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Basic Candlesticks II

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Disclaimer

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1. Technical Analysis

2. History of Candlesticks

3. How to Read Candlesticks

4. Candlestick patterns

Contents

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What is Technical Analysis?

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5Principles of Technical Analysis

Market Action Discounts Everything

- Anything that can possibly affect the market price, such as

fundamentals, political events, psychological effect

Prices move in Trends

- Essential to technical approach

- Purpose of charting is to identify trends as market creates trends

History tends to repeat itself

- The study of Human psychology

- Future is just a repetition of the past

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3 Basic Trends of the Market

Uptrend Downtrend Sideways

▪ Uptrend has a pattern of rising peaks and troughs

▪ Downtrend has a pattern of falling peaks and troughs

▪ Sideways has a pattern of horizontal peaks and troughs

What is Technical Analysis?

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Uptrend has a pattern of rising

peaks and troughs

What is Technical Analysis?

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Downtrend has a pattern of

falling peaks and troughs

What is Technical Analysis?

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Sideways has a pattern of

horizontal peaks and troughs

What is Technical Analysis?

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Candlesticks

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• Candlesticks are a type of charting technique

• Other techniques include Bar Charts and Line Charts

• Candlestick charts are used in Technical Analysis to

deduce trends and predict price movements

Introduction

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12Advantage of Candlestick Chart

• Easy to understand – offer a much more appealing chart

• Information displayed is more easily interpreted and

analysed

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13History of Candlesticks

• Japanese candlestick patterns originated from a

Japanese rice trader called Munehisa Homma during the

1700s

• Popularised by Steve Nison after his publication of

Japanese Candlestick Charting Techniques in 1991

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14How to Read Candlesticks

Every candlestick will have 4 data points:

Open – The opening price

High – The highest price over a fixed time period

Low – The lowest price over a fixed time period

Close – The closing price

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15How to Read Candlesticks

High

Close

Low

Hollow Body

Lower Shadow

Upper Shadow

Open

Price: Close above Open

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16How to Read Candlesticks

Price: Close below Open

High

Open

Low

Filled Body

Close

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17Candlestick Chart

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Reversal Patterns

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19Reversal Patterns

• Bullish reversal patterns appear in a downtrend

• Bearish reversal patterns appear in an uptrend

• Most reversal patterns require further confirmation

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20Morning Star

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21Morning Star

• Three-candle bullish reversal pattern

• Long black candlestick on first day, small candlestick on second

day and long white candlestick on third day

• Color of real body of short candle can be either white or black

• No overlap between first black and second small candles

• Third day closes above mid-point of first day

• Selling pressure weakens after gap down on second day, implying

possible reversal

• If second day is doji, pattern is called morning doji star

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22Morning Star

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23Morning Star

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24Evening Star

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25Evening Star

• Three-candle bearish reversal pattern

• Long white candlestick on first day, small black/white

candlestick on second day and long black candlestick on

third day

• Third day closes below mid-point of first day

• Buying pressure weakens after gap up on second day,

implying possible reversal

• If second day is doji, pattern is called evening doji star

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26Evening Star

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27Evening Star

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28Bullish Engulfing

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29Bullish Engulfing

• Two-candle bullish reversal pattern

• Forms after a decline

• First black body totally engulfed by second white body

without taking into consideration the shadow

• After declining trend, buying pressure after opening

resulted in higher close and possible reversal

• Greater engulfing implies stronger bullish reversal

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30Bullish Engulfing

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31Bullish Engulfing

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32Bullish Engulfing

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33Bearish Engulfing

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• Two-candle bearish reversal pattern

• Forms after an advance

• First white body totally engulfed by second black body,

without taking into consideration the shadow

• After advancing trend, selling pressure after opening

resulted in lower close and possible reversal

• Greater engulfing implies stronger bearish reversal

Bearish Engulfing

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35Bearish Engulfing

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36Bearish Engulfing

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37Bullish Harami

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38Bullish Harami

• Two-candle bullish reversal pattern

• Further confirmation required

• Declining preceding trend

• Black candlestick has large body that totally encompasses

the next candlestick

• Harami means ‘pregnant’ in Japanese

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39Bullish Harami

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40Bullish Harami

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41Bearish Harami

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42Bearish Harami

• Two-candle bearish reversal pattern

• Further confirmation required

• White candlestick has large body that totally encompasses

the next black candlestick

• Harami means ‘pregnant’ in Japanese

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43Bearish Harami

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44Piercing Line

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45Piercing Line

• Two-candle bullish reversal pattern

• Presence of an existing downtrend

• First candle must be a dark candle with a large real body

• Second candle opens lower and closes above the middle of

the real body of the first candle

• Further confirmation required

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46Piercing Line

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47Dark Cloud Cover

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48Dark Cloud Cover

• Two-candle bearish reversal pattern

• Occurs in existing uptrend

• A down candle (typically black or red) opens above the

close of the prior up candle (typically white or green), and

then closes below the midpoint of the up candle

• Shows a shift in momentum from upside to downside

• Further confirmation required

• Both candles should be relatively large

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49Dark Cloud Cover

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50Three White Soldiers

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• Bullish reversal pattern

• Consists of three consecutive long white bodies

• Open within the real body of the preceding candle

• Close near the high of the day

• Should not have very long shadows

• Suggests a strong change in market sentiment

Three White Soldiers

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52Three White Soldiers

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53Three Black Crows

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• Bearish reversal pattern

• Three consecutive long black bodies

• Open within previous body

• Close near the low of the day

• Short or no shadows

• Suggests that bears overtake bulls during three consecutive

trading sessions

Three Black Crows

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55Three Black Crows

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56Three Black Crows

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57Quiz

What is the candlestick shown on the right?

A.Bearish Engulfing

B.Bullish Engulfing

C.Harami

D.Morning Star

� (bearish reversal pattern)

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58Quiz

What is the candlestick shown on the right?

A.Harami

B.Bullish Engulfing

C.Bearish Engulfing

D.Morning Star

� (reversal pattern that depends on

preceding trend)

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59Quiz

What is the candlestick shown on the right?

A.Morning Doji Star

B.Morning Star

C.Evening Doji Star

D.Evening Star

� (bullish reversal pattern)

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60Quiz

What is the candlestick shown on the right?

A.Bullish Engulfing

B.Three White Soldiers

C.Bearish Engulfing

D.Three Black Crows � (bearish reversal pattern)

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61Quiz

What is the candlestick shown on the right?

A.Piercing Line

B.Dark Cloud Cover

C.Three White Soldiers

D.Three Black Crows

� (bullish reversal pattern)

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62Quiz: What are the candlestick patterns?

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Thank you

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