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Candlesticks
Brian Cox 5/21/06

The Essentials
The greatest advantage to using candle on your charts, instead of bars is that single candle lines and multiple candle patterns offer more reliable, earlier and more effective reversal singles

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The Essentials
Invented by the Japanese. Used first in the 1870s with the opening of the Japanese stock market. Can be used with the weekly, daily and 5 minute charts. Candlesticks do not give price targets and need a close to confirm candle signal
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The Essentials
Before placing a trade based on a candle signal:
other technical signals should be considered Consider the risk / reward of the trade.

Candle charts are best used as a tool not a system.

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Construction
Upper Shadow

White: Open low and close higher

Real body

Black / red: Open high and close lower

Lower Shadow
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Construction
High = 37
Close = 35 White: Open low and close higher Open = 30 low = 29 Lower Shadow
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Upper Shadow

High = 37
Open = 35 Black / red: Open high and close lower Close = 30 low = 29

Real body

Construction Review
The rectangular portion of the candlestick is called the real body. The thin line extending above the real body is called the upper shadow. The upper shadow of a black candle represents the range between the high and the sessions price.

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Construction Review
The lower shadow of a white real body candlestick represents the range between the sessions open and low. The black real body means that the close was lower than the opening. The white real body means that the close was higher than the opening.

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Basic Market Strategies

Candles play a powerful role in early reversal signals. Candle lines and patters confirm support and resistance.

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Basic Market Strategies

Candles come in many different shapes

Spinning Tops Tends to indicate indecision

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High Wave Candles Tends to indicate confusion

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Basic Market Strategies

Spotting reversals

Hammer following a down trend Bullish signal

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Hanging man following an up trend Possible Bearish signal

Shooting Star following an up trend Bearish signal

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Real Bodies can be black or white

Basic Market Strategies Review

A long lower shadow on a daily charts shows the market bouncing off from the lows of the day. The spinning top is another name for a small real body. The real body of a spinning top can be black or white. A wave candle must have long upper and lower shadows
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Basic Market Strategies Review

A spinning top indicates indecision. A wave candle indicates confusion. A hammer occurs in a downtrend. A hammer can be white or black. A hanging man occurs in an up trend. The confirmation for the hanging man is a close under the hanging mans close
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Basic Market Strategies Review

A shooting star occurs during an up trend. A shooting star is considered bearish

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The Dangerous Doji

The doji can signal a significant trend shift or reversal. A doji forms when the opening and closing price are the same. There are bearish and bullish doji. Are valuable for calling the market tops (especially after a long white candle).
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The Dangerous Doji

Long-legged Doji Market in Balance Rally could be losing steam

Dragonfly Doji Possible Bullish signal

Gravestone Doji Bearish signal

The doji is more influential when it is a rare occurrence.

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The Dangerous Doji

Northern doji

Southern doji

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The Dangerous Doji Review

A doji forms when the open and close are the same. A doji signals that the bears and bulls are in stalemate. The dragonfly doji, the high of the session represents the open, high and close. The doji in a rally is sometimes a sell signal.
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The Dangerous Doji Review

A doji in an uptrend is called a northern doji. The northern doji is most effective when the market is overbought and the doji appears at a resistance area.

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Long Real Bodies (Belt-Hold)

Candles with extended real bodies can also display strong signals

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Belt-hold signs
Bullish belt-hold Bearish belt-hold Resistance

Support

Bullish belt hold is white near support and bearish is black near resistance
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The Dangerous Doji Review

The bullish belt-hold; following a downtrend will starts low near resistance and raises up and closes out higher The bearish belt-hold; following a uptrend will start high near resistance and closes out lower.

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The Belt hold Review

The bearish belt hold becomes more signification as it nears resistance. The longer the height of the belt-hold candle, the more important the signal it gives. On the chart, we draw the support line from the bottom of the lower shadow.
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The Belt hold Review

The smaller the real body, the less force the move behind the move. A series of long lower shadows as the market is descending shows that the market is descending reluctantly. On the chart, we draw the support line from the bottom of the lower shadow.
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The Belt hold Review

If the trend is mostly higher, caution is warranted due to long upper shadows

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The Power of Candle Patterns

Candle charts are most powerful when two or more candle lines combine in a candle pattern. A dark cloud cover pattern is a bearish signal consisting of a twocandle patter that indicates a top reversal.

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The Power of Candle Patterns

Piercing Pattern Dark Cloud cover

White real body that closes within the back body, perferably more than 1/2 of black body lenght
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Follows a strong white body session. The second session opens above and closed below the center of the white body.
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The Power of Candle Patterns

Bullish Engulfing Bearish Engulfing

White real body opens lower and closes higher than the black body (the bulls have taken over!)
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Black body opens higher and closes lower than the white body (the bears have taken over)
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The Power of Candle Patterns Review

As the second session of a piercing pattern pushes more and more deeply into the first candle, it may become a bullish engulfing pattern. The opposite pattern to the dark cloud cover is the piercing pattern. A piercing pattern is to a bullish engulfing pattern as a dark cloud cover is to a bullish engulfing pattern.
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The Power of Candle Patterns Review

A bullish engulfing pattern occurs when at second sessions white real body raps around the prior sessions black body If an extremely large white candle completes a bullish engulfing pattern you should buy or sell based on the risk reward profile.
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Candle Patterns Review

Lets see an actual set of candle stick patterns

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Candlesticks
What would you Do now?

End of Part I

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Candlesticks
What would you Do now?

End of Part I

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Candlesticks
What does this indicate?

End of Part I

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Candlesticks
What is this called? (bearish or bullish)

End of Part I

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Candlesticks

End of Part I

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Candlesticks
Is it time to buy?

End of Part I

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Candlesticks
What will you do now?

End of Part I

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What is the name of this?

Candlesticks

End of Part I

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Candlesticks
Buy? Sell?

End of Part I

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Candlesticks
What is this called?

End of Part I

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Candlesticks
What is the direction?

End of Part I

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Strong Resistance

Candlesticks

End of Part I

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Candle Sticks

End of Part I

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