Piercing Pattern
Context
The market needs to be in a downtrend prior to the pattern
The opens needs to be at or below the low (or close) of the previous
candle
The bullish candle needs to close deeply into prior black real body

Meaning
The bearishishness of the bearish body are offset by the ability of the bulls
on the next session to push prices deeply into the black candles real body.

Criteria
The bullish candle has to close at least 50% into the prior real body
Opposite of Dark Cloud Cover

Identify this candlestick signal

Bullish Engulfing Pattern

Context
There needs to be a down trend prior to this two candle pattern occurring
since there needs to be a trend to reverse.
Bullish body needs to wrap around the preceding bearish body

Meaning
The first candles body being smaller than the second candle indicates that
the bears may be losing momentum. Then the extended tall white candle
proves the bulls have gained the upper hand. Once the candle closes it
shows that a reversal from the previous day has occurred

Criteria
The first candle of the pattern could be a doji
The first bearish body should be small relative to the bullish body
Opposite of Bearish Engulfing Pattern

Identify this candlestick signal

Rising Window
Context
There is no overlap between the current sessions low and the prior
sessions high

Meaning
A gap up shows how strongly one sided the market is in favor of the bulls.

Criteria
The entire rising window is a potential zone of support
The rising windows support would be broken on a close under the
bottom of the window
Opposite of Falling Window

Bearish
Candlestick
Signals

Identify this candlestick signal

Shooting Star
Context

Market in up trend
Real body can be black or white
Small real body at, or near, bottom of session
Upper shadow at least twice height of the real body

Meaning
Visually displays a session which the market rallied, and then failed to hold
those higher levels

Criteria
Very small lower shadow acceptable
Opposite of Hammer

Identify this candlestick signal

Hanging Man
Context

Market in a uptrend
Real Body White or Black
Small real body at, or near, top of sessions range.
Lower shadow at least 2x height real body

Meaning
Those who bought on the hanging man sessions open or close bought at
new highs for the move, thus making them nervous.

Criteria
Must come after a significant rally
Because of the bullish very long lower shadow, this signal needs bearish
confirmation the next session.
Opposite of Inverted Hammer

Identify this candlestick signal

(based on the same highs)

Tweezer Top
Context
Two candles with matching highs
Second candle must reflect bulls drive is easing (i.e. a doji, shooting
star, etc.)

Meaning
With the first and second candles failing at same highs we are getting
clues of a slackening of demand.

Criteria
Both candles need not be exactly the same highs
To be more important, the second candle line should have either a long
upper shadow, and/or small real body
Forex nuance has the open of the second candle at, or within a few pips,
of the close of the first candle
Opposite of Tweezers Bottom

Identify this candlestick signal

Bearish Harami
Context
Market in up trend
First candle is an unusually long white real body
Second real body is relatively small and within prior real body

Meaning
After a bull move, the long white real bodys vitality is followed by the small
real bodys uncertainty.

Criteria
Both real bodies can be the same color
The more deeply the second real body closes into the first real body, the
better the signals
Forex nuance has the open of the second candle at, or within a few pips,
of the close of the first candle
Opposite of Bullish Harami

Identify this candlestick signal

Bearish Counterattack
Context
Market is an up trend
Second candle opens above prior sessions high (or close), then closes
at prior close

Meaning
As good as things look at the second sessions open, the unchanged close
compared to the first candle is cause for concern.

Criteria
Closes do not have to be exactly the same
Extremely rare in the forex market
Opposite of Bullish Counterattack Line

Identify this candlestick signal

Dark Cloud Cover

Context
Market in up trend
Opens above prior high (or close)
Black candle closes well into prior long white candle

Meaning
The tall white candle relays the bulls are in complete control. But the
second sessions weak close into the white candles real body means the
tide has turned.

Criteria
Close of black candle has to close at least at half way into tall white
candles real body
Forex nuance has the open of the second candle at, or within a few
pips, of the close of the prior candle
Opposite of Piercing Pattern

Identify this candlestick signal

Bearish Engulfing Pattern

Context
Market in up trend
Black real body wraps around preceding small white real body

Meaning
The long black candle that wraps around the white candle reflects how the
bears have wrested control of the market from the bulls.

Criteria
First real body should be small compared to black real body
First candle of the pattern can be a doji
Forex nuance has the open of the second candle at, or within a few pips,
of the close of the first candle
Opposite of Bullish Engulfing Pattern

Identify this candlestick signal

Bear Separating
Context
Trend not important
Black candle that opens at, or below open of prior white real body, and
then closes under white candles open

Meaning
Control has now shifted from the bulls to the bears.

Criteria

Remember risk/reward since a substantial move has already occurred

If open of black candle is within prior white candle, it is a Bear Sash
This pattern is extremely rare in the forex market
Opposite of Bull Separating Line

Identify this candlestick signal

Falling Window
Context
There is no trading between current sessions high and prior sessions low

Meaning
The gap down echoes how strongly one-sided the market is in favor of the
bears.

Criteria
The whole falling window is a potential zone of resistance
The Falling Windows resistance is broken on a close above the top of
the window
Opposite of the Rising Window
This pattern is rare in the forex market

TOS Candle Scans

Bearish Candle Patterns: http://tos.mx/w3VMTZ
Bullish Candle Patterns: http://tos.mx/2crV3F

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