NUSInvest Workshop Series Candlesticks Patterns Session Two Candlesticks Patterns

NUS Students’ Investment Society

Workshops Syllabus – Sem 1 LT18, 6-7PM Week Lesson Topic Week 4 Introduction to FA & TA Week 5 Japanese Candlesticks & Charts (E-learning Week) Week 6 Annual Reports Week 7 NIL (Mid-terms Week) Week 8 Support & Resistance Week 9 Valuation Methodology Week 10 Exams Preparation Week 11 Week 12

PROFILE NUS Invest Research Analyst, Acting FA Director Year 2 BBA (Finance) First trading experience in 2010 Does both FA & TA, mostly FA

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Background

PRICE TRADING STRATEGIES Japanese Candlestick Stresses relationship between open and close prices BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Candle Anatomy Body: Distance between open and closing Tip of upper wick/shadow: Highest price of that period Bottom of lower wick/shadow/hair: Lowest price of that period Range (length) of candle stick indicates volatility Upward candlestick usually white or green or blue Downward candlestick usually black or red Bearish Candle Bullish Candle BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Gaps/ Windows Gap: Current open is not the same as prior closing price No price and no volume transacted hands between the gap (area on price chart where there is no trades) Effect of news after stock market closed for the day (e.g. earnings report) Psychology: Can act as resistance/ support (news that sparked the gap is still in play) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Gaps Daily Chart – Wal-Mart (WMT) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

1-Price Bar Patterns

PRICE TRADING STRATEGIES 1-Bar Pattern Long Lower Shadow Bullish signal Lower shadow must be at least the size of the real body Longer lower shadow: more reliable that it is a bullish trend Long Upper Shadow Bearish signal Upper shadow must be at least the size of the real body Longer upper shadow: more reliable that it is a bearish trend BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Marubozu White Marubozu Long white body, no wicks Bullish candle Open equals low, closing equals high Indicates buyers in control during entire period Black Marubozu Long black body, no wicks Bearish Candle Indicates sellers in control during entire period BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Hammer Found in downtrend Short body at the top of price range Little to no upper shadow Lower shadow must be at least twice the length of real-body Signals: Reversal pattern when found in a downtrend Short-term outlook indication Real body can be black or white (white: stronger signal) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Hammer Low reliability, requires confirmation Bullish gap for next session Subsequent session shows white real body above that of the hammer’s real body Significance/ Strength: Length of Lower Shadow Colour Buyers drive prices back up to close near the highs Long lower wick indicates initial selling prices BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Hanging Man Found in uptrend Short body at the top of price range Little to no upper shadow Lower shadow must be at least twice the length of real-body Warning of a potential downward trend Short-term outlook indication Also requires confirmation BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Hanging Man 1. Uptrend 2. Gap Up 3. Lower Shadow at least twice as big as Real Body 4. Real Body Bullish or Bearish; better if Bearish 5. Confirmation Candle Greater gap: Higher likelihood of reversal BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Shooting Star Found in uptrend Short body at the bottom of price range Little to no lower shadow Upper shadow must be at least twice the length of real-body Signals: Reversal pattern Short-term outlook indication Real body can be black or white (black: stronger signal) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Shooting Star Low reliability, requires confirmation Bearish gap for next session Subsequent session shows black real body below that of the shooting star’s real body Significance/ Strength: Length of Upper Shadow Colour Long upper wick indicates initial buying prices Open Bears were able to reject bulls completely (or push prices even lower by closing below open) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Shooting Star 1. Uptrend 2. Upper shadow at least twice as big as real body 3. Real body bullish or bearish (bearish: stronger indication) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Inverted Hammer Found in downtrend Short body at the bottom of price range Little to no lower shadow Upper shadow must be at least twice the length of real-body Signals: Reversal pattern Short-term outlook indication Real body can be black or white (white: stronger signal) BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Inverted Hammer BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Spinning Top & Doji Short body in the middle of two long wicks Market closed relatively unchanged Indicates indecision (‘standoff’ after significant price movement) Trend losing momentum; possible turning point Doji/ Long-legged Doji: stronger signal Open and close are the same Insignificant in sideway markets Buyers in control Sellers in control BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES More Doji Patterns Dragonfly Doji Gravestone Doji Four Price Doji Long lower, no upper Long upper, no lower Same upper, lower, open & close Very rare Low volume situations BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

2-Price Bar Patterns

Bullish Engulfing Candle When found in a downtrend: Bullish candle opens lower than previous candle’s close, closes higher than previous candle’s open Potential sign that trend is reversing Indicates control has shifted from sellers to buyers Gap down BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Bullish Engulfing 1. Downtrend 2. Bearish Candle 3. Gap Down 4. Bullish Candle 5. Close above previous Bearish Candle BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Bearish Engulfing Candle When found in a uptrend: Gap up: Bullish sign But: Bulls only push prices up slightly before bears take over and push prices much lower Potential sign that trend is reversing Indicates control has shifted from buyers to sellers Gap Up BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Bearish Engulfing 1. Uptrend 2. Bullish Candle 3. Gap Up 4. Bearish candle 5. Close below previous Bullish Candle Greater size difference: Increased significance BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Dark Cloud Cover Gap Up Bullish candle closes below the middle of previous candle Rejection of Gap: Bearish sign Retracement: Additional significance BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Piercing Line Pattern Gap down Bearish candle closes below the middle of previous candle Rejection of Gap: Bullish Sign Retracement: Additional significance BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Harami Bearish Harami Large bullish, followed by small bearish Gap down, unable to retrace  Uncertainty entering the market Bullish Harami Large bearish, followed by small bullish Gap up  Reversal Pattern BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Harami In a Downtrend 1. Downtrend 2. Bearish Candle 3. Gap Up 4. Small Bullish Candle In an Uptrend 1. Uptrend 2. Bullish Candle 3. Gap Down 4. Small Bullish Candle

PRICE TRADING STRATEGIES Tweezer Top & Bottom Bearish Tweezer Top Day 1 Close about equal to Day 2 Open Occurs during an uptrend (closes near the high) Sentiments reverses completely the next day Bullish Tweezer Bottom Occurs during downtrend (closing the day near the lows) Sometimes eliminates entire gains from previous day BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Tweezer Bottom 1. Downtrend 2. Bearish Candle 3. Day 1 Lows about equal to Day 2 Lows 4. Bullish Candle BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Tweezer Top Resistance Line High of Day 3 Gap Up to Prior Highs; Bulls rejected again High of Day 2 (Bulls rejected) High of Day 1 Resistance Line

3-Price Bar Patterns

PRICE TRADING STRATEGIES Morning Star Consists of 3 candlesticks Bearish Gap: Bears are in control during opening Day 2: Prices are not pushed much lower (small / neutral candlestick) Bullish: stronger sign Day 3: Bullish gap up Prices pushed further upward, sometimes eliminating all Day 1 losses BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Morning Star 1. Downtrend 2. Bearish Candle 3. Gap Down 4. Small Bullish/ Bearish Candle 5. Gap Up 6. Bullish Candle

PRICE TRADING STRATEGIES Evening Star Consists of 3 candlesticks: - Bullish, Small/ Neutral, Bearish Presence of bullish gap & bearish gap Day 2: Prices are not pushed much higher Bearish: stronger sign Day 3: Large bearish candlestick Prices pushed further downward, sometimes eliminating all of Day 1’s gains BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Evening Star 1. Uptrend 2. Bullish Candle 3. Gap Up 4. Small Bullish/ Bearish Candle 5. Gap Down 6. Bullish Candle Morning Star Pattern Powerful bearish reversal pattern!

Price Action Trading Strategies

PRICE TRADING STRATEGIES Pin Bar Setup Bullish Pin Bar Pin bar: middle of a 3-bar formation Open and Close of pin bar is within (or very close) price range of bar 1 and 3 Shadow of pin bar sticks out Longer, more significant Pin bars occurring at important support/ resistance level can be very accurate Can be taken as counter trend if well-defined and protrude significantly from surrounding price bars Indicates strong rejection occurred Preferably on daily chart time frame Bearish Pin Bar BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Pin Bar Setup Two large bullish pin bars bring an end to the previous downtrend Obvious bullish pin bars with the overall uptrend Pin bars occurring the context of a trending market BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Inside Bar Setup Inside bar: Bar (or series of bars) completely contained within preceding bar Not the same as harami Inside bars in strong trending markets breakout plays in that direction (‘pauses’) Mother bar Two inside bars contained within range of mother bar BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Inside Bar Setup Inside bar setups traded with the near-term momentum often give rise to large moves. Daily AUDUSD chart BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Fakey Setup Inside/Harami bar + False break, then closes back within range Fakey entry: triggered as price moves back up past the high of the inside bar (or the low in the case of a bearish fakey) Amateurs tried to pick market top, pros stepped in and flushed out amateurs in a flurry of buying Fakey setup BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

PRICE TRADING STRATEGIES Fakey Setup Substantial push higher after false-break to the downside False-break / Fakey setup BACKGROUND 1-BAR PATTERN 2-BARS PATTERN 3-BARS PATTERN PRICE TRADING STRATEGIES

Summary Background 2-Bars Pattern 1-Bar Pattern 3-Bars Pattern Candlestick Anatomy Bullish/ Bearish Engulfing Gaps Dark cloud cover/ Piercing Line Harami 1-Bar Pattern Tweezer Top/ Bottom Hammer/ Hanging Man 3-Bars Pattern Shooting Star/ Inverted Hammer Morning/ Evening Star Spinning Top Doji Price Trading Strategies Pin Bar Setup Inside Bar Setup Fakey Bar Setup

Resources Babypips.com Forexfactory.com

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