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Technical Analysis

Rabin ThapaLisnu Investmentlisnu

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Japanese candlestiky Introduction

y Candlestick charts were derived over 200 years ago by the Japanese, who used them forthe purpose of doing analysis of the rice markets. The technique evolved over time intowhat is now the candlestick technique used in Japan and indeed by millions of technicaltraders around the world. They are visually more attractive than standard bar and linecharts and they make for a clearer market reading, once understood.

y The major component of a candlestick is the body, i.e. the part that forms therectangular shape between the open and close points. While traditional Japanesecandlesticks use black and white bodies, we use green and red in our representations aswe believe the colours better define the market direction and we find them to be visually

more striking. A green body means that the close is higher than the open and thus theprice has increased over the period, whereas in a red body the closing price is lower thanthe opening price and the value has decreased over the period.

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MarubojuyA green Marubozu is a long green body with no shadows at

either end and it represents a bullish trend, meaning theopen price was the low price and the close price was the highprice. It generally comes at the start of a continuation bullishtrend, or a bullish reversal pattern. A red Marubozu has a

long red body and comes at the start of a continuationbearish trend or indicates a trend reversal

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Spinning topsy Spinning Tops have longer shadows than bodies and whether

they are green or red is usually not significant as they implymarket indecision and the trend is neither bullish norbearish. The open and close prices for the period are very

close, so in real terms the market has not really shifted,although there may have been a high or low spike (or both)during that period.

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Doji

y Doji sticks have the same open and close price. Obviously in fluctuatingcurrency markets, identical open and close prices may be rare, but if they areclose enough then the candlestick can be said to be aDoji.

y A Long-LeggedDoji has long shadows protruding from it, indicating that thereis considerable fluctuation on both sides of the open price, during the course ofthe trading period. Ultimately the period ends with the close price retractingback to the open price. It is a good signal of market indecision.

y ADragonflyDoji has only one long shadow, on the lower end of the open and

close price. This indicates that all price activity during the trading period is onthe lower side of the open price, but by the end of the trading period the pricehas moved back up to the open price. It is a good signal of a bearish trendreversal, i.e. price should now move upwards.

y A GravestoneDoji is the opposite of aDragonfly and again has one longshadow, to the high side of the open and close price. It indicates that during theprice period all price activity is at the upper end, but that the price retracts backto open price by the end of the trading period. It is a good signal of a bullishtrend reversal, i.e. price should now move downwards.

y A 4-Price Doji is a rare event, in that for the prescribed trading period, theopen, close, high and low price points are the same. Such an event is rare incurrency trading and normally only happens when trading is suspended

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Doji Chart

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Stars and Rain drops

y A star occurs when a short body candlestick gaps above a longbody candlestick. When the short body appears after and abovethe long body period, the long body must be an upside greencandle. If the short body appears after and below the long body,then the long body must be a downside red candle. Stars andraindrops form part of a more complicated pattern, usually areversal pattern, but need to be examined in a wider context.

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Paper Umbrella

yA paper umbrella forms when a small body has a longshadow to its underside. This can be a strong reversalindicator. Whether the body is green or red, both umbrellasindicate a bearish trend reversal, as the downward price

probe ultimately fails.

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Morning Star

y A Morning Star is a bullish indicator and points to a trend reversal. Itconsists of 1) a long red body during a downtrend, 2) a star with a shortgreen body that is gapped away from the red body and finally 3) a longgreen body, which is the confirmation of the trend reversal.

y How to recognise a Morning Star: It happens during a downtrend. The

shooting star has a short green body which is separated below the redbody period. There is a 3rd candle which has a long green body thatconfirms the trend upwards and has a close above the mid-point of thelong red body.

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Evening Star

y An Evening Star consists of 3 candles - 1) a long green candle, 2) a

shorter star candle where the price goes higher and finally 3) along red candle in the final trading period. This pattern is a goodindicator of a trend reversal and is a bearish sign. How torecognise an Evening Star: There are 3 candles and the patterncomes during a sustained uptrend. The first candle has a longgreen body. The second candle is much shorter and gaps above thelong green body. The third body is red and its close pierces belowthe mid-point of the long green body.

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