ABC of Candlestick Charting --------------------------------------------------------------------------------------------
Short and to the point Easy to Read Clearly Illustrated --------------------------------------------------------------------------------------------
From the Masters Soseki of Japan Murakam of Japan Translated into English by R.J.Pike Produced by S.W.Thompson ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
ABC of Candlestick Charting
copyright This book is copyright. Apart from any fair dealing for the purpose of private study, criticism, research, review or as such things permitted under the copyright Act, the publication of any part or part thereof is not permitted without the consent in writing from the owner of the copyright S.W.Thompson. Nor may this work be reproduced, transmitted in any form or by any means, electronic mechanical, photocopying, recording or otherwise without further written permission
Disclaimer This book has been designed for educational purposes only. It demonstrates that the use of this information as technical analysis (charting) is for your betterment and understanding of how useful skilled charting analysis can present an opportunity that can be carefully followed or watched for a favourable investment. Any investment decision made by you is of your own concern, and it is strongly recommended that you seek professional investment advice prior to taking any action. The producer of this work cannot be held responsible for any action taken by anybody through the use of this work. The producer and any staff or member of the production team expressly disclaim any liability to any person or body in reliance upon any part or whole of this works.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
Candlestick Charting There are numerous Charting programs all over the world, some work in color whilst others work in black and white. Some work in solids whilst others work in solids and blanks. However regardless of what charting program you may have, candlesticks have a positive and a negative- a down day and an up day. In solids a red candle is a down day and a blue (or green) is an up day. In solids and blanks a solid black candle is a down day and a white blank candle is an up day. Here are two examples of different candlestick charts, each as valid as the other.
For the purpose of illustration we have used solid candlesticks, since they are easier to accept when learning candlestick charting.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
THE BODY
Red candle is a down day. Black candle is a down day.
Blue is an up day. White is an up day.
The body of the candle tells us where the share price opened and where it closed after one trading session.
The color of the body tells us whether the
THE BODY COLOUR
share price went up or down after one trading session.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting When we first look at a candle body, we notice the color. Should the color of the candle body be RED/BLACK we know instantly the share price went down for that days trading session. Should we see a BLUE/ WHITE body candle, we know the share price has gone up for that days trading session.
THE BODY SIZE
The length of the candle body gives an immediate indication of the movement of price.
The short body candle tells us that the price of the share has increased or decreased moderately.
The long body candle tells us that the price of the share has increased or decreased dramatically or substantially.
It is important to note, that in order to know what makes for a “long body” one has to look back over the last few trading sessions. (Time period five to ten trading days). Should the chart you are studying consist of nothing but long body candles, which span between a price range on a regular basis, then these may well be considered “long candles” but they would have no significant message or readable meaning. However a share chart that supports a number of long and short candles, it would be easier to nominate what is long and what is short.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
THE BODY DEPTH. The body depth tells us at a glance the severity of the price movement.
Whilst the body tells us price movement, it also tells us how severe the movement has been in contrast to the previous trading session.
As with the long and short candles, severity of price movement can be measured when we look back over five to ten trading sessions. However if we take the previous day, we can quickly evaluate the strength of the movement for our current day.
BODY CONSTRUCTION. The red candle opens at its high. During the course of the trading session it moves down wards closing at its low.
The blue candle opens at its low. During the course of the trading session it moves upwards closing at its high.
Anyone who is learning to trade with candlestick charts must get used to analysing the individual candle (single candle) by doing so, will give you an insight as to the sentiment of those who traded the share during the course of the day.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting Whilst we know that the share price fluctuates during the course of each trading session, (up and down in price, then up and up or down and down) by breaking down the body into several increments, helps to get a feeling as to the strength or weakness
of the share. ( it is very rare that a share will rise or fall substantially and remain there with little or no further price fluctuation. If however you are trading the share “live” then you can monitor the price movement half hourly or hourly, which means that by the end of the trading session you have a very good idea of what the sentiment is towards the share, by other traders. (buyers or sellers).
THE CANDLE SHADOW. THE UPPER SHADOW. The upper shadow is a straight line from the top of the candle body.
Upper shadows
The upper shadow on a candle body tells us how high the share price went during the course of a trading session. We can see from (FIG1) the share price opened, moved up then turned around, came back to its opening price, continuing on down to its close. As it moved downwards it left its shadow behind, indicating its high for the session.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting From (FIG 2) we see the share price opened, climbed up to a high for the day, then turned around moving downwards, closing above the opening price, having created a shadow, indicating its high for the session.
THE LOWER SHADOW.
The lower shadow is formed with the share price opening and moving down, turning around and moving back up, to leave a shadow in its wake. Showing us the low.
THE BODYLESS SHADOW A shadow with no body simply means the share opened and closed at the same price.
It is of importance to note where the share price opened and closed in relation to the previous days trading session.
A bodiless shadow also takes on more
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting significance if it is a one off. In other words should the bodiless candle be
displayed on a chart where there are no other bodiless candles showing from previous trading sessions (say up to ten days) it takes on more importance. It also becomes
more important if it is found near the top of an up trending share, if near the bottom of a down trending share, it is of less importance. A bodiless candle found surrounded with other bodiless candles becomes relatively meaningless. Popular believe is that the bodiless candle is an indecision day, traders supposedly unsure which way the market will move. However by analyzing the individual bodiless candle day, we can get a feel for which way the market will move. Take FIG 5 for example.
The share opens then the price goes down, reaches a support level then turns around climbing up to a high, meets resistance turns around dropping back to its open price.
ALTERNATIVELY
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
Regardless of whether the share price moves up or down at the start of the session the result is the same.
In this case the share opened and closed at the same price, what would make this more significant would be the location of the candle in relation to the previous day or trend.
SHADOW DEPTH. We know the top of the upper shadow is the high and we know the bottom of the lower shadow is the low. If we take the price at the top of the upper shadow and the price of the bottom of the lower shadow we can quickly see just how volatile the share traded during a one day session. Regardless of the body size. A candle with long upper and lower shadows clearly tells us that the volatility of price was substantial. A candle with short upper and lower shadows clearly tells us the volatility of price was negligible.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
When analyzing the upper and lower shadows for volatility of price, it makes sense to look at the volume of trade for the session. It is not unusual to find a share price will show considerable change of price between the upper and lower shadows, then to find the volume of shares that have changed hands has been small.
In these first few pages, you have seen the body and the shadows of the candle being analyzed by way of the construction method. Whilst this may seem a tedious method of analyzing the performance of the single day candle, it is the most successful method of acquiring a feel for market sentiment.
The Japanese people honor aged old methods, and practice them accurately and when methods are passed down from one tutor to a student, it is with great care and attention to detail so as not to vary the meanings of the teaching over time periods.
PSYCHO-ANALYSE THE MARKET..?
To psycho-analyze the feelings or sentiment of traders or investors in the market, and the reasons why they act or do not act as they do, escapes us. We can not understand how technical analysts can place so much weight on the supposed psychology of the market when the market is nothing but chaos. How can you harness chaos. We like to be more realistic, there is an over supply of shares for sale, driving the market down, or there is a strong demand for shares, driving the market up.
The years of study and self trading the market with candlesticks has taught us what we consider to be the best system for using the golden rules. Using rules or forming a system of rules only becomes useful or true, if you apply the rules correctly. Therefore it is important when looking at the last traded day candle, you apply the same rules each time. At the end of the day, it becomes natural and the feel for market behavior is quickly realized, when you break down and reconstruct the single candle on that one trading day session.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting We have found that the construction of a single candle day has become a visual habit with us, in other words we look at the last day candle and immediately become familiar with which way the events happened during the course of the trading day. No longer do we draw the construction of the days candle, we are able to recognize the behavior of those who have been participating and those who have an interest in the stock.
It is this habitual analysis that has afforded us with this insight of which way we should act, do we sell, do we hold, more importantly can we look forward to further gains, we are all agreed that, this is an amazing gift, and one that is so easily learnt. How hard can it be, to practice when learning this skill of construction during your study of candlestick charting.
At the end of the day, to be able to look at a candlestick chart and visualize what happened in the market during the day, and to be able to make decisions as to your next move.
SUMMARY. Body and Body colour.
Body Size.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
Body and Body colour. •
Open and Close Price.
•
High and Low Price.
•
At a glance Up or Down.
Body Size. •
Indicates price movement.
•
Short body = moderate.
•
Long body= substantial.
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ABC of Candlestick Charting Body Depth,
Body Depth. •
Severity of price change. When comparing with previous sessions.
•
Look back over a five to ten day period.
Body Construction.
Body Construction. •
Find the Open
•
Find the Close.
•
Assume the movement of price by drawing the body movement for the session.
Upper Shadow.
Upper Shadow. •
How high the share price went during the trading session.
The Lower Shadow
The Lower Shadow. •
How Low the share price went during the trading session.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting The Body less Shadow
The Body less Shadow. •
Share opened at a price and closed at the same price.
•
Indecision.
•
Importance as to location.
•
Must do a construction to find the strength.
Shadow Depth
Shadow Depth. •
Severity of Volatility.
Other Important Points
• Location.
Where the candle appears on a candlestick chart.
Construct the movement of a single
• Construction
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
candle during its one day session.
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ABC of Candlestick Charting
Note the type, size of body, size of
• Previous traded days
shadows, upper shadow and lower shadow of the previous days candle.
Take note of the trend of the share over
• Chart Trend
the recent period. Take note of similar candlesticks appearing throughout the chart.
NAMES AND SHAPES. Many names given to candlestick shapes originated in Japan. However, the English interpretation and pet names are being used to name the various shapes of candles that you may come across throughout this reading. Pet names are the names I have given to certain candle shapes for many years. ( I hope they make sense to you). I shall where ever possible also include the common name or the Japanese name.
THE HAMMER The hammer is found towards the end. Or at the end of a down trending share. A blue hammer is a stronger signal than a red hammer. The shadow must be at least twice the length of the body.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting THE HANGING
The hanging man can be found towards the top of an uptrending
MAN
share. Or at the very top.
The colour of the hanging man does not have much bearing on the signal. THE SOLDIER
The soldier doji (Gravestone Doji).
DOJI
The soldier doji can be found at the top of an uptrend or at the bottom of a down trend. It is a candle shape which shows indecision. Until analysed to find the market sentiment.
TOP TEE DOJI
The top tee doji (Dragonfly Doji) The top tee doji is usually found at the end of a down trend. When found at the end of a down trend this is a strong signal.
THE CROSS
The doji cross.
DOJI.
The doji cross is a strong indication of indecision.
THE
The spinning top. Have small bodies with an upper and lower
SPINNING
shadows. It is usual to find the shadows are longer the the actual
TOP
body of the candle. The colour of the body is not important, nor for that matter are the shadows, what is important is the size of the body in relation to the shadows.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting LONG BLUE
The long blue candle. Is found on a bullish uptrend or at the beginning of a bullish uptrend. This candle when found at the end of a down trend usually turns the trend around. When found amongst up trending candles in an up trending share is usually a signal of bullish strength.
LONG RED
The long red candle. Is found on a bearish down trend or at the beginning of a bearish down trend. This candle when found at the end of an up trending share usually turns the trend around. When found amongst down trending candles on a down trending share it is usually a signal of bearish strength.
CLOSING
The closing long. Has no shadow on the close end of the candle,
LONG
hence the name closing long means closing at the high or low.
When a red closing long is encountered it indicates weakness in the share. When a blue is encountered it indicates strength in a share
OPENING
The opening long. Has no shadow on the opening end of the candle.
LONG
Hence the name opening long which means opening at the high or low. When a red opening long is encountered it indicates a weakness in the share. When a blue is encountered it indicates strength in a share.
LONG DAYS
Long day candles found in up trending or down trending share
AND SHORT
charts have an importance providing they are a one off. Several
DAYS
Long candles in a short period of trading sessions negate the strength of the candle. The same can be said for the short day candle. Which resembles a spinning top in some cases, the difference being the shadows on a short day are generally shorter or as short as the body of the candle.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
THE
The shooting star is found at the top of an up trend.
SHOOTING STAR.
The shadow must be at least twice the length of the body.
The colour of the body is not important, however a red body shooting star is a stronger signal.
A shooting star that gaps from the previous session has more significant. THE
The inverted hammer can be found towards the bottom or at the
INVERTED
base of a down trending share.
HAMMER The colour of the inverted hammer is not important.
Trading confirmation has to be seen to give this candle effectiveness. Trading sessions following this candle should be above.
TREND REVERSING SINGLE CANDLES. THE HAMMER.
The Hammer is a one trading session candle, or a single candle. It does not form part of the candlestick pattern, and is considered to be a strong indication of a trend reversal. The hammer is only found at the end of a down trending share.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
The small body is always at the top or upper end of the candle.
The colour of the body is not important, however
a blue body at the top end of a hammer shadow gives a far stronger signal than a red body. The lower shadow of the hammer should be longer than the body, somewhere between two to three times as long. It is usually the case in a red coloured hammer to find no upper shadow, since the share price closed lower than the opening price however in the case of a blue coloured hammer a small upper shadow may appear, this is not important since the relevance of the candle is maintained by the length of the lower shadow. The Hammer candle gives out its strongest signal when it is below the previous trading session candle, when it has developed after a strong down trend and has a shadow that is at least twice its body length.
CONSTRUCTION OF A HAMMER. ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
A BLUE HAMMER.
The share price opens then moves down during the trading session. Reaches a low, then turns around and climbs upwards for the rest of the session,closing above its opening price. After a big sell off, supply runs out and traders anxious to enter the market are willing to pay higher prices creating demand. Since the share closed above its opening price is an indication that there is still demand. It is not unusual to find the share continue upwards on the next trading session. However you should not act until you have this confirmation. It is also not unusual to find the share trading sideways over the next few sessions.
A RED HAMMER
The share price opens then moves down during the trading session. Reaches a low, then turns around and climbs upwards for the rest of the session stopping short before the opening price. After a big sell of (over supply) supply runs out and traders anxious to enter the market are willing to pay higher prices. (demand). As with the blue hammer it
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting Is always better to wait for confirmation of a reverse in the trend. The following trading day candle should ideally open above the hammer and close above its opening price. •
A hammer opening with a gap contributes to the strength of the signal.
•
A hammer with a blue body is more bullish than a hammer with a red body.
•
The lower shadow of the hammer should be at least twice the length of the body
•
It is always best to wait for confirmation before entering the market.
•
Confirmation would be a higher open with a still higher close on the next trading session.
SINGLE TREND REVERSING CANDLES….. The Shooting Star candle is a one trading session candle. The shooting star is found at the end of an up trending share. This candle usually creates a gap from the previous days candle, should that happen it is a strong signal for a reversal of the trend. Whilst a shooting star candle is a one trading session candle and is more often than not, taken as a single candle, when it encroaches the previous days trading candle, then we must take the previous trading day candle into consideration. The small body of the candle is always at the bottom
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
Or the low of the candle. The body colour of the shooting star is not important, however a red body at the bottom of the shadow has more significance than a blue body. The upper shadow of the candle should be at least twice as long as the body of the candle. Should a shooting star candle also have a lower shadow, this must be very small or negligible. However remember the relevance of the candle is maintained by the length of the upper shadow. The shooting star gives out its strongest signal when it opens above the previous days candle showing a gap, when it has developed after a strong uptrend, it is not unusual to see a shooting star create a new high share price at the end of the up trend.
CONSTRUCTION OF A SHOOTING STAR.
The share price opens then moves upwards during the trading session. Reaches a high for the day, then turns around and drops down, leaving a shadow to
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting indicate where it has been. It drops to its opening
price then continues down to its closing price.(the days low) Remember the share has been trading in an uptrend, at the top of the trend there is still demand for the shares, the share reaches a new high price, before turning around, demand dries up, there is then an over supply, which starts the sell off, as supply increases, and demand wanes, the price of the share becomes cheaper and cheaper. The share price having reached its opening price, continues down as the sell off increases. The share has now closed below its opening price, this is an indication that the sell off will continue on the next trading session. However you should not act until you have confirmation. This confirmation usually occurs on the next trading session with a gap downwards at opening. Alternatively, the share opens at a similar price to its previous close then moves down as supply continues to satisfy demand.
The share price opens, moves up during the trading session, reaches a high for the day, then drops back down, stopping short of its opening price. At its high there is over supply and demand for the share at its high price has dried up. As sellers continue to come into the market selling off at lower and lower prices,
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting the price is driven down. As with the red shooting star, confirmation is needed. Confirmation would be the same as the red bodied shooting star. •
A shooting star that gaps above the previous days candlestick, indicates a strong reversal signal.
•
A shooting star with a red body, is inclined to be a stronger signal than a shooting star with a blue body.
•
The length of the upper shadow should be at least twice the length of the body.
•
It is always best to wait for confirmation before exiting the market.
•
Confirmation would be a lower opening and lower closing on the next session.
SINGLE TREND REVERSING CANDLES…..
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
The Hanging Man, has the same makeup as the hammer, the difference being, the hanging man is found during an uptrend or at the top of an uptrend. •
The body of the Hanging man is always at the top of the long lower shadow.
•
The shadow must be at least twice the body length.
•
The body colour is not important.
•
A hanging man can support an upper shadow but it should be small or negligible.
The Inverted Hammer, has the same makeup as the shooting star, the difference being, the Inverted Hammer is found during or at the bottom of a downtrend.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES The Engulfing candle pattern consists of two trading day sessions. The first candle body (which is with the trend) is smaller than the second day engulfing candle body. The body of the engulfing candle (which is against the trend) must totally engulf the body of the first day candle. The shadow of these two candles are not taken into consideration. We are only interested in the bodies of the two candles. The severity of the change in the two trading days, reflects a possible change to the existing trend. If the second day candle body is blue (as above) during a down trend or at the bottom of a down trend then as suggested by the following construction there is a dramatic turn around in the down trending share. The first day candle supports the existing trend. The share has been trending down. The trading day opens with a small rise in price, this is short lived and the share is driven further down in keeping with the trend. Towards the end of the trading session the share turns back up closing just above its low for the session. In certain cases where the movement of price is negligible or the body of the first candle is very small, it could be considered as indecision, the first clue to a possible change.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting The second day candle, goes against the existing down trend. A strong candle body showing no indecision. As can be seen with the construction of the second day candle. The share opens, and initially continues the downward trend. Supply dries up, shares prices hold. Demand for the share increases, driving the price further up to a high for the day, which usually is an invitation for some profit taking, this however is short lived. The share closes just below its high for the day. What we do see by the construction of the trading day session is a dramatic and obvious demand for the share. A reversal as dramatic as is shown would be a strong signal of a reverse of trend. Confirmation by the following day is recommended, with the share price opening above the close of the engulfing day.
As with the down trending Engulfing candle pattern, the up trending engulfing candle pattern through construction clearly shows us a dramatic change against the existing trend. Confirmation by the following trading day is recommended.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
•
Engulfing Pattern consists of two trading day candles.
•
The second day must completely engulf the first day.
•
Shadows are not important and are not taken into consideration.
•
At the top of an up trend there is a swing towards selling off.
•
At the bottom of a down trend there is a swing towards buying up.
•
The first day candle should reflect the trend.
•
The second day candle should be the opposite in colour.
•
The second day candle should indicate a severe change in share price.
•
Volume of trade on the first day is light.
•
Volume of trade on the second day is heavy.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES‌.. The Harami pattern is created by the use of two trading day candles. The first trading day is a long bodied candle that is an extension of the existing trend. The trading session sees heavy volume. The second day supports a small body, with light trading during the session. The Harami can be seen as the opposite of the engulfing pattern, the bodies are usually opposite in colour. The body of the second day candle is completely inside the body of the first day candle, shadows are not taken into consideration, the harami is measured from the open and close of the first day and the open and close of the second day, therefore the first day completely engulfs the second day. Many such harami patterns that support a long bodied day followed by a small bodied day also create days where the small bodied candle may have an equal top or an equal bottom with the body of the long bodied candle, in these cases we consider them to be the harami, however they are not haramis if both candle days have equal tops and bottoms. The first day candle opened moving down without conviction, turns around and continues the trend upwards, all the indications are that the trend will continue up. However the next trading session produces a small bodied candle, that opens below the close of the previous trading day, moves up, turns around and continues down, closing down . Traders watching the share are not concerned after the first candle is formed, however on formation of the second day candle traders should be on alert for confirmation of any change of trend on the next trading day session. Confirmation of a trend reversal would be an opening share price below the opening price of the small candle day.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting A down trend is in place, a long day candle appears indicating a continuation of the down trend. The following trading session produces a short day candle which opens above the previous days close, but closing below the open of the previous day.
The first day candle clearly shows that demand for cheaper prices is being met by supply. A substantial change down in price can only mean share holders are abandoning their positions and excepting less in doing so. The second day candle clearly shows that initially the trend would continue down in line with the previous day, however supply appears to have dried up, share holders are now in a position where the price is too cheap, the option being, hold on and ride the loss, or sell and take the loss. Most share holders placed in that situation hold on and ride out the drop in price. As a consequence of which the demand for shares increases, which in turn drives the price up. Those traders who have done their home work, are now aware of the opportunities that await them, subject to the following trading day. Should the following day open above the close of the small bodied candle day and then continue to close on a high, this would be an indication of a pending trend reversal. Nothing in this candle pattern is guaranteed, very often a share will trade sideways, before moving up or down. However many stocks have a repetitious candle chart history. By back tracking through the previous trading sessions (say one to two months) if this harami pattern appears then take note of what happens after its appearance.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
•
There has to be a reasonable trend in place.
•
Long day candle appears continuing the existing trend.
•
The body of the short candle following the long day candle must be within the body of the long day candle.
•
Shadows are not taken into consideration.
•
The long or dominant candle colour should be in keeping with the trend.
•
Red for a down trend.
•
Blue for an uptrend.
•
The short candle should be of the opposite colour.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES…… HARAMI AND THE DOJI’S. There are four types of Doji’s, three of which have significant power to reverse the trend when preceded by a candle body that engulfs the open and close price of the doji. The doji may or may not display a body which is created by a price variance so small that it neither fits a shooting star/inverted hammer, nor a hammer/hanging man. As explained in NAMES AND SHAPES, the three main doji’s are significantly different from each other, each having a power role when engulfed by the body of a long day candle. By doing a construction of the appearing doji, you will soon get the feel for or the sentiment of those trading the share. However be warned, the very nature of the doji, whether it’s a Gravestone, Dragonfly, or Cross are inherently unreliable. Remember these are candlesticks that portray indecision, therefore you will find them to continually fail as signals when they appear regularly in the same share chart. Having said that, when they do appear in strategic locations on a chart either as harami/doji’s or on their own, a doji that has failed to become a shooting star, hammer a hanging man or an inverted hammer, because the body of the doji does not qualify it as any of the above mentioned, they can and very often do become strong reversal signals. The long body of the first day candle completely engulfs the second day gravestone doji. In this location which is the top of an up trending share the gravestone doji becomes a significant reversal signal. CONSTRUCTION.
The share price opens moves up to a high for the day, Then turns around and moves to the low of the day where it closes. A strong indication of a weakening up trend.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting The second day gravestone doji whilst being an indecision day candle, when constructed shows definite sentiment towards a trend reversal.
There has been strong buying at higher prices, reaching a high which has become unsustainable. The sell off starts
Driving the share price back down to its opening price. A gravestone doji that is located at the top of an uptrending chart, with no other similar doji’s in sight, puts out a strong reversal signal.
A true gravestone doji and a true dragonfly doji have bodies that are created by a very small price difference, (between the open price and close price) and should not be confused with the bodyless doji. The bodyless doji opens and closes at the same price, which creates an upper shadow or a lower shadow or both. Very often a share will open and close without moving up or down, simply trading at the same price throughout the day. In my view this is not only an indecision day, its also a lack of interest day. No buying demand and no supply for sale. These doji days are very common amongst Australian stocks, and should be treated as failed days.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES‌.. The body of the first day candle completely engulfs the second day Dragonfly doji. Located at the top end of an uptrend share chart, the dragonfly doji can have the power to turn the trend down. However like the gravestone doji the dragonfly doji is an indecision candle day, and is subject to failure. The best way to treat the doji candle is to wait for confirmation on the following day trading session. Construction of the doji day does help in analyzing the sentiment of the market. So do a construction of the doji day then wait to see what happens next session.
The first day candle shows a strong bullish day, having opened with a small sell off, supply at the lower price dries up, the demand for the share increases and during the course of the trading session the price is driven up
By an ever increasing demand. The second day candle tells a very different story. Having opened Down, below the previous closing price, the share price is driven down with supply exceeding demand. At its low for the day, supply dries up, demand takes over and the price is driven back up, closing just under its opening price. This indecision by share holders creates uneasiness, which continues through to the next trading day. Confirmation on the following trading session is the key as to what to do.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
In this chart example of the Harami/Doji Dragonfly, the key as to what to do can clearly be seen. The share opening with a gap down, on the following trading session is enough evidence that it will go down further.
The Harami/Doji Cross, like the other harami doji signals, gauges importance depending on its location in the share chart that is being analysed. During the course of an up trend or a down trend, the harami cross will signal a small reversal break, meaning the stock trend will change its direction for up to one to four following trading sessions. However if a harami doji cross is found at the top end or bottom end of a trend, it has significantly more effect on the trend reversal. This trend reversal will be confirmed by the next one to two trading day sessions. The harami doji cross is not a common two candle signal, and is not found very often in Australian stock charts. There are many doji cross signals found in the stock charts, very few of them qualify as harami doji’s. Another important point to remember with the harami doji cross is the size of the body of the second day candle, which in all cases must only represent a very small price variance. As a guide perhaps one or two cents, in a trading day that has moved to a high of six to ten cents and down six to ten cents, before closing only one or two cents from the opening price.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
During the down trend, the first harami candle is formed. The share price opens moves up, turns around and continues the trend downwards. A late rally drives the price up to close well below Its opening price.
Alternately the day may have opened moving down to its low before moving back up to its high and back down to close one or two points above its opening price.
Regardless which way the share may start moving, the result is to be taken as being the same.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
COMMON DOJI CROSS’S. Here is a variety of doji cross’s commonly found throughout the numerous share charts of Australian listed stocks.
Doji crosses come in various combinations, some with long upper and lower shadows, some with short upper and lower shadows, some as harami doji cross’s and some that stand by themselves. Regardless how or where you may find a doji cross, what is important is location, and confirmation. •
All doji’s come in a variety of shapes and shadow sizes.
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All doji’s are considered as indecision trading days.
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Colour is of no importance.
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Most doji’s indicate a short lived price correction either up or down.
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Harami doji’s are not readily common in Australian share charts.
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Location of the doji is what is important.
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Over abundance of doji’s appearing in a single chart, renders the doji unreadable. Or of less importance.
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A bodyless doji is not only an indecision day, it also shows lack of interest in the share.
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A doji day that opens and closes without creating an up or a down shadow with minor trading volume is considered a boring or lack of interest day.
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Confirmation after a doji day is absolutely essential.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES…… DARK CLOUD COVER. The dark cloud cover combination of two candlesticks, is perhaps one of the very few patterns that does not require any confirmation of an ensuing trend reversal. The dark cloud cover is a charting statement. GET OUT. Common throughout all Australian stock charts, this reversal pattern pre-empts the share price movement for the following session. The dark cloud cover pattern is only found at the end of an up trending share chart. No exceptions. The first day candle is blue is comparably long and pushes the price to new highs, the second day candle is also comparably long (compared to other longs in the same chart) is red in colour, opens above the high of the previous day (not the close) then drops down closing at least half way down the body length of the previous candle. The first day candle extends the existing trend upwards to a new high, in most cases on reasonable volume.
The first day candle opens and moves up throughout the trading session. Forms a new high, closing just below.
The second day candle opens above the high of the previous days candle, moving down during the trading session. There can be no doubt the trend will reverse, confirmation is not required.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
•
Dark cloud cover pattern is only found at the top of an up trending share.
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The first day candle is blue (an up day candle).
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The second day is red (a down day candle)
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The open of the second day candle must be above the high of the previous day.
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The close of the second day candle must have penetrated down to at least the mid point of the first day candle, or further down.
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The further the penetration cover of the first candle by the second day candle the stronger the reversal signal.
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Shadows are not taken into consideration, only the two bodies of the two candle days.
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Long day candles can vary in length, to correctly determine whether or not the candle day is long, comparisons with other long or lengthy candles in the same chart is perhaps the best analysis.
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Long day candles must not be confused with Dominant day candles. A dominant candle day is as its name applies, dominating all other candles on the chart, and usually has a high volume of share turnover to justify its dominance.
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A dominant candle has little or no reversal potential, and is usually found once a trend reversal has been established.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES…… PIERCING LINE. The piercing line combination of two candlesticks, is the opposite of the dark cloud cover combination, it is only found at the bottom of a down trending share, and needs no confirmation of a trend reversal. The piercing line, two candle day combination is commonly found in Australian share charts, like the dark cloud cover combination, when found it is a candlestick charting statement, GET IN. This combination pre-empts the share price movement for the following sessions. The piercing line pattern first day candle is always red, a long day candle and extremely bearish. The second day candle is blue or very bullish, opens below the close of the first day candle, then moves strongly upwards throughout the trading session to close well above the mid point of the previous day candle.
The first day candle opens and moves down to a new low, in keeping with the trend. Supply exceeds demand and there seems no end to the down trend.
The second day share price opens below the low of the previous days candle low, turns around on demand, trading up for the rest of the session, and closing well into the body of the previous days candle. Unlike the dark cloud cover pattern, the piercing line pattern requires the second day to exceed the midpoint of the first day candle.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
•
The piercing line pattern is only found at the bottom of a down trend.
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The first day candle is red in keeping with the down trend.
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The second day candle is blue (an up day candle)
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The open of the second day candle must be below the close of the previous day.
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The close of the second day candle must penetrate up into the body of the first candle well past the mid way point.
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The second day candle must not exceed the open of the first day candle, otherwise it would then become an engulfing candle.
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Shadows are not taken into consideration, only the two bodies of both candles.
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Both candles are long day candles. To correctly determine whether or not the candle day is long, comparisons with other long or lengthy candles in the same chart is perhaps the best analysis.
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The second day candle should not be a dominating candle, in other words the volume of the day should be comparable to the previous days volume.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING TWO CANDLES……
BODYLESS DOJI. The bodyless doji is a two candle pattern, that can be found at the top or the bottom of a trend. In many cases the bodyless doji is a signal that prepares you for a trend reversal. Bodyless literally means no body. The share price opens and closes at the same price, having moved up or down during the course of the trading session. Having said that, you can be forgiven if you include any doji, be it a cross or a dragonfly or even a gravestone, providing the share price difference is negligible (not more than one of two points). (Points being a fraction or a fraction of a fraction). The bodyless doji appears regularly throughout most Australian stock charts. Ideally the first day candle should be long and be a continuation of the existing trend. The second day candle should be a shadow that has formed below the low of the previous day on a down trend and above the high of the previous day on an up trend, opening and closing at the same price. After a strong moving trend up or down, an indecision day occurs, this should be enough to alert you, regardless of what position you hold, long or short, in or out.
In this construction, the share price opens and moves down throughout the trading session, closing just above its low for the day. Demand for the share is weak in keeping with previous down days and the general trend. The second day candle opens well below the previous long day candle low, causing a gap between it and the previous long day candle. The second day doji being an indecision day
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
Candle opens, moving up or down then closing a fraction below its opening price. Demand is now growing, whilst supply at the cheaper price dries up.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting •
The bodyless candle combination can be found at the top of an uptrend or at the bottom of a down trend.
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The first day candle is a long bodied candle whose colour is in keeping with the existing trend.
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The second day candle has no body or at the most a body that represent a fraction of the price.
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On an up trending stock the second day candle must open with a gap above the high of the day (not the close).
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On a downtrending stock the second day candle must open with a gap below the low (not the close) of the previous days candle.
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Volume of the second day candle is in keeping with the volume of the previous day.
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Confirmation by the following trading session is essential.
PIERCING CANDLE PATTERN EXAMPLES….
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING THREE DAY CANDLES‌.. THE MORNING STAR. The morning star candlestick pattern is found at the bottom of a down trending share. The first day candle indicates a continuation of the down trend. The second day candle gaps below the first day continuing the decent. The third day candle gaps above the second day candle closing well into or above the first day candle body.
The first day share price opens, moves down wards in keeping with the existing trend. Demand is weak.
The second day candle gaps below the first day, as the construction suggests there is little movement in price, almost an indecision day.
The third day candle gaps above the second day, supply has dried up and demand has driven the Price up for the day. The morning star pattern rarely need confirmation, it is clear from the constructions, the trading sentiment towards the share has turned from bearish to bullish.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
•
The first day candle is red and continues the down trend.
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The second day candle can be red or blue but must be a small day candle.
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The third day candle is blue clearly showing a reversal of trend.
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The second day candle must gap below the previous days low (not close)
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The third day candle must gap above the high of the previous days candle.
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The third day candle must be the opposite in colour to the first days candle.
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The body of the third day should be well up towards the high of the first day, with an even stronger signal, should the day end higher than the high of the first day.
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Volume on the first and third day candles is usually heavy, or stronger than previous days. (up to one week).
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Volume on the second day is light
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
TREND REVERSING THREE DAY CANDLES‌..
THE EVENING STAR. Whilst the Morning Star is found at the bottom of a down trending stock, the Evening Star is found during or at the top of an uptrend, a powerful indicator for a reversal and commonly found in Australian Charted Stocks. The first day is usually a long candle continuing the uptrend, the second day candle is a short day star candle which gaps away from the first day candle, and can be any colour, (an up day or down day). The third day candle gaps down and continues down during the trading session to close lower, this then completes the Evening Star pattern.
CONSTRUCTION
The first day the share opens to a short sell off, but quickly turns around and continues the uptrend.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
CONSTRUCTION
The second day candle gaps above the body of the first candle. Colour is not important, what is important is that the second day is a short or indecisive day.
CONSTRUCTION
Third day candle gaps below the second day candle and trades down during the course of the trading session to close down for the day.
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The first day candle is always the colour of the trend, In an Evening Star the first day candle is Blue.
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The second day candle is usually a short day candle or indecision day candle like a doji.
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The second day candle colour is not important, although a red candle gives a stronger indication of what may happen the following day.
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting •
The second day candle must gap away from the body of the first day candle.
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The third day candle is always opposite in colour to the first day, this strongly indicates a reversal in trend.
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It is not uncommon to find that the first day and the third day candles are long candles showing a substantial movement in price and volume.
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The first day price is driven up on good volume.
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The third day price is driven down on good volume.
Similar combinations. The two day and three day candle combinations incorporate many single day trend reversing candles, as a consequence of which we find similar patterns as the Dark cloud cover (two day) or The morning and evening stars (three day) candle combinations featuring the Doji or the spinning top as the centre or second day candle. In order to cut to the chase, since all of the above read rules apply in the same way, we have taken the simple less tedious way out, so as not to insinuate that there is any difference in the combinations because of a single day candle.
Here shown below are the various combinations, which are to be read with the same interpretation as those already explained.
The Morning and Evening DOJI stars
ABC of Candlestick Charting © 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
The basic and most common one, two or three day candle combinations have been used and discussed. We have covered these chosen singles or patterns, because of their popular appearances throughout the charts of the leading world stock markets.
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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ABC of Candlestick Charting
The candlestick chart on the Japanese Stock Market, is no different to the candlestick chart displayed on any stock listed on the Dow or London stock market, but more importantly, the trigger candles, the trend reversing candles, and their various combinations, one day, two day, three day and so on, appear and have the exact same reaction regardless of language, creed, or beliefs.
We hope you have enjoyed this brief discussion on the famous Japanese art of Charting with Candlesticks.
We hope you use this new found knowledge to further understand the chaos which is the Worlds Stock Markets.
Thank you
ABC of Candlestick Charting Š 2003 Stanley Thompson. www.chartingwithcandlesticks.com
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