As you know, I continually bleat on about flippin’ Candles - drives you all nuts right? Anyway, I had been working on the Spreadbet Blog Series and fancied knocking up a quick, easy and nearly fun Blog draft - with the intention that it would probably see the light of day in March ish (and so it has !!).
I have had a lot of Readers ask me about Candles and I seem to have ignited some interest (geddit?), so I fancied a Blog on it. My thinking was that I would randomly pick a Chart of a Stock and then point out how Candlestick Charting techniques enable me to ‘read’ what the Share Price is doing and have some idea of its future moves - the ability to peek into the near future, now that would be handy, would it not?
As ever, Simplicity is always best, particularly with Technical Analysis of any sort. In essence, there are 2 overall types of Candlestick Patterns - Reversal Patterns and Continuation Patterns. The latter are far harder to understand and less useful anyway, so I will ignore them in this Blog (if you want more detail on Continuation Patterns and Candlestickery in general, then pop over to Wheelie’s Bookshop and get a copy of ‘Candlestick Charting for Dummies’ via www.wheeliedealer2.weebly.com).
Click this link to go to a Wikipedia Page which covers the common Candlestick patterns (this link is also at the bottom of my ‘Useful Links’ webpage) http://en.wikipedia.org/wiki/Candlestick_pattern
This means that we are really concerned here with ‘Reversal Patterns’ - which means they are Patterns (or single Candles) that form when an Uptrend (or Upmove) or Downtrend (or Downmove) is coming to an end and is most likely going to change direction and go the other way. Many of the Candle Patterns I highlight below are ‘Context Sensitive’ - this means they only work after a clear Downtrend or clear Uptrend. If they appear in a Sideways Move, then they have no real relevance.
As you will see in the Chart, I have put Black Circles around the Candlesticks I want you to look at, and I have numbered them for easy description and identification. I have also put in 2 Arrows that will be described at the end. I have done a Bullet List for the numbers that follows below the Chart. I have also repeated the Chart further down the page to try and make it easier to read.
- CIRCLE 1. From the Left, there was a bit of an Uptrend for a few days, and then we got the ‘Shooting Star’ type Candlestick that I have circled - it’s the one with the Red ‘Body’ near the bottom with Long ‘Wick’ (or ‘Tail’) upwards. Nice Reversal Warning and worked a treat here. Note, White Candle Bodies mean it was an UP day and Red Candle Bodies mean it was a DOWN day. A ‘Doji’ is pretty much any Candle that has a narrow Body, although a Textbook Doji looks a bit like a Spinning Top.
- CIRCLE 2. This is quite a nice one, although I can’t remember the name. It is a sort of ‘3 Inside Up’ 3-day Pattern, where the little ‘Star’ like thing in the middle SHOULD BE followed by a ‘clean’ Up Day to complete the pattern. In this case, we got another ’Doji’ Candle on Day 3, whereas ideally the Day 3 Up would be a nice clean Up Candle with little or no Wicks or Tails (a Marabuzo I think it is called - probably spelt that wrong, my Japanese is a tad rusty, apart from Suzuki, Kawasaki, Yamaha, Honda etc.) However on the next day we got a nice Up White Candle so it was game on, with a sort of delayed ’Confirmation’ of the ‘3 Inside Up’ Pattern. The concept of a ‘Confirmation’ is quite important for Short Term Traders who use Candlesticks - it is less important for Long Term Buy and Hold merchants like me, but is still handy. I won’t dwell on Confirmation but it is simply the idea that the Candle on the day following the Reversal Signal, confirms that the new change of direction is in place. Day Traders and Position Traders are waiting to see the start of these Confirmations being made before they Enter their trade.
- CIRCLE 3. After the lovely Up Move from Circle 2, we got the first warning that things were running out of puff at the ‘Long Tails’ Doji Candle which appears to the Left of the Circle marked 3. This Candle has an Up Tail and a Down Tail of about the same length and they are very long. We then got another Doji the next day and the clincher that we are Reversing to a Down Move was the Red Doji which has the Body near the bottom - it’s a sort of ‘Inverted Hammer’ but not a text book one. It is worth noting here than whenever an established Trend is in place, as soon as you start getting Dojis the Trend is starting to weaken. It may not Reverse straightaway off the Doji, but it will Reverse very soon - the Trend (Uptrend or Downtrend) is getting tired once Dojis start appearing. Bear this in mind if you look at any of the Major Index Daily Candlestick Charts now.
- CIRCLE 4. Then we got a huge Down Red Candle which was quickly followed by a White Doji Candle with a Long Tail down and it is sort of a Hammer Doji - very nice and clear sign that a Reversal is about to happen.
- CIRCLE 5. There was then a lot of higgledy piggledy messing about until at Circle 5 we got a much nicer Red Inverted Hammer Doji - this is much cleaner than the one in Circle 3 but you should see the similarity.
- CIRCLE 6. A few down days for the Day Traders and Position Traders to spank, and then we got something pretty near a ‘Dragonfly Doji’ - these are the most beautiful things to get as they are extremely reliable indicators that a Down Move is about to Reverse up.
- CIRCLE 7. A Lush Upmove followed, then we finally got a near Hammer Doji that marked the top. To be clear, this is not a good one and would have been hard to trade. However, after the Dojis of the next couple of days, an alert Trader would have realised what was going on. Sometimes the Indicators are not easy to spot. It doesn’t matter - just trade the Clear ones and ignore the poor Signals !!
- CIRCLE 8. About 6 days down and then a gorgeous Dragonfly Doji - lovely. That’s the Red Thing with Legs right up to it’s skirtline and a nice thin Body (calm down Wheelie, it’s a poxy Candlestick Pattern man, get a grip - go and take a cold shower or something…)
- CIRCLE 9. Wow, if you liked the Dragonfly in 8, then check out this Inverted Hammer - a stunner. That is near textbook and great to trade Short off. I really should be a Day Trader……..nah, can’t be arsed.
- CIRCLE 10. Anyway, that Shorting Day Trader after the Inverted Hammer banked a huge amount of Points and then saw a sort of Dragonfly thing again at Circle 10. Close that Short !!
- CIRCLE 11. On 11, the Price had been dropping and then we got 2 Red Candles side by side, which led to the Big Up White Candle. This 2 day Pattern is technically a Harami (Pregnant Woman viewed sideways on) but in reality it was a pee poor signal and would have been hard to trade.
- CIRCLE 12. Neat little Dragonfly type thing after a down move.
- CIRCLE 13. An Inverted Hammer after a short move up.
- CIRCLE 14. I think this is a 2 day Pattern called ‘Dark Cloud Cover’ - I tend not to trade off of these - I prefer Dragonflies, Hammers, Dojis in general after big Down Moves to buy. Clean and clear Haramis are pretty good as well.
- CIRCLE 15. The White Candle in Circle 15 is a sort of Hammer with a Long Down Tail after a similar Red Candle the day before - would have been hard to trade but look at the run up afterwards.
- The Red Arrow points to where it Topped out after a good run up. However, this would be hard to trade except for someone with a lot of expertise - I think there might be a commonish 2 day Pattern here but not one I remember.
- Where I am pointing to on the Blue Arrow, there is a Dragonfly Doji like thing and a similar Doji on the next day - but they are sort of ‘out of context’ so would have been hard to trade. Combined with other Indicators like Momentum and Relative Strength Index (RSI), maybe it would have been ok for a Trader to see.
It is worth noting that I have kept the above discussion limited purely to the Candles - so you can see their Power without complicating things too much. In practice, if you combine these Indicators with simple things like Trend Channel lines, RSI (Relative Strength Index) and MACD (Moving Average Convergence Divergence), you have a pretty powerful and practicable, Short Term and timely, Prediction Tool. How cool is that?
To be frank, it amazes me how few people use these tricks - simply by reading this Blog you probably are now hugely ahead of the vast majority of Market Participants - this stuff can give you a real and useable ‘Edge’.
Most free Charting Packages will enable you to show Candlestick charts from a Menu rather than simple ‘Line’ charts. I know the ADVFN app on my Fone and Tablets has this function - I use it all the time.
It is worth realising that Candlesticks are ‘fractal’. This means they work on any timeframe - and once you get in the habit, it will amaze you how good they are. You can use on perhaps as little as 5 minutes right up to Months - through a wide span including 15 minutes, Hours, Days, Weeks etc. I use Daily Candles as my main tool and use Weekly ones at the Weekend - Weekly ones are brilliant because as with anything in Technical Analysis, Longer Term Trends/Indicators dominate over Shorter Time Periods.
Hopefully from this Blog you will get a feel for how useful Candles can be - pick up ‘Candlestick Charting for Dummies’ and you can read a lot more on it and boost your knowledge.
Right, I got some washing up to do, see ya, wd