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INTRODUCTION TO BASIC CANDLESTICK PATTERNS10th September 2015

Nicholas Tan & Lucas LeeGlobal Macro Department

http://nusinvest.com/

Disclaimer

Introduction to Basic Candlestick Patterns

10th September 2015



within this report

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Agenda



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• Introduction to Candlestick Patterns

• Basic Candlestick Patterns

• Trading Strategies



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What are Candlestick Patterns?



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• They are:

• A form of Technical Analysis i.e. reading the movement of the market

• Allows investors and traders to make high-probability guesses about the direction of the market

• Offer insights into the psychology of the market



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A Brief History of Candlesticks



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• Candlestick Patterns:

• Originally Developed by Japanese rice traders in the early 1600s

• White Candles when prices went up; Black Candles when prices went down

• Honma Munehisa (1724-1803): Rice trader from Sakata, father of candlestick analysis

• Popularised by Steve Nison in the 1991



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Understanding the Candlestick



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• Anatomy of a Candlestick

• Body

• Shadows

• Open/Close

• High/Low



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Market for Stock X on Thursday, 10th September



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Open

High

Low

Close

$2.00

$2.25

$1.00

$1.25


What can we learn from Candlestick Patterns?



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• From a candlestick pattern, we can know…

• The Open/Close/High/Low Prices

• The volume and strength of buying/selling pressure

• Whether there is more greed or fear

• How to make our trades!



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within this report



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Let’s make a guess!


Bulls vs Bears



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• Bulls want the price to go up

• Bears want the price to go down

• The Stock Market is a constant battle between the bulls and bears/ between buyers and sellers


Bulls vs Bears



within this report



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Who is in control?



within this report



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Agenda



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• Introduction to Candlestick





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within this report



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Candlestick Patterns




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• Hammer (after a Downtrend)

• Small body

• Long lower shadows at least twice the length of the real body

• No/Short upper shadows

• Suggests Bullish Momentum/ Buying Pressure



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Single Candlestick Patterns




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Open

Low

High/Close




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Where is the market headed?

Go Long!




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• Shooting Star (after an Uptrend)

• Small real bodies

• Long upper shadows at least twice the length of the real body

• No/Short lower shadows

• Suggests Bearish Momentum/ Selling Pressure



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within this report



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Open

High

Low/Close




within this report



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Where is the market headed?




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• Doji

• Open and Close Prices almost the same

• Market is two-sided

• Suggests indecision and trepidation between buyers and sellers



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within this report



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Open

Close

High

Low




within this report



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What’s happening in the market?




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• Marubozu (‘Shaven Top’)

• Long white/black body with no shadows

• A full white body suggests that bulls controlled the price from open to close

• A full black body suggests that bears controlled the price from open to close



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Open

Close

Low

High




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Three White Soldiers: Where is the market going?




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• Bullish Engulfing Pattern

• Small Bearish Candle followed by a Long Bullish Candle

• Engulfs the entire range of the previous bearish candle

• Suggests higher than average volumes and strong Bullish Momentum



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Two Candlestick Patterns




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• Bearish Engulfing Pattern

• Small Bullish Candle followed by a Long Bearish Candle

• Engulfs the entire range of the previous bullish candle

• Suggests higher than average volumes and strong Bearish Momentum



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Two Candlestick Patterns




within this report



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Questions to Ask when using Technical Analysis:

• Key Questions:

• What is happening in the market?

• Who is in control? Bulls/Buyers? Bears/Sellers?

• What is the market telling you to do?


Agenda



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• Introduction to Candlestick





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Agenda for Trading Strategies



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• Examples of failed candlestick patterns

• How to use candlesticks properly to create trading strategies



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What is Shorting?



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• Shorting is a trade that allows one to profit from falling prices

• Exact mechanism of this trade will not be examined



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Failed candlestick patterns(Hammer)



within this report



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Failed candlestick patterns(Shooting Star)



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Failed candlestick patterns(Bearish Engulfing)



within this report



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Failed candlestick patterns(Bullish Engulfing)



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Philosophy of Trading Candlesticks



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• Candlesticks alone are of limited utility

• Create strategy to combat this problem



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Premise of a candlestick pattern



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• Indicate a zone where reversal is likely

• This zone does not always lead to a high probability reversal in prices

• Solution: Principle of zonal confirmation



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What is Zonal Confirmation



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• Whenever a candlestick pattern appear, it creates a possible ‘zone of reversal’

• We should not always expect a reversal there

• We have to learn how to ‘confirm’ that this zone will indeed lead to a high probability reversal in prices



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What is zonal confirmation?



within this report



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Creating a possible zone of reversal



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Zonal Confirmation



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Summary of zonal confirmation strategy



within this report



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• Identify a candlestick pattern and create a possible ‘zone’ around it

• Once this zone is confirmed, we go ahead and bet on reversal in prices


Zonal strategy applied to Apple



within this report



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Theory of Ranges (Second Strategy)



within this report



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• Market does not always move in one direction

• Most of the time, it will move around aimlessly without a clear direction within a certain range

• When this happens, we call this a ‘ranging’ market


Representation of range in candlestick



within this report



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https://www.google.com.sg/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCODixr_X48cCFUOQjgod8fwIXg&url=/url?sa=i&rct=j&q=&esrc=s&source=images&cd=&cad=rja&uact=8&ved=0CAcQjRxqFQoTCODixr_X48cCFUOQjgod8fwIXg&url=http://stockcharts.com/school/doku.php?id=chart_school:chart_analysis:introduction_to_candlesticks&psig=AFQjCNH9OL3DcJPLr_z36WnNm__XG6QLIA&ust=1441672702801107&psig=AFQjCNH9OL3DcJPLr_z36WnNm__XG6QLIA&ust=1441672702801107

How does knowing Theory of Ranges help?



within this report



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• Market is either in Trend or range

• When ranging, it is prepared to transit into a trend

• Trade in that direction


What usually happens to such traders?



within this report



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How to establish proper range



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• Establish a possible range with a Doji Candlestick

• Prices must ‘respect’ the boundaries

• ‘Range confirmation’


How to establish proper range



within this report



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The End!



within this report

More men have become great through practice than by nature."-

Democritus



10th September 2015


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