Presentation on theme: "Advanced Technical Analysis: Candlesticks"— Presentation transcript:
1 Advanced Technical Analysis: Candlesticks Presenter: Shaun van den BergHead of Client EducationWednesday, 20th March 2013
2 Introduction to Candlesticks Recognising patterns AgendaIntroduction to CandlesticksRecognising patternsBasic Candlestick PatternsBullish CandlesticksBearish CandlesticksTechnical Analysis ToolsMoving Averages/ Support & Resistance/ Trend LinesTechnical Indicators / Volume AnalysisTrade Ideas using Candlesticks – TA toolsUpcoming WebinarsUpcoming Traders Forum MeetingsSummary & Conclusion
3 Introduction to Candlesticks Presenter: Shaun van den Berg
4 Introduction to Candlesticks Used to forecast price behaviourUnderstand frequently recurring market scenarios.Candlestick pattern combinationsPeriod of consolidationOther patterns hint of forceful price move.Provide deep insight into the market conditions.Useful stand alone tool.Create synergy of techniques.Combining candlestick charting techniques with traditional technical analysis = Powerful formula.Provide visual cues - Makes reading price action easier.Effective way to study the emotions of other tradersInterpret price
5 Introduction to Candlesticks Offer greater depth of information - Bar chartsHigh and low are emphasised.Emphasis on relationship – Close & open price.Nothing matters more than price.Everything else is secondary.Identify different types of price action more quicklyTend to predict reversals or continuations in trendsOne of the most difficult aspects of trading.Combined with other technical analysis tools –Useful way to select entry & exits points.
6 Historical Background Originated in the style of technical charting used by the Japanese for over 100 years agoUsed to analyse the price of rice contractsLong before the bar chart & point-and-figure analysis systemsIn the 1700s a Japanese man named Homma, a trader in the futures market, discovered that, although there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of the traders.Understood that when emotions played into the equation a vast difference between the value & the price of rice occurred.Difference between the value & the price - Applicable to shares today as it was to rice contracts in Japan centuries ago.The principles established by Homma are the basis for the candlestick chart analysis, which is used to measure market emotions towards a share.Steven Nison is credited with popularising candlestick charting and has become recognised as the leading expert on their interpretation.
7 Reading Charts Why do we read charts? To determine what the "big money" is doing!Reading charts - Art-form that takes years to master.You have to be able to analyse a chart & come to a conclusion about whether or not to risk your hard earned money on a trade.This is what separates the novice trader from the professional.There are several factors on a chart that make it worthy of trading.By analysing these factors, we can determine with high probability which direction a share will move.
8 Bar Chart ComparisonFormat similar to a modern-day Bar Chart.Display Open, High, Low, & Closing prices (OHLC)Same informationPrettier, graphic format.New way of looking at prices.Do not involve any calculations.Extenuates the relationship between the opening & closing prices.Purpose is to serve as a visual aid.
10 Differences: Bar vs Candles Bar chartists focus on the relationship between the open & close price for the day.Candlesticks - More emphasis on the relationship - Closing price of today - Closing price of yesterday / tomorrow.Emphasis on progression - Change.Candlestick provides an easy-to-decipher picture of price action
11 Anatomy of a Candlestick Candlestick – Vertical line - High/low rangeLarger body in the middle - Range between the opening & closing prices.If body “filled-in” – Price closed below open.Filled or Black body - Top of block - Opening price / Bottom of body - Closing price.Hollow or White (Unfilled) body - Closing price is higher (above) opening price.
13 Anatomy of a Candlestick The hollow or filled section - Called “real body” or body.Hollow candlesticks - Close is greater than open - Buying pressure.Filled candlesticks - Close is less than open - Selling pressure.The thin lines above & below the body display the high/low range.Called shadows - Chartists have always thought of these as the wicks of the candle.Top of the upper shadow is the “high”.Bottom of the lower shadow is the “low”.
14 Advantages of Candlestick Charting Easy to interpret - Good place for novice to start figuring out chart analysis.Easy to use - Your eyes adapt quickly to information in the bar notation.Cool candlestick patterns names – e.g. Shooting Star - Helps you to remember what the pattern means.Good at identifying market turning pointsReversals from an uptrend to a downtrendReversal of a downtrend to an uptrend.
15 High Low SequenceCandlesticks do not reflect the sequence of events between the open & close.The relationship between the open & the close.The high & the low are obvious & indisputable, but candlesticks (and bar charts) cannot tell us which came first.
16 High Low SequenceFirst sequence -Shows two small moves & one large move:A small decline off the open to form the low,A sharp advance to form the high, andA small decline to form the close.This sequence portrays strong, sustained buying pressure & would be considered more bullish.Second sequence - Shows three rather sharp moves:A sharp advance off the open to form the high,A sharp decline to form the low, andA sharp advance to form the close.This sequence reflects more volatility & some selling pressure.
17 Anatomy of a Candlestick Colour tells you whether the share traded up or down over the course of the day.Length of the entire candle from wick top to wick bottom tells you the entire range of trading for the day.Length of the body tells you how much the share moved from the open to the close.Length of the wick on either end can suggest the tenor of the market trading.A long top wick on a short candle body suggests a bullish push was rejected by tradersA long top wick on a long candle body suggests that the market pushed back against a bullish rise but could not force prices back down to the opening price.
18 Body Sizes (Long vs Short) Long bodies - strong buying or selling.The longer the body is, the more intense the buying or selling pressure.Short bodies - imply very little buying or selling activity.Long white candlesticks - strong buying pressure.The longer the white candlestick, the further the close is above the open.This indicates that prices increased considerably from open to close & buyers were aggressive.Long black (filled) candlesticks - show strong selling pressure.The longer the black candlestick, the further the close is below the open.This indicates that prices fell a great deal from the open and sellers were aggressive.
19 Shadows or Wicks Upper shadows - session high. Lower shadows - session low.Long shadows show that trading action occurred well past the open & close.Short shadows indicate that most of the trading action was confined near the open & close.If the shadow is short on a filled real body it is indicative of an open closer to the high for the day.A short upper shadow on an open real body indicates the close was near the high.If a candlestick has a long upper shadow & short lower shadow,Buyers bid prices higher,For one reason or another, sellers came in & drove prices back down to end the session back near its open price.If a candlestick has a long lower shadow & short upper shadowSellers forced price lower,But for one reason or another, buyers came in and drove prices back up to end the session back near its open price.
20 Bulls or Bears? Only two groups of people in the stock market. Buyers (Bulls),andSellers (Bears).For every buyer there has to be a seller / For every seller there has to be a buyer.Which group is in control of the price action now?If prices close at the top of the range – Buyers more aggressive / Willing to get in at any price.Sellers only willing to sell at higher prices.Causes the price to move up.If prices close at the bottom of the range – Sellers more aggressive / Willing to get out at any price.Buyers only willing to buy at lower prices.Causes the price to move down.Where price closes in relation to the range - Tells us who is winning- Buyers / Sellers.This is the most important thing to know when reading candlestick charts.
21 Wide Range Candles (WRC) Wide range candles (WRC) - High volatility (interest in the share)Prices tend to move in the direction - WRC.Look to the left to gauge interest of buyers or sellersTrade in the direction of the trend & the candles.You want to know:Interest in the share?Is it being accumulated?Is it being distributed by institutional traders?
22 Narrow Range Candles (NRC) Narrow range candles (NRC) - Low volatility.Period of very little interest in the share.NRC often lead to reversals (up or down)Low volatility leads to high volatility; andHigh volatility leads to low volatility.Enter a trade in periods of low volatilityExit a trade in periods of high volatility
23 WRC & NRC Low volatility leads to high volatility; High volatility leads to low volatility.Enter a trade in periods of low volatilityExit a trade in periods of high volatility
24 Six Types of Candlesticks Long white candlesticks - Bulls are in control / trading for most of session.Long black candlesticks - Bears in control / trading for most of the session.Small candlesticks - Neither Bulls or bears could move the price & prices finished about where they started.Long lower shadow - Bears in control for part of the trading session - Lost control by the end - Bulls made an impressive comeback.Long upper shadow - Bulls control part of the trading session - Lose control in the end - Bears made an impressive comeback.Long upper & lower shadow - Both Bears & Bulls had their moments during the trading session - Neither could put the other away – Results in a draw.
25 Steps to Interpretation Understand the parts of a candlestick pattern.Body - Opening price & ends at the closing price.Tail - Thin line under the body - Lowest price for the day.Shadow - Thin line above the body - Highest price for day.Determine the time frame of the chart.Each candle on the chart represents a specific period of time.Time frame – 2 minutes to several months or years.The bottom of the chart will be labeled with time increments.Determine if the share price went up or down during the trading period.The colour - Whether price closed higher or lower than open.Black candlesticks - Share price went down.White candlesticks - Share price went up.Continued …
26 Steps to Interpretation Find the open & close of trading for the day.Black candlestick - Open is at the top & close is at the bottom.White candlestick - Open is at the bottom & close is at the top.Determine the range of trading for the day.Look at length from tail to shadow.A long candlestick - Prices varied widely.A short candlestick - Share traded within a narrow price range.Interpret the length of the body.Long body - Price made a big change during day.Short body - Closing price was very close to open.Interpret the length of the tail & shadow.Long tail - Prices dipped low but recovered before the close.Long shadow - Prices soared but pulled back before the close.Put it all together.For example, a short black candlestick with a long tail - Prices fell over the course of the day - Closed near the opening price.
27 Bullish Candlestick Patterns Presenter: Shaun van den Berg
28 Recognising PatternsMany candlestick patterns - Only a few actually worth knowing.Discuss 10 candlestick patterns worth looking for.Patterns only useful - Understand what is happening/ Each pattern.Must be combined with other forms of technical analysisWhen you see one of these patterns on the weekly chart - Move down to the daily chart.Does the daily chart agree with your expectations on the weekly chart?If so, then the odds of a reversal increase.
29 Bullish Candlestick Patterns Bullish patterns - These are reversal patterns that show up after a pullbackSource:
30 Bullish Engulfing Pattern Pattern consists of two candles.First day - Narrow range candle that closes down for the day.Sellers are still in control of the share but because it is a narrow range candle & volatility is low, the sellers are not very aggressive.Second day - Wide range candle that "engulfs" the body of the first candle & closes near the top of the range.Buyers have overwhelmed the sellers (demand is greater than supply).Buyers are ready to take control of this share!Source:
31 Bullish Engulfing Pattern The share price formed a Bullish Engulfing pattern at a level that had previously been established as support.This candlestick pattern is better played on a pullback within an uptrend rather than at the end of a down trend.
33 Bullish Hammer Pattern Called a hammer – “Hammering out a bottom.”The share opens, then at some point the sellers take control of the share & pushed it lower.By the end of the day, the buyers won & had enough strength to close the share at the top of the range.Hammers can develop after a cluster of stop loss orders are hit.Professional traders come in to grab shares at a lower price.Source:
34 Bullish Hammer Pattern The share opens, sellers take control & push it lower.Buyers eventually win & have enough strength to closethe share at the top of the range.
35 Bullish Hammer Pattern Hammers can develop after a cluster of stop loss orders are hit.
36 Bullish Harami Pattern “Harami” - Old Japanese word for “pregnant”.Long black candlestick - “mother.”Small candlestick - “baby”.When you see this pattern the first thing that comes to mind is that the momentum preceding it has stopped.On the first day you see a wide range candle that closes near the bottom of the range.The sellers are still in control.Second day - there is only a narrow range candle that closes up for the day.Note: Do not confuse this pattern with the engulfing pattern.The candles are opposite!Source:
37 Bullish Harami Pattern On the first day you see a wide range candle that closes near the bottom of the range - Sellers are still in control.Second day - Narrow range candle - Closes up for the day.
38 Bullish Piercing Pattern Two-candle reversal pattern.First day - Wide range candle - Closes near bottom of the range.Sellers are in control.Second day - Wide range candle – Closes at least halfway into the prior candle.Those that shorted the share on the first day are now sitting at a loss on the rally that happens on the second day.Sets up a powerful reversal.Source:
39 Bullish Piercing Pattern First day - Wide range candle - Closes near bottom of the range - Sellers in control.Second day - Wide range candle – Closes at least halfway into the prior candle
40 Probably the most popular candlestick pattern. Doji PatternsProbably the most popular candlestick pattern.Represents indecision & causes traders to question the current trend.The share opens up.Goes nowhere throughout the dayCloses right at or near the opening price.Triggers reversals in opposite direction.Source:
42 DojiLong-Legged Doji is characterised with very long shadows - Shows indecision of the buyers & sellers - Important reversal signals.Bullish Dragonfly Doji is a single candlestick pattern - occurs at the bottom of a trend or during a downtrend. Very similar to the Bullish Hammer Pattern. Distinction - Body or not - Opening & closing prices are identical & there is no body.Bullish Gravestone Doji is a specific Doji with opening & closing prices equal to the low of the day. Bottom reversal pattern - Similar to Bullish Inverted Hammer Pattern - occurs in a downtrend & represents a possible reversal of trend.
43 Shows indecision of the buyers & sellers - Important reversal signals. Long-Legged DojiShows indecision of the buyers & sellers - Important reversal signals.
44 Bullish Dragonfly Doji Occurs at the bottom of a trend or during a downtrend- Opening & closing prices are identical & no body.
45 Bullish Gravestone Doji Bottom reversal patternOpen & closing prices equal to the low.
46 Bearish Candlestick Patterns Presenter: Shaun van den Berg
47 Bearish Candlestick Patterns Bearish patterns - Opposite of the bullish patterns.Bearish patterns come after a rally.Signify a possible reversal just like the bullish patterns.Source:
48 Bearish Engulfing Pattern First day - Narrow range candle that closes up for the day.Buyers are still in control of the share but because it is a narrow range candle & volatility is low, the buyers are not very aggressive.Second day - Wide range candle that "engulfs" the body of the first candle & closes near the bottom of the range.Sellers have overwhelmed the buyers (supply is greater than demand).
49 Bearish Shooting Star Pattern The share opens, then at some point the buyers take control of the share & push it higher.By the end of the day, the sellers win & have enough strength to close the share at the bottom of the range.
50 Bearish Harami Pattern On the first day you see a wide range candle that closes near the top of the range - Buyers are still in control.Second day - there is only a narrow range candle that closes down for the day.
51 Bearish Dark Cloud Cover First day - Wide range candle - Closes near top of the range - Buyers are in control.Second day - Wide range candle – Closes at least halfway into the prior candle
52 DojiLong-Legged Doji is characterised with very long shadows - Shows indecision of the buyers & sellers - Important reversal signals.Bullish Dragonfly Doji is a single candlestick pattern - occurs at the bottom of a trend or during a downtrend. Very similar to the Bullish Hammer Pattern. Distinction - Body or not - Opening & closing prices are identical & there is no body.Bullish Gravestone Doji is a specific Doji with opening & closing prices equal to the low of the day. Bottom reversal pattern - Similar to Bullish Inverted Hammer Pattern - occurs in a downtrend & represents a possible reversal of trend.
53 Technical Analysis: Candlesticks & other TA tools Moving AveragesSupport & ResistanceTrend linesTechnical Indicators
65 Summary: Candlesticks AdvantagesEasy to interpretEasy to useCool candlestick patterns namesGood at identifying market turning pointsSteps to interpretationUnderstand the parts of a candlestick pattern.Determine the time frame of the chart.Determine if the share price went up or down during the period.Find the open & close of trading for the day.Determine the range of trading for the day.Interpret the length of the body.Interpret the length of the tail & shadow.Put it all together.
66 **Please note: limited to 100 people Upcoming WebinarsIntroduction to Exchange Traded Products (ETPs)Date: Wednesday, 10 April 2013Time: 13:00 14:00Introduction to Fundamental AnalysisDate: Wednesday, 24 April 2013**Please note: limited to 100 people
67 Traders Forum Meetings DurbanDate: Wednesday, 17 April 2013Time: 17:30 for 18:00 until 20:00JohannesburgDate: Tuesday, 28 May 2013PretoriaDate: Tuesday, 25 June 2013Date: Tuesday, 30 July 2013Cape TownDate: Wednesday, 21 August 2013
68 ConclusionPresentation link will be edComment on FaceBookSubscribe to toolsThe Stockbroker (CFD & SSF traders)Look out for upcoming WebinarsETPFundamental AnalysisGood LuckHappy Trading!
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