Table of

Contents

The human mind is not as good at processing large amounts of information as we might like.
In fact, psychologists have shown that human beings are only able to juggle small numbers
of related but conflicting pieces of information without making judgement errors. As a result,
traders faced with vast amounts of information turn to technical analysis to study the price
changes of assets and gain insights into market dynamics.

Enter candlestick charts!

In this ebook, we cover:

1. The Basics Of Candlestick Charting 3

2. The Components of a Candlestick Chart 5
3. Indecisive Patterns 7
4. Reversal Patterns 9
5. Combining Patterns & Indicators 12
6. 5 Common Myths About Candlesticks 13
7. The Conclusion 15

So lets dig in, shall we?

Page 2
 The Basics Of
Candlestick
Charting

01
Older than bar charts, line charts and point and figure charts with
a history stretching back to Japanese rice traders in the 17th and
18th century, Japanese candlestick charting is a technical system
that has been refined by centuries of use.

It is powerful and so versatile that it can be used to improve your market analysis no matter
what your background in technical analysis. For example,

They can be used for speculation and hedging.

They are suitable for analyzing stocks, commodities, indices and all currency pairs.
They can also be fused with any Western technical tool.

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 www.BinaryOnline.com The Basics of Candlesticks Charting

To understand the many benefits of candlesticks, it helps to compare candlestick charts with
some of the alternative charting methods we have. For example, line charts are simple and
straightforward. They display the prices of an asset over time. However, because no other
information is displayed, attempting to formulate any sort of trading strategy from a line
chart is not a worthwhile venture.

In contrast, bar charts, which are relatively prevalent, are constructed from bars that
represent the price action of an asset over a period of time. They show the difference
between the high and the low of the period.

Then we have point and figure charts, which are great for revealing support and resistance
levels. A point and figure chart is composed of xs and os drawn on a sheet of graph paper.
The xs mark a series of up moves without any price reversal. Conversely, the os represent a
series of down moves without any price reversal. Time is not factored in.

Although interesting, point and figure charting is really a throwback to a time when stock
prices were charted based on the closing prices found daily in the financial press. With the
advent of technology, they have lost their appeal.

Candlesticks, on the other hand, have captured the attention of traders for many reasons.

Page 4
 The Components of
a Candlestick Chart

02 Take any financial asset. Each day of trading is characterised by 4

key components in terms of data.

1. The opening price

2. The closing price

3. The highest price traded on the day

4. And the lowest

These are also the 4 pieces of data needed to construct the bars that make up candlestick
charts. For reference purposes, consider the candlestick below.

Page 5
 www.BinaryOnline.com The Components of a Candlestick Chart

1. The opening price

The first piece of data you need to construct a candlestick is the opening price of an asset
for the day. This will always be either the top or bottom of the candle where a hollow or white
candle is bullish. This means that the opening price is lower than the closing price.

Conversely, a filled or black candle is bearish. This means that the opening price of the asset
is higher than the closing price.

2. The highest and lowest price traded on the day

To construct a candlestick, you also need the highest and lowest prices reached during a
trading session. These prices are used to create the thin vertical line or wick of the candlestick
where the top of the wick marks the highest price of the session while the bottom of the wick
represents the lowest price.

3. The closing price

The fourth and last piece of data you need to construct a candlestick is the assets closing
price. This is the final price thats traded during the day. Depending on how the asset
performed during the day, the closing price may appear at the top or bottom of the candle.

For example, if an asset had a bullish performance, the candle part of the candlestick will be
hollow and the closing price will be marked by the top of the candle. If the asset performed
bearishly, the candle will be filled and the bottom will mark the closing price for the day.

Additional information that may appear on a candlestick chart are:

1. Volume
In trading, volume is the number of shares traded during a certain period
of time. A volume measurement can sometimes appear in the bottom quarter to
bottom third of a candlestick chart.

2. Technical indicators
Numerous technical indicators may appear on candlestick charts including RSI. These provide
some useful additional information that you can take into consideration when making chart-
based decisions.

Page 6
 Indecisive
Patterns

The best known candlestick patterns in market analysis are the dojis.

03
These happen when the opening and closing prices of an asset are the
same, or almost the same, so that there is no real body. The challenge
here is to recognize the implications of the doji. For example, after a
series of downtrending candles, a doji may be indicative of a bottom
and a potential turn higher. This is a bullish situation.

Conversely, a doji candle that appears after a series of uptrending candles may be indicative
of a price turn in a bearish situation. The most common doji patterns are the following:

The dragonfly doji

This doji has a long lower tail and little to no
upper tail. If it appears after an uptrend, it is
indicative of a bearish reversal. If it appears
after a downtrend, it hints at an uptrend.

The gravestone doji

This is an upside down dragonfly doji. It is
characterised by a long upper tail and no
lower tail. If the doji appears after an uptrend,
it is indicative of a bearish outlook.

Page 7
www.BinaryOnline.com Indecisive Patterns

The four price doji

This is the name of the candle that appears
when the open, low, high and close prices of
an asset are all the same. This occurs when
trading is very quiet.

The long-legged doji.

This doji has long upper and lower tails.

The rickshaw man

This doji is similar to the long-legged pattern
but with the open and close prices in the
middle of the price range.

Page 8
 Reversal
Patterns

In addition to the dojis, which reflect an indecisive market condition,

04
some candlestick patterns provide useful clues pertaining to when
and where a market is ending one trend and starting another. This
opens a window of opportunity for traders to get on the new trend
early. The common candlestick reversal patterns are as follows:

1. Stars
As a reversal pattern, stars come in several forms. In most cases, the pattern consists of 3
candles- a large one, a second smaller one and then another large one in the direction of
the new trend. For example,

The Shooting Star

The shooting star has a long upper tail, a small real body at the lower end
of the price range and little to no lower tail. If this candle pattern appears
following an upward move, it suggests a strong rally off the opening price
on buying enthusiasm. This will fade as the market rejects the higher
prices and the asset will collapse back to close near the opening price.

The Evening Star

In contrast, with the evening star pattern, the first candle is a long white
candle followed by a second candle with a gap-higher opening price
and small real body. The third candle has a black real body that closes
well into the range of the first candles white body. This is indicative of a
bearish turn.

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 www.BinaryOnline.com Reversal Patterns

The Morning Star

If you turn the above pattern around, you get the morning star reversal
pattern. In this pattern, the first candle is a long black candle. The second
candle features a gap-lower opening price and a small real body. The
third candle has a long white body that closes well into the range of the
first candles long black body. This is a bullish turn signal.

2. Engulfing patterns
Sometimes an event can cause a sudden change in investor sentiment. This change shows
up on a candlestick chart with an engulfing pattern.

Bullish Engulfing Pattern Bullish Engulfing Pattern

With a bullish engulfing pattern, prices With a bullish engulfing pattern, prices
open below the previous closing price open below the previous closing price and
and then surge higher. then surge higher.

3. Harami
The hammer and hanging man reversal patterns look very much alike. The difference lies in
whether the pattern occurs at the end of a downtrend or an uptrend. For example,

The hammer reversal pattern occurs within an extended downtrend and has the look
of a hammer with a long tail. The body may be black or white. It hints at the prospects
of a bullish move.

In contrast, the hanging man is a bearish reversal pattern. It occurs within an extended
uptrend. It has the appearance of a man with a leg hanging down.

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 www.BinaryOnline.com Reversal Patterns

4. Hammer and hanging man

The hammer and hanging man reversal patterns look very much alike. The difference lies in
whether the pattern occurs at the end of a downtrend or an uptrend. For example

The hammer reversal pattern occurs within an extended downtrend and has the look
of a hammer with a long tail. The body may be black or white. It hints at the prospects
of a bullish move.

In contrast, the hanging man is a bearish reversal pattern. It occurs within an extended
uptrend. It has the appearance of a man with a leg hanging down.

Page 11
 Combining Candlestick
Patterns & Indicators

Some traders use nothing but candlestick patterns to inform their

05
trades. This is certainly a route you can take but a much better
approach to trading would be to combine candlesticks with other
technical indicators. This serves to confirm the conclusions you draw
from your charts.

Using trendlines
Trendlines are the most basic of all technical indicators where a trendline is a line on a chart
that shows the general direction an asset is taking. Trendlines can trend up, down, or not at
all.

For example, lets say that you determine a trend is bullish. If your candlestick pattern says the
same thing, you may look to buy. On the other, if you witness a bearish candlestick pattern,
you may be inclined to ignore it, or at least take caution before implementing a sell signal.

Using moving averages

Apart from drawing trendlines, you can also calculate moving averages to complement
your candlestick chart. By definition, a moving average is the average of the closing prices of
an asset over a period of time. With any chart containing two or more moving averages, you
can pick out an uptrend when a fast moving average is higher than a slow one. Conversely,
you can identify a downtrend when a fast moving average is lower than a slow one.

Using RSI
The next technical indicator you can use to inform your trades is the relative strength index
or RSI. It compares the strength of an assets up days against the strength of its down days.
Many traders use the RSI indicator by strictly buying when it hits 30 or selling when it hits
70. This is a recipe for disaster. A much better approach is to combine a divergent RSI with
a candlestick pattern, adding overbought and oversold levels into the equation.

Page 12
 5 Common Myths
About Candlesticks

06 Undoubtedly, candlestick charts are a path to making money in the

markets. The trick is to make sure that you are using them correctly.

1. Candlesticks are bar charts.

By now, it should be abundantly clear that candlesticks are very
different from ordinary bar charts. For example , candlesticks are
aesthetically appealing and feature patterns that can be easily
discerned and used. Also, there arent any exotic names for bar chart
patterns.

2. Candlestick charts are more difficult to create.

If you think about it, candlestick charts can be created by using the
same information thats used to make bar charts. The only way
candlestick charts can be harder to create is if you are creating them
by hand.

3. Candlesticks do not work for the small trader.

Wrong again. This may have been true years ago when almost all trading went
through a trading specialist. Today the Internet has transformed trading in such a way that
there arent professionals standing between you and the execution of a trade. Technology
has leveled the playing field

Page 13
 www.BinaryOnline.com 5 Common Myths about Candlesticks

4. Trading is an easy way to get rich.

This myth has been around for a number of years but you need to get one thing straight:
Trading is not easy,. If trading were easy, wed all do it for an hour a day and live a life of
luxury. As you trade, you will notice that there is a direct correlation between how much time
you devote to trading preparations and how well you do.

5. Charting only works for short-term trades.

Last but not least, charts are wonderful for short-term trading but long-term charts are also
very useful, especially if you have full-time jobs outside of trading. With long-term charts, all
you have to do is work with longer time periods on your charts and plan your trades.

Page 14
There is a saying that goes something like this:

Candles exhaust themselves to give light to

men.

For centuries, traders have been using candlestick

charts to assimilate what they read. In this ebook,
we looked at some of the patterns and techniques
you can use to understand the market price action
of different assets. The purpose of this book is not
to teach you how to trade the markets, but instead
how to find trading opportunities in the markets.
Regardless of whether you are a part-time trader
or full-time trader, you are now equipped with a
lot of the resources you need to find important
trading signals and generate returns.

Feeling ready to trade the markets?

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