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C a n dle st ick

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Ca n dle st ick Ch a r t in g Ex pla in e d

An I n t r odu ct ion To Ca n dle st ick s

  There are t wo t ypes of ways t o analysis t he price of a st ock, fundam ent al analysis, and t echnical analysis. Fundam ent al analysis is used t o gauge t he price of a st ock based on t he fundam ent al at t ribut es of t he st ock, such as price/ earnings rat io, Ret urn on invest , and associat ed econom ic st at ist ics.

  Technical analysis deals m ore wit h t he psychological com ponent of t rading a st ock, and is influenced for t he m ost part on em ot ionalism . The t echnical analyst is seeking t o answer t he quest ion " how are ot her t raders viewing t his st ock, and how will t hat effect t he price in t he im m ediat e fut ure". As you will see, t he candlest ick chart is t he m ost effect ive way t o gauge t he sent im ent s of ot her t raders.

Th e H ist or y of Ca n dle st ick Ch a r t s

  The Japanese were t he first t o use t echnical analysis t o t rade one of t he world's first rice fut ures m arket s in t he 1600s. A Japanese m an by t he nam e of Hom m a who t raded t he fut ures m arket s in t he 1700s discovered t hat alt hough t here was link bet ween supply and dem and of t he rice, t he m arket s were also st rongly influenced by t he em ot ions of t he t raders.

  Hom m a realized t hat he could benefit from underst anding t he em ot ions t o help predict t he fut ure prices. He underst ood t hat t here could be a vast difference bet ween value and price of rice.

  This difference bet ween value and price is as valid t oday wit h st ocks, as it was wit h rice in Japan cent uries ago. The principles est ablished by Hom m a in m easuring m arket em ot ions in a st ock are t he basis for t he Candlest ick Chart analysis, which we will present in t his sem inar.

Ca n dle st ick vs. W e st e r n Ch a r t s

  The West ern bar chart is m ade up of four parts com ponent s, open, high, low, and close. The vert ical bar depict s t he high and low of t he session, while t he left horizont al line represent s t he open and t he right horizont al line represent s t he close.

  

Figu r e 1

  The Japanese Candlest ick Line ( Figure 2) uses t he sam e dat a ( open, high, low, and close) t o creat e a m uch m ore visual graphic t o depict what is going on wit h t he st ock. The t hick part of t he candlest ick line is called t he real body. I t represent s t he range bet ween t he session’s opening and closing prices. I f t he real body is red, it m eans t hat t he close of t he session was lower t han t he open. I f t he real body is green, it m eans t hat t he close was higher t han t he open. The lines above and below t he body are t he shadows. The shadows represent t he session’s price ext rem es. The shadow above t he real body is called t he upper shadow and t he shadow below t he real body is called t he lower shadow. The t op of t he upper shadow is t he high of t he day, and t he bot t om of t he lower shadow is t he low of t he day.

  

Figu r e 2

  One of t he m ain differences bet ween t he West ern Line and t he Japanese Candlest ick line is t he relat ionship bet ween open and closing prices. The West erner places t he great est im port ance on t he closing price of a st ock in relat ion t o t he prior periods close. The Japanese place t he highest im port ance on t he close as it relat es t o t he open of t he sam e day. You can see why t he Candlest ick Line and it s highly graphical represent at ion of t he open t o close relat ionship is such an indispensable t ool for t he Japanese t rader. To illust rat e t he difference, com pare t he daily chart plot t ed wit h West ern Lines ( Figure 3) wit h t he exact sam e chart plot t ed wit h Japanese Candlest ick lines ( Figure 4) . I n t he West ern bar chart as wit h t he Japanese Candlest ick chart , it is easy t o int erpret t he overall t rend of t he st ock, but not e how m uch easier it is t o int erpret change in sent im ent on a day t o day basis by viewing t he change in real body color in t he Japanese Candlest ick chart .

  

Figu r e 3

  

Figu r e 4

Tr a de r 's Se n t im e n t

  One of t he great est values of t he candlest ick chart is t he abilit y t o read m arket sent im ent regarding a st ock. To illust rat e consider t he following exam ple of a st ock t raded from t he eyes of a West ern chart t rader and t hen from t he eyes of a candlest ick chart t rader.

  W e st e r n Cha r t Tr a de r

  At t he close of t he day's session you observe t hat t he st ock closed well above your ent ry price ( 2) , which leaves you very cont ent wit h your t rade. Aft er t he close of day 2, you open t he financial sect ion of t he paper and check t he closing price of t he st ock and observe t hat not only is your st ock well above your ent ry price, but also has gained slight ly ( it is wort h m ent ioning t hat m ost west ern papers only publish closing prices while Japanese papers publish bot h opening and closing prices) . On day 3 you open and t he newspaper t o check t he close and not ice a slight dip in your st ocks price but you do not panic, because you are st ill well in t he m oney. You convince yourself t hat t he st ock has only dipped slight ly relat ive t o t he ent ry day close ( day 1) , and should resum e it s up t rend on t he next day. On day 4, you check t he close and not ice t hat t he st ock has fallen significant ly relat ive t o t he prior days close. You are now concerned about prot ect ing t he profit s t hat you had previously bragged about j ust days before. On t he beginning of day 6, you call your broker ( or logon t o your online t rading account ) and place a m arket order t o sell at t he first opport unit y. At t he day 5 m arket s open, t he st ock opens sharply lower and cont inues t o fall. Your order is execut ed at a price several point s below where you ent ered. You t hen shrug off t he t rade as an unpredict able m isfort une, and m ove on t o t he next t rade.

  

Figu r e 5

Ca n dle st ick Ch a r t Tr a de r

  Now suppose you are a candlest ick chart t rader t rading t he sam e st ock using a candlest ick chart ( Figure 6) . At t he beginning of Day 1 you ent er t he st ock based on a candlest ick pat t ern ent ry signal ( we will discuss proper ent ries in det ail lat t er in t his unit ) . At t he close of t he day's session you observe t hat t he st ock closed well above your ent ry price ( 2) which leaves you very cont ent wit h your t rade, but also m oves you int o a st at e of caut ion for signs of a change in t rend or reversal. Aft er t he close of day 2, you observe t he candlest ick form ed for t he day and not ice t hat t he real body is sm all indicat ing t hat t here was a t ug of war bet ween t he bears and t he bulls. You also observe t hat t he real body is read in color indicat ing t hat t he st ock closed lower t han t he open indicat ing t hat t he bulls act ually lost t he t ug of war t o t he bears. Based on t hese observat ions you conclude t hat t he bullish rally in t he st ock has ceased, and t he bullish sent im ent of t he m arket regarding t he st ock is changing. You decided t o sell your posit ion at t he days close, or at t he m arket open on t he next day t o lock in your profit . I f t his were a st ock in t he m idst of an overall downt rend, you m ay decide t o short t he st ock under t he low of t he day 2 bearish candlest ick.

  As you can see t he candlest ick chart t rader has t he advant age over t he west ern chart t rader in t hat he can use t he signals generat ed in each candlest ick t o help foret ell t he changing sent im ent s of t he m arket regarding a st ock.

  The open t o close relat ionship revealed in t he candlest ick is m ore effect ive t han t he close- t o- close relat ionship com m only used by west ern t raders.

  

Figu r e 6

Su pply a n d D e m a n d

  A st ock's price will adj ust t o higher or lower prices based st rict ly on supply and dem and principles. I n Figure 7 is shown a diagram of a green candlest ick. The green color of t he candlest ick indicat es t hat t he closing price of t he st ock at t he end of t he day is higher t han t he opening price at t he beginning of t he day.

  

Figu r e 7

  As you will see, t he candlest ick's color and size provide very im port ant clues regarding t he TRADER'S SENTI MENT t oward a given st ock's fut ure price. Not ice t hat 't rader's sent im ent ' is t he key phrase here. I n short t erm t rading, it is crit ical for t he t rader t o have a clear underst anding of what ot her t raders are t hinking. As you will see, t he m ost direct way t o get t hat underst anding is t hrough proper int erpret at ion of t he candlest ick. Let 's look at an exam ple. I n Figure 8 is shown a candlest ick of XYZ Com pany, which opened at 25 and closed at 25 3/ 8.

  

Figu r e 8

  The candlest ick is green in color, which gives us a quick visual signal t hat t he st ock price has rallied higher during t his period. How can we use t his inform at ion t o help us underst and what ot her t raders are t hinking? To answer t his quest ion, we will follow t he candlest ick's changes st ep by st ep t o underst and t he m echanism which is driving t he st ock price t o m ove higher.

  I n Figure 8, we see t he st ock opens at 25, and t hen quickly rallies t o 25 1/ 8. The reason t he price m oves t o 25 1/ 8 is because t here is a high dem and t o buy t he st ock at 25 1/ 8, and a short supply of sellers offering st ock at 25 1/ 8.

  Once all of t he st ock available at 25 1/ 8 is snat ched up, t he next group of sellers st eps up t o offer t heir st ock at 25 1/ 4. All of t he 25 1/ 4 st ock is quickly snat ched up because t here are st ill a larger num ber of t raders willing t o buy at 25 1/ 4 t han sellers willing t o sell st ock at 25 1/ 4.

  Once t he 25 1/ 4 st ock is gone, t he next group of sellers st eps up t o offer t heir st ock at 25 3/ 8. The 25 3/ 8 st ock is quickly snat ched up t oo.

  This process will repeat it self unt il t he buyers loose int erest in buying t he st ock result ing in a reduct ion of dem and. The result of com bining t hese st eps is a green candlest ick wit h an opening price of 25, rallying t o a closing price of 25 3/ 8. During t he rally period; however, t he ast ut e candlest ick reader will be able t o observe t he long green color of t he candlest ick, and deduce t hat buyer dem and is high. Now t here is only one reason why t raders would increase dem and by st epping up t o buy t he st ock, and t hat is because t hey t hink t hat t he st ock will go up in t he near fut ure. So by observing t he candlest ick color and size, t he ast ut e candlest ick reader is able t o deduce exact ly what ot her t raders are t hinking, and t hat is t hat t hey t hink t he st ock price will go higher in t he fut ure. I n Figures 9 & 10 we show an exam ple of how t he sam e principle in reverse applies t o t he analyses of a red candlest ick.

  

Figu r e 9

  

Figu r e 1 0

  The reason t he price m oves t o 25 1/ 4 is because t here are m any sellers looking t o unload t here st ock at 25 1/ 4, and a low num ber of buyers willing t o buy at 25 1/ 4. Once all of t he buyers have bought t he st ock at 25 1/ 4, t he next group of buyers st eps up t o bid for st ock at t he lower price of 25 1/ 8. The desperat e sellers quickly sell all of t he st ock at 25 1/ 8, and t hen t he next set of buyers st ep up at t he price of 25. This process will repeat it self unt il all of t he sellers have unloaded all of t he st ock t hat t hey want t o sell, result ing in a reduct ion of supply. The result is a red candlest ick wit h an opening price of 25 3/ 8, falling t o a closing price of 25. During t he st ock's price fall; however, t he ast ut e candlest ick reader will be able t o observe t he long red color of t he candlest ick, and deduce t hat dem and for t he st ock is low. Now t here is only one reason why t raders would increase t he supply of st ock t o sell, and t hat is because t hey t hink t hat t he st ock will go down in t he near fut ure. So by observing t he candlest ick color and size, t he ast ut e candlest ick reader is able t o deduce exact ly what ot her t raders are t hinking, and t hat is t hat t hey t hink t he st ock price will go lower in t he fut ure.

Bu y on Gr e e d, Se ll on Fe a r

  There are only t wo forces behind t he supply and dem and forces t hat drive a st ock's price higher or lower. Those forces are t he em ot ional forces of fear and greed. To illust rat e t his point we refer t o Figure 11.

  

Figu r e 1 1

  Suppose you are a t rader observing t he bullish rally of St ock XYZ at t he beginning of t he 3rd bullish green candlest ick, and considering an ent ry. You have wit nessed t he st ock rally huge for t wo days and know t hat each t rader who ent ered on t he first t wo days is now a big winner. Based on t he em ot ion of greed you decide t o ent er at t hat beginning of t he 3 day, and m ent ally count your profit s as t he price rallies t o a new high. Aft er t he st ock closes, you brag t o your friends at t he golf course regarding t he great t rade t hat you m ade t hat day. You go hom e from t he golf course and celebrat e t he vict ory wit h your spouse and m aybe even discuss how you will use t he ext ra m oney t hat you have earned t hrough t he t rade. Now keep in m ind t hat t he profit is only on paper and not one penny has been earned yet . The next m orning you check t he price of your posit ion, wit h expect at ions t hat your bullish st ock will rocket t o t he m oon! Now im agine t he em ot ion t hat goes t hrough your m ind when your posit ion not only fails t o go higher, but also opens below your ent ry price. What is t he em ot ion t hat flows t hrough your body as you not only see your profit s erode before your eyes, but now rob your account of precious capit al? The em ot ion t hat you will experience is undoubt edly fear and will prom pt you t o scram ble t o liquidat e your posit ion as soon as possible t o m inim ize your losses.

  Now consider t hat t here were also 2 or 3 t housand addit ional t raders who ent ered t he sam e st ock at around t he sam e price wit h t he hopes of t he gaining t he sam e profit .

  All of t hese t raders will be t ripping over t hem selves t rying t o get out of t he st ock. As was illust rat ed in t he previous sect ion, t his increase in fear result s in an increase in supply of t he st ock relat ive t o t he increase in dem and, and t riggers t he sharp decline in t he price.

  The deeper t he red candlest ick cut s int o t he bullish green candlest icks, t he m ore t raders are t hrown int o loosing posit ions, and t hus t he furt her t he price decline. Perhaps you are beginning t o realize t he power of em ot ions in price m ovem ent s of a st ock. The t echnical analyst t hrough candlest ick reading is t rained t o read t his greed and fear em ot ions in t he m arket and capit alize on t hem .

Ca pit a liz in g on Fe a r a n d Gr e e d

  From t he previous sect ion, we det erm ined t hat price m ovem ent s result from m assive em ot ions of fear and greed regarding t rader's posit ion in t he m arket wit h a given st ock. Recognizing t he foot print s of greed and fear is not difficult . Recognizing t he signs t hat t he rally or decline before it happens is t he difficult part of t rading. How m any t im es has t his sit uat ion happened t o you: You ent er a t rade based on a bullish reversal signal, but t hen exit on a slight pull back only t oo see t he st ock rally t o a new high aft er you exit . Or how oft en have you held on t o a st ock t hat experiences a bearish pull back in hopes t hat it will t urn around, only t o see t he st ock plum m et t o new lows before you finally concede t o defeat and exit . Unfort unat ely, t here is no syst em t hat can predict wit h 100% accuracy exact ly where a greed rally or fear sell off begins. There are; however, t echniques based on candlest ick pat t erns t hat help us locat e probable areas for t hese t urning point s. The rest of t his sect ion will explore t he t echniques in ident ifying t hose probable areas t hat properly m anaged will result in profit s for t he t rader in t he long run.

Re cogn iz in g Re ve r sa l Sign a ls

  Throw a baseball st raight up int o air. As t he ball approaches t he t op of it s proj ect ile pat h it will decelerat e t o a speed of zero, and t hen reverse downward picking up speed as it approaches t he ground.

  Now im agine yourself drilling int o a piece of wood. You suddenly hit a hard spot in t he wood at which t im e bear down wit h all of your m ight t o overcom e t he t em porary resist ance creat ed by t he knot in t he wood.

  When you penet rat e t he knot you surge forward and quickly poke t hrough t o t he ot her side. These are t wo analogies t o help explain t he pat t erns of st ocks as t hey t ransit ion bet ween one m ove and t he next m ove.

  When a st ock is com plet ing a m ove, it experiences a period of decelerat ion, which is referred t o by chart ist as price consolidat ion. Consolidat ion is one of t he m ost im port ant signals t hat a st ock is about t o begin a new m ove.

  The m ove can be a cont inuat ion in t he sam e direct ion, or it can be a reversal in t he opposit e direct ion. The area of consolidat ion represent s a bat t le zone where t he bears are at war wit h t he bulls. The out com e of t he bat t le oft en defines t he direct ion of t he next m ove. As short - t erm t raders, it is im port ant t o ident ify t hese areas of consolidat ion and ent er a t rade j ust as t he new m ove is beginning. During t he consolidat ion period or 'bat t le zone', t raders, bot h long and short are pat ient ly wait ing on t he sidelines wat ching t o learn t he out com e of t he bat t le. As t hese winners em erge, t here is oft en a scram ble of t raders j um ping in wit h t he winning t eam . The candlest ick pat t erns gives t he t rader excellent clues on when t his m ove is about t o t ake place, and helps t he t rader t im e his ent ry so t hat he can get in at t he very beginning. There are four different consolidat ion pat t erns experienced by st ocks. They are 1) Bearish Cont inuat ion, 2) Bullish Cont inuat ion, 3) Bearish Reversal, 4) Bullish Reversal.

  Th e Be a r ish Con t inu a t ion Con solida t ion Pa t t e r n

  Several st rong bearish candlest icks precede t he Bearish Cont inuat ion pat t ern where t he bears are clearly in cont rol ( Figure 12) . The bears and bulls t hen begin t o bat t le by pushing t he st ock up and down in price in a t ight ly form ed consolidat ion zone. The narrowing size of t he candlest icks t oward a line of support indicat es t hat t he bears are winning t he bat t le. The bulls finally weaken and allow t he bears t o penet rat e t he line of support , at which t im e t he bears quickly conquer new t errit ory by t aking t he st ock t o lower prices. By recognizing t he consolidat ion pat t ern t he t rader is able t o short t he st ock j ust aft er t he st ock breaks t he line of support , and profit from t he sharp m ove downward. The cause of t he sharp sell off is fueled by t he em ot ions of t he t raders wat ching for t he out com e of t he bat t le. Traders who bought t he st ock in t he area of consolidat ion in hope of a rally off of support , are now scram bling t o exit t heir losing posit ions. Traders who are short from t he period before t he area of consolidat ion are realizing t hat t heir original ent ries were correct and are adding t o t heir winning posit ions.

  

Figu r e 1 2

Th e Bullish Re ve r sa l Con solida t ion Pa t t e r n

  Several st rong bearish candlest icks precede t he Bullish Reversal Cont inuat ion pat t ern where t he bears are clearly in cont rol ( Figure 13) . The bears and bulls t hen begin t o bat t le by pushing t he st ock up and down in price in a t ight ly form ed consolidat ion zone. The narrowing size of t he candlest icks t oward a line against upward resist ance indicat ing t hat t he bulls are winning t errit ory from t he bears. The bears finally weaken and allow t he bulls t o penet rat e t he line of resist ance, at which t im e t he bulls quickly conquer new t errit ory by t aking t he st ock t o higher prices. By recognizing t he consolidat ion pat t ern t he t rader is able t o buy t he st ock j ust aft er t he st ock breaks t he line of resist ance, and profit from t he sharp m ove upward. The cause of t he rally is fueled by t he em ot ions of t he t raders wat ching for t he out com e of t he bat t le. Addit ional t raders who j um p in t o buy t he st ock now t hat it s st rengt h has been confirm ed fuel t he sharp upward m ove. Traders who are current ly short t he st ock in t he area of consolidat ion wait ing in hope of a breakdown, are now scram bling t o cover t heir short posit ions. This buying act ion also fuels t he fire pushing t he st ock t o higher prices.

  

Figu r e 1 3

Th e Be a r ish Re ve r sa l Con solida t ion Pa t t e r n

  Several st rong bullish candlest icks precede t he Bearish Reversal Cont inuat ion pat t ern where t he bulls are clearly in cont rol ( Figure 14) . The bears and bulls t hen begin t o bat t le by pushing t he st ock up and down in price in a t ight ly form ed consolidat ion zone. The narrowing size of t he candlest icks t oward a line of support indicat es t hat t he bears are winning t he bat t le. The bulls finally weaken and allow t he bears t o penet rat e t hrough t he line of support , at which t im e t he bears quickly conquer new t errit ory by t aking t he st ock t o lower prices. By recognizing t he consolidat ion pat t ern t he t rader is able t o sell short t he st ock j ust aft er t he st ock breaks t he line of support , and profit from t he sharp spike downward. Addit ional t raders who j um p in t o short t he st ock now t hat it s weakness has been confirm ed fuel t he sharp sell off. Traders, who are current ly long t he st ock in t he area of consolidat ion wait ing in hope of a breakdown, are now scram bling t o sell t heir long posit ions. This selling act ion also fuels t he fire pushing t he st ock t o lower prices.

  

Figu r e 1 4

Th e Bullish Con t inu a t ion Con solida t ion Pa t t e r n

  Several st rong bullish candlest icks precede t he Bullish Cont inuat ion Consolidat ion Pat t ern where t he bulls are clearly in cont rol ( Figure 15) . The bears and bulls t hen begin t o bat t le by pushing t he st ock up and down in price in a t ight ly form ed consolidat ion zone. The narrowing size of t he candlest icks t oward a line of resist ance indicat es t hat t he bulls are winning t he bat t le. The bears finally weaken and allow t he bulls t o penet rat e t he line of resist ance, at which t im e t he bulls quickly conquer new t errit ory by t aking t he st ock t o higher prices. By recognizing t he consolidat ion pat t ern t he t rader is able t o buy t he st ock j ust aft er t he st ock breaks t he line of resist ance, and profit from t he sharp m ove upward. The cause of t he sharp sell off is fueled by t he em ot ions of t he t raders wat ching for t he out com e of t he bat t le. Traders, who short ed t he st ock in t he area of consolidat ion in hope of a sell off in t he area of consolidat ion, are now scram bling t o exit t heir losing posit ions. Traders who are long from t he period before t he area of consolidat ion are realizing t hat t heir original ent ries were correct and are adding t o t heir winning posit ions.

  

Figu r e 1 5

I n cr e a sin g Th e Odds

  As we learned in t he last sect ion, t he best t rading opport unit ies present t hem selves j ust aft er a breakt hrough in price consolidat ion. Not every consolidat ion pat t ern; however, is t radable. There are addit ional pat t erns, which significant ly increase t he odds of t he t rade following t hrough in t he desired direct ion. The t ools, which we present , are 1) support / resist ance 2) t rends, 3) m oving averages.

  Su ppor t a n d Re sist a n ce

  Support and resist ance are general price areas t hat have halt ed t he m ovem ent of st ock in t he past . Support lines are horizont al lines t hat correspond wit h an area where st ock previously bounced. Resist ance lines are horizont al lines corresponding wit h an area where st ock resist ed m oving t hrough. Support and resist ance lines are used t o help access how m uch t he st ock price will rem ove before it is halt ed. There are t wo m ain t ypes of support and resist ance; 1) Maj or price support / resist ance, and 2) Minor price support / resist ance

  M a j or Pr ice Su ppor t / Re sist a nce

  Maj or Price Support is an art ificial horizont al line represent ing an area where a st ocks downward m ovem ent was halt ed t o give way t o a new upward m ovem ent ( Figure 16) . Therefore, t he price level is support ing t he price of t he st ock. Sim ilarly, Maj or Price Resist ance is an art ificial horizont al line represent ing an area where a st ocks u ward m ovem ent was halt ed t o give way t o a new downward m ovem ent . Therefore, t he price level is resist ing t he price of t he st ock. When considering a st ock as a t rading opport unit y it is im port ant t o not e t he locat ion of t he nearest support and resist ance levels. St ocks near areas of support m ake for bet t er buy opport unit ies and st ocks near areas of resist ance m ake for bet t er short opport unit ies. I n t he sam e way, t he t rader should be m ore caut ious about short ing st ock above areas of support , and buying st ock near areas of resist ance.

  

Figu r e 1 6 M in or Pr ice Su ppor t / Re sist a nce Minor Price Support is an art ificial horizont al line represent ing an area, which previously served as price resist ance, but has now t ransform ed t o price support ( Figure 17) .

  Likewise, Minor Price Resist ance is an art ificial horizont al line represent ing an area, which previously served as price support , and has now t ransform ed t o price resist ance ( Figure 18) . When considering a st ock as a t rading opport unit y it is im port ant t o not e t he locat ion of t he nearest support and resist ance levels. St ocks near areas of support m ake for bet t er buy opport unit ies and st ocks near areas of resist ance m ake for bet t er short opport unit ies. I n t he sam e way, t he t rader should be m ore caut ious about short ing st ock above areas of support , and buying st ock near areas of resist ance. For an in- dept h analysis of how m inor support & resist ance works, see t he free " Educat ional Sect ion" of our m ain websit e at ht t p: / / www.candlest ickshop.com / free

  

Figu r e 1 7

  Figu r e 1 8 Tr e n ds

  Every st ock is in one of t hree st at es: 1) Up Trend, 2) Down Trend, and 3) Sideways Trend ( Figure 20) . An Up Trend is defined by a series of higher highs and higher lows. A Down Trend is defined by a series of lower highs followed by lower lows. A Sideways Trend is defined by a series of relat ively equal highs and lows.

  

Figu r e 2 0

  Even t he st rongest st ocks will need a period of rest t hrough a pullback in price or a period of m arking t im e wit h lit t le t o no price m ovem ent . A st rong st ock will oft en pull back in price as short t o m edium t erm t raders t ake t heir profit s off t he t able, and in t he process, increase selling pressure, which will t em porarily push t he st ock lower. A st rong st ock, aft er rest will oft en resum e it s rally aft er t hese slight pullbacks. The t rader has bet t er odds in his favor by playing t he st ock in t he direct ion of t he t rend. For exam ple, st ocks in and up t rend can be bought , and st ocks in a downt rend can be short ed ( Figures 21& 22) . A st ock in a sideways pat t ern can be eit her bought our short ed if t he st ock ison st rong price support or resist ance. I n ot herwise, t he t rader should ent er long posit ions only on up t rending st ocks t hat have pulled back for rest ready t o resum e t he rally. Likewise, t he t rader should ent er short posit ions on down t rending st ocks t hat have pulled back for rest ready t o resum e t he decline.

  

Figu r e 2 1

  

Figu r e 2 2

M ovin g Ave r a ge s

  The m ost basic form of m oving average, and t he one we recom m end t o all our t raders is called t he sim ple m oving average. The sim ple m oving average is t he average of closing prices for all price point s used. For exam ple, t he sim ple 10 m oving average would be defined as follows:

  10MA = ( P1 + P2 + P3 + P4 + P5 + P6 + P7 + P8 + P9 + P10) / 10 Where P1 = m ost recent price, P2 = second m ost recent price and so on The t erm " m oving" is used because, as t he newest dat a point is added t o t he m oving average, t he oldest dat a point is dropped.

  As a result , t he average is always m oving as t he newest dat a is added. Moving averages can be used as support and resist ance levels. St ocks t end t o rebound off of m oving averages m uch in t he sam e way t hat t hey rebound off m aj or and m inor support and resist ance lines.

  A m oving average can be plot t ed using any period; however, t he periods t hat seem t o provide t he st rongest support and resist ance for short t erm t rading are t he

  10MA, 20MA, 50 MA, 100MA and 200MA.

  

Figu r e 2 3

  

Figu r e 2 4

Ca n dle st ick Lin e Tim e Fr a m e s

  One of t he beaut iful at t ribut es of t he candlest ick line is t hat t he sam e analysis can be applied t o m ult iple t im e fram es. The t im e fram e of a candlest ick line is t he t im e durat ion bet ween t he candlest ick's opening price and closing price. For exam ple, a daily candlest ick chart would consist of candlest ick lines wit h opening prices corresponding wit h t he day's opening price, and closing prices corresponding wit h t he day's closing price ( Figure 25) . A 5- m inut e candlest ick chart would have candlest ick lines wit h t im e durat ion of 5 m inut es bet ween each candlest ick's opening price and closing price. Most good com put er chart ing soft ware allows easy conversion from one t im e fram e t o t he next . As we will see in lat t er exam ples, ut ilizing several different t im e fram es in viewing a st ocks candlest icks pat t ern is a very effect ive way t o read t he underlying sent im ent s behind a st ocks m ovem ent .

  

Figu r e 2 5

D isse ct in g a Ca n dle st ick

  Changing t im e fram es when viewing candlest ick pat t erns is useful t ool when looking for pat t erns leading up t o good t rading opport unit ies. For exam ple, consider t he Bullish Haram i Pat t ern t hat is m anifest ed on t he Daily t im e fram e chart ( Figure 26) . The sam e st ock plot t ed on a 15 m in t im e fram e chart shows t hat t he st ock is act ually set t ing up for a Bullish Reversal Consolidat ion pat t ern. Using t he Daily chart and t he 15 m in chart t oget her m ake it easier t o find possible t rade opport unit ies. For exam ple, t he t rader can scan for Haram i set ups on t he Daily chart , and t hen pull up a 15 m in chart t o confirm t he st ock is experiencing a consolidat ion pat t ern preparing for a break out .

  

Figu r e 2 6

Figu r e 2 7