Technical Bazaar

Technical Parameters

MACD

MACD, which stands for Moving Average Convergence / Divergence, is a technical analysis indicator created by Gerald Appel in the 1960s. It shows the difference between a fast and slow exponential moving average (EMA) of closing prices. During the 1980's MACD proved to be a valuable tool for any trader. With the emergence of computerized analysis, it has become highly unreliable in the modern era, and standard MACD based trade execution now produces a greater distribution of losing trades. Some additions have been made to MACD over the years but even with the addition of the MACD histogram, it remains a lagging indicator. It has often been criticized for failing to respond in mild/volatile market conditions.Since the crash of the market in 2000, most strategies no longer recommend using MACD as the primary method of analysis, but instead believe it should be used as a monitoring tool only. It is prone to whipsaw, and if a trader is not careful it is possible that they might suffer substantial loss, especially if they are on margin or trading options. The standard periods recommended back in the 1960's by Gerald Appel are 12 and 26 days

A signal line (or trigger line) is then formed by smoothing this with a further EMA. The standard period for this is 9 days.

The difference between the MACD and the signal line is often calculated and shown not as a line, but a solid block histogram style. This construction was made by Thomas Aspray in 1986. The calculation is simply

histogram = MACD − signal

Interpretation

MACD is a trend following indicator, and is designed to identify trend changes. It's generally not recommended for use in ranging market conditions. Three types of trading signals are generated,

MACD line crossing the signal line.
MACD line crossing zero
Divergence between price and MACD levels

The signal line crossing is the usual trading rule. This is to buy when the MACD crosses up through the signal line, or sell when it crosses down through the signal line. These crossings may occur too frequently, and other tests may have to be applied.

The histogram shows when a crossing occurs. When the MACD line crosses through zero on the histogram it is said that the MACD line has crossed the signal line. The histogram can also help visualizing when the two lines are coming together. Both may still be rising, but coming together, so a falling histogram suggests a crossover may be approaching.

A crossing of the MACD line up through zero is interpreted as bullish, or down through zero as bearish. These crossings are of course simply the original EMA(12) line crossing up or down through the slower EMA(26) line.

Positive divergence between MACD and price arises when price makes a new selloff low, but the MACD doesn't make a new low (i.e. it remains above where it fell to on that previous price low). This is interpreted as bullish, suggesting the downtrend may be nearly over. Negative divergence is the same thing when rising (i.e. price makes a new rally high, but MACD doesn't rise as high as before), this is interpreted as bearish.

Divergence may be similarly interpreted on the price versus the histogram, where the new price levels are not confirmed by new histogram levels. Longer and sharper divergences (distinct peaks or troughs) are regarded as more significant than small shallow patterns in this case. .to avoid making short term trades against the direction of the intermediate trend.

Sometimes it is prudent to apply a price filter to the Bullish Moving Average Crossover to ensure that it will hold. An example of a price filter would be to buy if MACD breaks above the 9-day EMA and remains above for three days. The buy signal would then commence at the end of the third day.

Signal Processing

The MACD is a filtered measure of the velocity. The velocity has been passed through two first order linear low pass filters. The "signal line" is that resulting velocity, filtered again. The difference between those two, the histogram, is a measure of the acceleration, with all three filters applied. The "MACD crossing the signal line" suggests that the direction of the acceleration is changing. "MACD line crossing zero" suggests that the average velocity is changing direction

Bearish & Bullish Divergences

A bearish divergence occurs when a technical analysis indicator is suggesting that a price should be going down but the price of the stock, future, or currency pair is continuing to maintain its current uptrend.

Likewise, a technical indicator is showing a bullish divergence from price when the indicator is indicating that price should be bottoming and heading higher, yet the actual price action is continuing downward.

Commodity Channel Index

The Commodity Channel Index (CCI) is an oscillator originally introduced by Donald Lambert in an article published in the October 1980 issue of Commodities magazine.

Since its introduction, the indicator has grown in popularity and is now a very common tool for traders in identifying cyclical trends not only in commodities, but also equities and currencies. The CCI can be adjusted to the timeframe of the market traded on by changing the averaging period.

Calculation

The CCI is calculated as the difference between the typical price of a commodity and its simple moving average divided by themean deviation of the typical price. The index is usually scaled by a factor of 1/0.015 to provide more readable numbers where the pt is the typical price (average of the high, low, and closing prices), SMA is the simple moving average, and σ is the mean deviation.

The Commodity Channel Index is often used for detecting divergences from price trends as an overbought/oversold indicator, and to draw patterns on it and trade according to those patterns. In this respect, it is similar to bollinger bands, but is presented as an indicator rather than as overbought/oversold levels.

The CCI typically oscillates above and below a zero line. Normal oscillations will occur within the range of +100 and -100. Readings above +100 imply an overbought condition, while readings below -100 imply an oversold condition. As with other overbought /oversold indicators, this means that there is a large probability that the price will correct to more representative levels

Gaps

Have you ever wondered what causes gaps in price charts and what they mean? Well, you've come to the right place. Just in case, a gap is an area on a price chart in which there were no trades. Normally this occurs between the close of the market on one day and the next day's open. Lot's of things can cause this, such as an earnings report coming out after the stock market has closed for the day. If the earnings were significantly higher than expected, many investors might place buy orders for the next day. This could result in the price opening higher than the previous day's close. If the trading that day continues to trade above that point, a gap will exist in the price chart. Gaps can offer evidence that something important has happened to the fundamentals or the psychology of the crowd that accompanies this market movement. Before we get into the different types of gaps, here is a chart showing a gap so you will know what we are talking about.

Gaps appear more frequently on daily charts, where every day is an opportunity to create an opening gap. Gaps on weekly or monthly charts are fairly rare: the gap would have to occur between Friday's close and Monday's open for weekly charts and between the last day of the month's close and the first day of the next month's for the monthly charts. Gaps can be subdivided into four basic categories: Common, Breakaway, Runaway, and Exhaustion.

Common Gaps

Sometimes referred to as a trading gap or an area gap, the common gap is usually uneventful. In fact, they can be caused by a stock going ex-dividend when the trading volume is low. These gaps are common (get it?) and usually get filled fairly quickly. "Getting filled" means that the price action at a later time (few days to a few weeks) usually retraces at the least to the last day before the gap. This is also known as closing the gap. Here is a chart of two common gaps that have been filled. Notice that after the gap the prices have come down to at least the beginning of the gap? That is called closing or filling the gap.

A common gap usually appears in a trading range or congestion area, and reinforces the apparent lack of interest in the stock at that time. Many times this is further exacerbated by low trading volume. Being aware of these types of gaps is good, but doubtful that they will produce a trading opportunities.

Breakaway Gaps

Breakaway gaps are the exciting ones. They occur when the price action is breaking out of their trading range or congestion area. To understand gaps, one has to understand the nature of congestion areas in the market. A congestion area is just a price range in which the market has traded for some period of time, usually a few weeks or so. The area near the top of the congestion area is usually resistance when approached from below. Likewise, the area near the bottom of the congestion area is support when approached from above. To break out of these areas requires market enthusiasm and, either, many more buyers than sellers for upside breakouts or more sellers than buyers for downside breakouts.

Volume will (should) pick up significantly, for not only the increased enthusiasm, but also many are holding positions on the wrong side of the breakout and need to cover or sell them. It is better if the volume does not happen until the gap occurs. This means that the new change in market direction has a chance of continuing. The point of breakout now becomes the new support (if an upside breakout) or resistance (if a downside breakout). Don't fall into the trap of thinking this type of gap, if associated with good volume, will be filled soon. It might take a long time. Go with the fact that a new trend in the direction

Of the stock has taken place, and trade accordingly

Runaway Gaps

Runaway gaps are also called measuring gaps, and are best described as gaps that are caused by increased interest in the stock. For runaway gaps to the upside, it usually represents traders who did not get in during the initial move of the up trend and while waiting for a retracement in price, decided it was not going to happen. Increased buying interest happens all of a sudden, and the price gaps above the previous day's close. This type of runaway gap represents an almost panic state in traders. Also, a good up trend can have runaway gaps caused by significant news events that cause new interest in the stock.

Runaway gaps can also happen in downtrends. This usually represents increased liquidation of that stock by traders and buyers who are standing on the sidelines. These can become very serious as those who are holding onto the stock will eventually panic and sell – but sell to whom? The price has to continue to drop and gap down to find buyers. Not a good situation.

The term measuring gap is also used for runaway gaps. This is an interpretation that is hard to find examples for, but it is a way of helping one decide how much longer a trend will last. The theory is that the measuring gap will occur in the middle, or half way, through the move.

Sometimes, the futures market will have runaway gaps that are caused by trading limits imposed by the exchanges. Getting caught on the wrong side of the trend when you have these limit moves in futures can be horrifying. The good news is that you can also be on the right side of them. These are not common occurrences in the futures market despite all the wrong information being touted by those who do not understand it, and are only repeating something they read from an uninformed reporter.

Exhaustion Gaps

Exhaustion gaps are those that happen near the end of a good up- or downtrend. They are many times the first signal of the end of that move. They are identified by high volume and large price difference between the previous day's close and the new opening price. They can easily be mistaken for runaway gaps if one does not notice the exceptionally high volume.

It is almost a state of panic if the gap appears during a long down move and pessimism has set in. Selling all positions to liquidate holdings in the market is not uncommon. Exhaustion gaps are quickly filled as prices reverse their trend. Likewise, if they happen during a bull move, some bullish euphoria overcomes trades, and buyers cannot get enough of that stock. The prices gap up with huge volume; then, there is great profit taking and the demand for the stock totally dries up. Prices drop, and a significant change in trend occurs. Exhaustion gaps are probably the easiest to trade and profit from.

Conclusion

There is an old saying that the market abhors a vacuum and all gaps will be filled. While this may have some merit for common and exhaustion gaps, holding positions waiting for breakout or runaway gaps to be filled can be devastating to your portfolio. Likewise, waiting to get on-board a trend by waiting for prices to fill a gap can cause you to miss the big move. Gaps are a significant technical development in price action and chart analysis, and should not be ignored.

Moving Averages

Introduction

Moving averages are one of the most popular and easy to use tools available to the technical analyst. They smooth a data series and make it easier to spot trends, something that is especially helpful in volatile markets. They also form the building blocks for many other technical indicators and overlays.
The two most popular types of moving averages are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). They are described in more detail below.

Simple Moving Average (SMA)

A simple moving average is formed by computing the average (mean) price of a security over a specified number of periods. While it is possible to create moving averages from the Open, the High, and the Low data points, most moving averages are created using the closing price. For example: a 5-day simple moving average is calculated by adding the closing prices for the last 5 days and dividing the total by 5.
10+ 11 + 12 + 13 + 14 = 60
(60 / 5) = 12

The calculation is repeated for each price bar on the chart. The averages are then joined to form a smooth curving line - the moving average line. Continuing our example, if the next closing price in the average is 15, then this new period would be added and the oldest day, which is 10, would be dropped. The new 5-day simple moving average would be calculated as follows:
11 + 12 + 13 + 14 +15 = 65
(65 / 5) = 13
Over the last 2 days, the SMA moved from 12 to 13. As new days are added, the old days will be subtracted and the moving average will continue to move over time.

Moving averages are lagging indicators; they fit in the category of trend following indicators. When prices are trending, moving averages work well. However, when prices are not trending, moving averages can give misleading signals.

Exponential Moving Average (EMA)

In order to reduce the lag in simple moving averages, technicians often use exponential moving averages (also called exponentially weighted moving averages). EMA's reduce the lag by applying more weight to recent prices relative to older prices. The weighting applied to the most recent price depends on the specified period of the moving average. The shorter the EMA's period, the more weight that will be applied to the most recent price. For example: a 10-period exponential moving average weighs the most recent price 18.18% while a 20-period EMA weighs the most recent price 9.52%. As we'll see, the calculating and EMA is much harder than calculating an SMA. The important thing to remember is that the exponential moving average puts more weight on recent prices. As such, it will react quicker to recent price changes than a simple moving average. Here's the calculation formula.

Exponential Moving Average Calculation

Exponential Moving Averages can be specified in two ways - as a percent-based EMA or as a period-based EMA. A percent-based EMA has a percentage, as it's single parameter while a period-based EMA has a parameter that represents the duration of the EMA.

The formula for an exponential moving average is:

EMA (current) = ((Price (current) - EMA (prev)) x Multiplier) + EMA (prev)
For a percentage-based EMA, "Multiplier" is equal to the EMA's specified percentage. For a period-based EMA, "Multiplier" is equal to 2 / (1 + N) where N is the specified number of periods.

For example, a 10-period EMA's Multiplier is calculated like this:

(2 / (Time periods + 1)) = (2 / (10 + 1)) = 0.1818 (18.18%)
This means that a 10-period EMA is equivalent to an 18.18% EMA.

Note that, in theory, every previous closing price in the data set is used in the calculation of each EMA that makes up the EMA line. While the impact of older data points diminishes over time, it never fully disappears. This is true regardless of the EMA's specified period. The effects of older data diminish rapidly for shorter EMA's. Than for longer ones but, again, they never completely disappear.

Simple Versus Exponential

From afar, it would appear that the difference between an exponential moving average and a simple moving average is minimal. For this example, which uses only 20 trading days, the difference is minimal, but a difference nonetheless. The exponential moving average is consistently closer to the actual price. On average, the EMA is 3/8 of a point closer to the actual price than the SMA.

Period	EMA Absolute Difference	SMA Absolute Difference
10	0.39	0.29
11	1.87	1.87
12	1.39	1.49
13	0.87	0.99
14	1.95	2.17
15	2.27	2.61
16	1.41	1.76
17	1.92	2.24
18	2.54	2.84
19	1.21	1.39
20	0.94	0.92

Average	1.52	1.69

Which is better?

Which moving average you use will depend on your trading and investing style and preferences. The simple moving average obviously has a lag, but the exponential moving average may be prone to quicker breaks. Some traders prefer to use exponential moving averages for shorter time periods to capture changes quicker. Some investors prefer simple moving averages to long time periods to identify long-term trend changes. In addition, much will depend on the individual security in question. A 50-day SMA might work great for identifying support levels in the S&P Nifty, but a 100-day EMA may work better for the Bse Sensex. Moving average type and length of time will depend greatly on the individual security and how it has reacted in the past.

The initial thought for some is that greater sensitivity and quicker signals are bound to be beneficial. This is not always true and brings up a great dilemma for the technical analyst: the trade off between sensitivity and reliability. The more sensitive an indicator is, the more signals that will be given. These signals may prove timely, but with increased sensitivity comes an increase in false signals. The less sensitive an indicator is, the fewer signals that will be given. However, less sensitivity leads to fewer and more reliable signals. Sometimes these signals can be late as well.

For moving averages, the same dilemma applies. Shorter moving averages will be more sensitive and generate more signals. The EMA, which is generally more sensitive than the SMA, will also be likely to generate more signals. However, there will also be an increase in the number of false signals and whipsaws. Longer moving averages will move slower and generate fewer signals. These signals will likely prove more reliable, but they also may come late. Each investor or trader should experiment with different moving average lengths and types to examine the trade-off between sensitivity and signal
Reliability.

Moving averages smooth out a data series and make it easier to identify the direction of the trend. Because past price data is used to form moving averages, they are considered lagging, or trend following, indicators. Moving averages will not predict a change in trend, but rather follow behind the current trend. Therefore, they are best suited for trend identification and trend following purposes, not for prediction.

When to Use

Because moving averages follow the trend, they work best when a security is trending and are ineffective when a security moves in a trading range. With this in mind, investors and traders should first identify securities that display some trending characteristics before attempting to analyze with moving averages. This process does not have to be a scientific examination. Usually, a simple visual assessment of the price chart can determine if a security exhibits characteristics of trend.

In its simplest form, a security's price can be doing only one of three things: trending up, trending down or trading in a range. An up trend is established when a security forms a series of higher highs and higher lows. A downtrend is established when a security forms a series of lower lows and lower highs. A trading range is established if a security cannot establish an up trend or downtrend. If a security is in a trading range, an up trend is started when the upper boundary of the range is broken and a downtrend begins when the lower boundary is broken.

Moving Average Settings

Once a security has been deemed to have enough characteristics of trend, the next task will be to select the number of moving average periods and type of moving average. The number of periods used in a moving average will vary according to the security's volatility, trend ness and personal preferences. The more volatility there is, the more smoothing that will be required and hence the longer the moving average. Stocks that do not exhibit strong characteristics of trend may also require longer moving averages. There is no one set length, but some of the more popular lengths include 21, 50, 89, 150 and 200 days as well as 10, 30 and 40 weeks. Short-term traders may look for evidence of 2-3 week trends with a 21-day moving average, while longer-term investors may look for evidence of 3-4 month trends with a 40-week moving average. Trial and error is usually the best means for finding the best length. Examine how the moving average fits with the price data. If there are too many breaks, lengthen the moving average to decrease its sensitivity. If the moving average is slow to react, shorten the moving average to increase its sensitivity. In addition, you may want to try using both simple and exponential moving averages. Exponential moving averages are usually best for short-term situations that require a responsive moving average. Simple moving averages work well for longer-term situations that do not require a lot of sensitivity.

Uses for Moving Averages

There are many uses for moving averages, but three basic uses stand out:

Trend identification/confirmation
Support and Resistance level identification/confirmation
Trading Systems

Trend Identification/Confirmation

There are three ways to identify the direction of the trend with moving averages: direction, location and crossovers.

The first trend identification technique uses the direction of the moving average to determine the trend. If the moving average is rising, the trend is considered up. If the moving average is declining, the trend is considered down. The direction of a moving average can be determined simply by looking at a plot of the moving average or by applying an indicator to the moving average. In either case, we would not want to act on every subtle change, but rather look at general directional movement and changes.

The second technique for trend identification is price location. The location of the price relative to the moving average can be used to determine the basic trend. If the price is above the moving average, the trend is considered up. If the price is below the moving average, the trend is considered down.

The third technique for trend identification is based on the location of the shorter moving average relative to the longer moving average. If the shorter moving average is above the longer moving average, the trend is considered up. If the shorter moving average is below the longer moving average, the trend is considered down.

Support and Resistance Levels

Another use of moving averages is to identify support and resistance levels. This is usually accomplished with one moving average and is based on historical precedent. As with trend identification, support and resistance level identification through moving averages works best in trending markets.

Moving Average Envelopes

Moving Average Envelopes consist of a moving average plus and minus a certain user defined percentage deviation. Moving Average Envelopes serve as an indicator of overbought or oversold conditions, visual representations of price trend, and an indicator of price breakouts. The inputs of the Moving Average Envelopes indicator is shared below:

Moving Average: A simple moving average of both the highs and the lows. (Generally 20-period, but varies among technical analysts; also, a person could use only the close when calculating the moving average, rather than two)
Upper Band: The moving average of the highs plus a user defined percentage increase (usually between 1 & 10%).
Lower Band: The moving average of the lows minus a user-defined percentage (again, usually between 1 & 10%).

Price Breakout Indicator
When stock prices are done resting and consolidating, they breakout, in one direction or the other.

When prices break above the upper envelope, and then buy.
When prices break below the lower envelope, and then sell.

Price Trend Indicator
A new trend in price is usually indicated by a price breakout as outlined above with a continued price close above the upper band, for an upward price trend. A continued price close below the lower band would indicate a new downward price trend

Conclusions

Moving averages can be effective tools to identify and confirm trend, identify support and resistance levels, and develop trading systems. However, traders and investors should learn to identify securities that are suitable for analysis with moving averages and how this analysis should be applied. Usually, an assessment can be made with a visual examination of the price chart, but sometimes it will require a more detailed approach.

The advantages of using moving averages need to be weighed against the disadvantages. Moving averages are trend following, or lagging, indicators that will always be a step behind. This is not necessarily a bad thing though. After all, the trend is your friend and it is best to trade in the direction of the trend. Moving averages will help ensure that a trader is in line with the current trend. However, markets, stocks and securities spend a great deal of time in trading ranges, which render moving averages ineffective. Once in a trend, moving averages will keep you in, but also give late signals. Don't expect to get out at the top and in at the bottom using moving averages. As with most tools of technical analysis, moving averages should not be used on their own, but in conjunction with other tools that complement them. Using moving averages to confirm other indicators and analysis can greatly enhance technical analysis.

Pivot Points

Pivots are used to project potential support and resistance levels. The main time periods used are daily, weekly, and monthly pivots. The formula for the daily pivot point, support, and resistance is shown below:

Pivot Point = [Yesterday's High + Yesterday's Low + Yesterday's Close] / 3

Support Levels

S1 = [Pivot Point * 2] - Yesterday's High
S2 = Pivot Point - Yesterday's High + Yesterday's Low
S3 = S2 - Yesterday's High + Yesterday's Low

Resistance Levels

R1 = [Pivot Point * 2] - Yesterday's Low
R2 = Pivot Point + Yesterday's High - Yesterday's Low
R3 = R2 + Yesterday's High - Yesterday's Low

To calculate weekly or monthly numbers, simply replace "yesterday's" with "last week's" or "last month's" high or low.

<>
Stochastic Oscillator

The stochastic oscillator is a momentum indicator used in technical analysis, introduced by George Lane in the 1950s, to compare the closing price of a commodity to its price range over a given time span.

This indicator is usually calculated as:
and can be manipulated by changing the period considered for highs and lows.

Stochastics Fast & Slow
The idea behind this indicator is the prices tend to close near their past highs in bull markets, and near their lows in bear markets. Transaction signals can be spotted when the stochastic oscillator crosses its moving average.
Two stochastic oscillator indicators are typically calculated to assess future variations in prices, a fast (%K) and slow (%D). Comparisons of these statistics are a good indicator of speed at which prices are changing or the Impulse of Price. %K is the same as Williams %R, though on a scale 0 to 100 instead of -100 to 0, but the terminology for the two are kept separate.
The fast stochastic oscillator or Stoch %K calculates the ratio of two closing price statistics: the difference between the latest closing price and the lowest closing price in the last N days over the difference between the highest and lowest closing prices in the last N days:

Where:
CP is closing price
LOW is low price
HIGH is high price

The usual "N" is 14 days but this can be varied. When the current closing price is the low for the last N-days, the %K value is 0, when the current closing price is a high for the last N-days, %K=100.
The slow stochastic oscillator or Stoch %D calculates the simple moving average of the Stoch %K statistic across s periods . Usually s=3:

or more generally:

The %K and %D oscillators range from 0 to 100 and are often visualized using a line plot. Levels near the extremes 100 and 0, for either %K or %D, indicate strength or weakness (respectively) because prices have made or are near new N-day highs or lows.

There are two well known methods for using the %K and %D indicators to make decisions about when to buy or sell stocks. The first involves crossing of %K and %D signals, the second involves basing buy and sell decisions on the assumption that %K and %D oscillate.

In the first case, %D acts as a trigger or signal line for %K. A buy signal is given when %K crosses up through %D, or a sell signal when it crosses down through %D.Such crossovers can occur too often, and to avoid repeated whipsaws one can wait for crossovers occurring together with an overbought/oversold pullback, or only after a peak or trough in the %D line. If price volatility is high, a simple moving average of the Stoch %D indicator may be taken. This statistic smooths out rapid fluctuations in price.

In the second case, some analysts argue that %K or %D levels above 80 and below 20 can be interpreted as overbought or oversold. On the theory that the prices oscillate, many analysts including George Lane, recommend that buying and selling be timed to the return from these thresholds. In other words, one should buy or sell after a bit of a reversal. Practically, this means that once the price exceeds one of these thresholds, the investor should wait for prices to return through those thresholds (e.g. if the oscillator were to go above 80, the investor waits until it falls below 80 to sell).

George Lane, a financial analyst from the 1950s is one of the first to publish on the use of stochastic oscillators to forecast prices. According to Lane you use the stochastics indicator with a good knowledge of "Elliot Wave Theory ". A Center piece of his teaching is the divergence and convergence of trend lines drawn on stochastics as diverging/ converging to trend lines drawn on price cycles. Stochastics has the power to predict tops and bottoms.

It should be noted that the existence of price oscillations is hypothetical and statistical at best--stock price movements are a consequence of the actions of human decision-makers and past behavior of market variables does not necessarily predict future behavior.

Candlestick Basics

Candlestick charts are an effective way of visualizing price movements.
There are two basic candlesticks:
• Bullish: When the close is higher than the open (usually green or white)
• Bearish: When the close is lower than the open (usually red or black)
There are three main parts to a candlestick:
1. Upper Shadow: The vertical line between the high of the day and the close (bullish candle) or open (bearish candle)
2. Real Body: The difference between the open and close; colored portion of the candlestick
3. Lower Shadow: The vertical line between the low of the day and the open (bullish candle) or close (bearish candle)

Bullish Engulfing Pattern

Bearish Engulfing Pattern

Tweezer Tops & Bottoms

Windows

Candlestick Pattern Dictionary

Bullish Engulfing Pattern :-

Top ˆ

The Bullish Engulfing Candlestick Pattern is a bullish reversal pattern, usually occurring at the bottom of a downtrend. The pattern consists of two Candlesticks: • Smaller Bearish Candle (Day 1) • Larger Bullish Candle (Day 2) The bearish candle real body of Day 1 is usually contained within the real body of the bullish candle of Day 2. On Day 2, the market gaps down; however, the bears do not get very far before bulls take over and push prices higher, filling in the gap down from the morning's open and pushing prices past the previous day's open. The power of the Bullish Engulfing Pattern comes from the incredible change of sentiment from a bearish gap down in the morning, to a large bullish real body candle that closes at the highs of the day. Bears have overstayed their welcome and bulls have taken control of the market. Buy Signal There are three main times to buy using the Bullish Engulfing Pattern; the buy signals that are presented below are ordered from the most aggressive to most conservative: 1. Buy at the close of Day 2 when prices rallied upwards from the gap down in the morning. A strong indication that the rally on Day 2 was significant and truly a reversal of market sentiment, is if there was a substantial increase in volume that accompanied the large move upward in price 2. Buy on the day after the Bullish Engulfing Pattern occurs; by waiting until the next day to buy, a trader is making sure that the bullish reversal and enthusiasm of the prior day is continuing and was not just a one day occurrence like a short covering rally. A trader using methodology #2, would likely wait for a more concrete buy signals such as the one presented in method #3 next. 3. After a trader sees the Bullish Engulfing Pattern, the trader would wait for another signal, mainly a price break above the downward resistance line before entering a buy order.

Bearish Engulfing Pattern :-

Top ˆ

Dark Cloud Cover :-

Top ˆ

Dark Cloud Cover is a bearish candlestick reversal pattern, similar to the Bearish Engulfing Pattern. There are two components of a Dark Cloud Cover formation: • Bullish Candle (Day 1) • Bearish Candle (Day 2) A Dark Cloud Cover Pattern occurs when a bearish candle on Day 2 closes below the middle of Day 1's candle. In addition, price gaps up on Day 2 only to fill the gap and close significantly into the gains made by Day 1's bullish candlestick. The rejection of the gap up is a bearish sign in and of itself, but the retracement into the gains of the previous day's gains adds even more bearish sentiment. Bulls are unable to hold prices higher; demand is unable to keep up with the building supply. Sell Signal Traders usually suggest not selling exactly when one sees the Dark Cloud Cover Pattern (Day 1 & Day 2) until other confirming signals are given such as a break of an upward trendline or other technical indicators. One reason for waiting for confirmation is that the Dark Cloud Cover Pattern is a bearish pattern, but not as bearish as it could be: parts of the gains from Day 1 have still been preserved. A more bearish reversal pattern is the Bearish Engulfing Pattern that completely rejects the gains of Day 1 and usually closes below the lows of Day 1. Also of interest, the bullish equivalent of the Dark Cloud Cover Pattern is the Piercing Pattern

Doji :-

Top ˆ

The Doji is a powerful Candlestick formation, signifying indecision between bulls and bears. A Doji is quite often found at the bottom and top of trends and thus is considered as a sign of possible reversal of price direction, but the Doji can be viewed as a continuation pattern as well. A Doji is formed when the opening price and the closing price are equal. A long-legged Doji, often called a "Rickshaw Man" is the same as a Doji, except the upper and lower shadows are much longer than the regular Doji formation. The creation of the Doji pattern illustrates why the Doji represents such indecision. After the open, bulls push prices higher only for prices to be rejected and pushed lower by the bears. However, bears are unable to keep prices lower, and bulls then push prices back to the opening price. Of course, a Doji could be formed by prices moving lower first and then higher second, nevertheless, either way, the market closes back where the day started. In a Doji pattern, the market explores its options both upward and downward, but cannot commit either way. After a long up trend, this indecision manifest by the Doji could be viewed as a time to exit one's position, or at least scale back. It is important to emphasize that the Doji pattern does not mean reversal, it means indecision. Doji's are often found during periods of resting after a significant move higher or lower; the market, after resting, then continues on its way. Nevertheless, a Doji pattern is a great sign that a prior trend is losing its strength, and taking some profits might be well advised. Two powerful versions of the Doji formation are linked below: • Dragonfly Doji • Gravestone Doji

Dragonfly Doji :-

Top ˆ

The Dragonfly Doji is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. The Dragonfly Doji is created when the open, high, and close are the same or about the same price (Where the open, high, and close are exactly the same price is quite rare). The most important part of the Dragonfly Doji is the long lower shadow. The long lower shadow implies that the market tested to find where demand was located and found it. Bears were able to press prices downward, but an area of support was found at the low of the day and buying pressure was able to push prices back up to the opening price. Thus, the bearish advance downward was entirely rejected by the bulls. The Dragonfly Doji is an extremely helpful Candlestick pattern to help traders visually see where support and demand is located. After a downtrend, the Dragonfly Doji can signal to traders that the downtrend could be over and that short positions should probably be covered. Other indicators should be used in conjunction with the Dragonfly Doji pattern to determine buy signals, for example, a break of a downward trendline.

Evening Star :-

Top ˆ

The Evening Star Pattern is a bearish reversal pattern, usually occurring at the top of an uptrend. The pattern consists of three candlesticks: • Large Bullish Candle (Day 1) • Small Bullish or Bearish Candle (Day 2) • Large Bearish Candle (Day 3) The first part of an Evening Star reversal pattern is a large bullish green candle. On the first day, bulls are definitely in charge, usually new highs were made. The second day begins with a bullish gap up. It is clear from the opening of Day 2 that bulls are in control. However, bulls do not push prices much higher. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji). Generally speaking, a bearish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that is the most significant candlestick. Day 3 begins with a gap down, (a bearish signal) and bears are able to press prices even further downward, often eliminating the gains seen on Day 1. . The Evening Star pattern is a very powerful three-candlestick bearish reversal pattern.

Gravestone Doji :-

Top ˆ

The Gravestone Doji is a significant bearish reversal candlestick pattern that mainly occurs at the top of up trends. The Gravestone Doji is created when the open, low, and close are the same or about the same price (Where the open, low, and close are exactly the same price is quite rare). The most important part of the Gravestone Doji is the long upper shadow. Technicians generally interpret the long upper shadow as meaning that the market is testing to find where supply and potential resistance is located. The construction of the Gravestone Doji pattern occurs when bulls are able to press prices upward. However, an area of resistance is found at the high of the day and selling pressure is able to push prices back down to the opening price. Therefore, the bullish advance upward was entirely rejected by the bears. The Gravestone Doji is an extremely helpful Candlestick reversal pattern to help traders visually see where resistance and supply is likely located. After an up trend, the Gravestone Doji can signal to traders that the up trend could be over and that long positions should probably be exited. But other indicators should be used in conjunction with the Gravestone Doji pattern to determine an actual sell signal. A potential trigger could be a break of the upward trendline support.

Hammer :-

Top ˆ

The Hammer candlestick formation is a significant bullish reversal candlestick pattern that mainly occurs at the bottom of downtrends. The Hammer formation is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, twice the length as the real body. When the high and the close are the same, a bullish Hammer candlestick is formed and it is considered a stronger formation because the bulls were able to reject the bears completely plus the bulls were able to push price even more past the opening price. In contrast, when the open and high are the same, this Hammer formation is considered less bullish, but nevertheless bullish. The bulls were able to counteract the bears, but were not able to bring the price back to the price at the open. The long lower shadow of the Hammer implies that the market tested to find where support and demand was located. When the market found the area of support, the lows of the day, bulls began to push prices higher, near the opening price. Thus, the bulls rejected the bearish advance downward. The Hammer is an extremely helpful candlestick pattern to help traders visually see where support and demand is located. After a downtrend, the Hammer can signal to traders that the downtrend could be over and that short positions should probably be covered. However, other indicators should be used in conjunction with the Hammer candlestick pattern to determine buy signals, for example, waiting a day to see if a rally off of the Hammer formation continues or other chart indications such as a break of a downward trendline. But other previous day's clues could enter into a trader’s analysis

Hanging Man :-

Top ˆ

The Hanging Man candlestick formation, as one could predict from the name, is a bearish sign. This pattern occurs mainly at the top of up trends and is a warning of a potential reversal downward. It is important to emphasize that the Hanging Man pattern is a warning of potential price change, not a signal, in and of itself, to go short. The Hanging Man formation, just like the Hammer, is created when the open, high, and close are roughly the same price. Also, there is a long lower shadow, which should be at least twice the length of the real body. When the high and the open are the same, a bearish Hanging Man candlestick is formed and it is considered a stronger bearish sign than when the high and close are the same, forming a bullish Hanging Man (the bullish Hanging Man is still bearish, just less so because the day closed with gains). After a long up trend, the formation of a Hanging Man is bearish because prices hesitated by dropping significantly during the day. Granted, buyers came back into the stock, future, or currency and pushed price back near the open, but the fact that prices were able to fall significantly shows that bears are testing the resolve of the bulls. What happens on the next day after the Hanging Man pattern is what gives traders an idea as to whether or not prices will go higher or lower. It is important to repeat, that the Hanging Man formation is not the sign to go short; other indicators such as a trendline break or confirmation candle should be used to generate sell signals.

Inverted Hammer :-

Top ˆ

The Inverted Hammer candlestick formation occurs mainly at the bottom of downtrends and is a warning of a potential reversal upward. It is important to note that the Inverted pattern is a warning of potential price change, not a signal, in and of itself, to buy. The Inverted Hammer formation, just like the Shooting Star formation, is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, which should be at least twice the length of the real body. When the low and the open are the same, a bullish Inverted Hammer candlestick is formed and it is considered a stronger bullish sign than when the low and close are the same, forming a bearish Hanging Man (the bearish Hanging Man is still considered bullish, just not as much because the day ended by closing with losses). After a long downtrend, the formation of an Inverted Hammer is bullish because prices hesitated their move downward by increasing significantly during the day. Nevertheless, sellers came back into the stock, future, or currency and pushed prices back near the open, but the fact that prices were able to increase significantly shows that bulls are testing the power of the bears. What happens on the next day after the Inverted Hammer pattern is what gives traders an idea as to whether or not prices will go higher or lower. It is important to repeat, that the Inverted Hammer formation is not the signal to go long; other indicators such as a trendline break or confirmation candle should be used to generate the actual buy signal.

Morning Star :-

Top ˆ

The Morning Star Pattern is a bearish reversal pattern, usually occurring at the bottom of a downtrend. The pattern consists of three candlesticks:
• Large Bearish Candle (Day 1)
• Small Bullish or Bearish Candle (Day 2)
• Large Bullish Candle (Day 3)

The first part of a Morning Star reversal pattern is a large bearish red candle. On the first day, bears are definitely in charge, usually making new lows.
The second day begins with a bearish gap down. It is clear from the opening of Day 2 that bears are in control. However, bears do not push prices much lower. The candlestick on Day 2 is quite small and can be bullish, bearish, or neutral (i.e. Doji).
Generally speaking, a bullish candle on Day 2 is a stronger sign of an impending reversal. But it is Day 3 that holds the most significance.
Day 3 begins with a bullish gap up, and bulls are able to press prices even further upward, often eliminating the losses seen on Day 1.

The Morning Star pattern is a very powerful three-candlestick bullish reversal pattern. The bearish equivalent of the Morning Star is the Evening Star pattern

Piercing Pattern :-

Top ˆ

The Piercing Pattern is a bullish candlestick reversal pattern, similar to the Bullish Engulfing Pattern. There are two components of a Piercing Pattern formation: • Bearish Candle (Day 1) • Bullish Candle (Day 2) A Piercing Pattern occurs when a bullish candle on Day 2 closes above the middle of Day 1's bearish candle. Moreover, price gaps down on Day 2 only for the gap to be filled and closes significantly into the losses made previously in Day 1's bearish candlestick. The rejection of the gap up by the bulls is a major bullish sign, and the fact that bulls were able to press further up into the losses of the previous day adds even more bullish sentiment. Bulls were successful in holding prices higher, absorbing excess supply and increasing the level of demand Buy Signal. Generally other technical indicators are used to confirm a buy signal given by the Piercing Pattern (i.e. downward trend line break). Since the Piercing Pattern means that bulls were unable to completely reverse the losses of Day 1, more bullish movement should be expected before an outright buy signal is given. Also, more volume than usual on the bullish advance on Day 2 is a stronger indicator that bulls has taken charge and that the prior downtrend is likely ending.

Shooting Star :-

Top ˆ

The Shooting Star candlestick formation is a significant bearish reversal candlestick pattern that mainly occurs at the top of up trends.

The Shooting formation is created when the open, low, and close are roughly the same price. Also, there is a long upper shadow, generally defined as at least twice the length of the real body.
When the low and the close are the same, a bearish Shooting Star candlestick is formed and it is considered a stronger formation because the bears were able to reject the bears completely plus the bears were able to push prices even more by closing below the opening price.
The Shooting Star formation is considered less bearish, but nevertheless bearish when the open and low are roughly the same. The bears were able to counteract the bears, but were not able to bring the price back to the price at the open.
The long upper shadow of the Shooting Star implies that the market tested to find where resistance and supply was located. When the market found the area of resistance, the highs of the day, bears began to push prices lower, ending the day near the opening price. Thus, the bears upward rejected the bullish advance.

.
The Shooting Star is an extremely helpful candlestick pattern to help traders visually see where resistance and supply is located. After an up trend, the Shooting Star pattern can signal to traders that the up trend could be over and that long positions should probably be reduced or completely exited.
However, other indicators should be used in conjunction with the Shooting Star candlestick pattern to determine sell signals, for example, waiting a day to see if prices continued falling or other chart indications such as a break of an upward trend line.
Generally speaking though, a trader should wait for a confirmation candle before entering.

Tweezer Tops & Bottoms :-

Top ˆ

The Tweezer Top formation is a bearish reversal pattern seen at the top of up trends and the Tweezer Bottom formation is a bullish reversal pattern seen at the bottom of downtrends.

A Tweezer Top formation consists of two candlesticks:
• Bullish Candle (Day 1)
• Bearish Candle (Day 2)
A Tweezer Bottom formation consists of two candlesticks:
• Bearish Candle (Day 1)
• Bullish Candle (Day 2)
Sometimes Tweezer Tops or Bottoms have three candlesticks.
A bearish Tweezer Top occurs during an up trend when bull’s take prices higher, often closing the day off near the highs (a bullish sign). However, on the second day, how traders feel (i.e. their sentiment) reverses completely. The market opens and goes straight down, often eliminating the entire gains of Day 1.
The reverse, a bullish Tweezer Bottom occurs during a downtrend when bears continue to take prices lower, usually closing the day near the lows (a bearish sign). Nevertheless, Day 2 is completely opposite because prices open and go nowhere but upwards. This bullish advance on Day 2 sometimes eliminates all losses from the previous day.

Gaps or Windows :-

Top ˆ

Gaps, as they are called in the west, or Windows as they are called in Japanese Candlestick Charting, are an important concept in technical analysis. Whenever, there is a gap (current open is not the same as prior closing price) that means that no price and no volume transacted hands between the gaps.

Gaps are important areas on a chart that can help a technical analysis trader better find areas of support or resistance. Also, Gaps are an important part of most Candlestick Charting patterns.
Often after a gap, prices will do what is referred to as "fill the gap". This occurs quite often. Think of a gap as a hole in the price chart that needs to be filled back in. Another common occurrence with gaps is that once gaps are filled, the gap tends to reverse direction and continue its way in the direction of the gap.
Windows
A Gap Up occurs when the open of Day 2 is greater than the close of Day 1. Contritely, a Gap Down occurs when the open of Day 2 is less than the close of Day 1.
There is much psychology behind gaps. Gaps can act as:
• Resistance: Once price gaps downward, the gap can act as long-term or even permanent resistance.
• Support: When prices gap upwards, the gap can act as support to prices in the future, either long-term or permanently.

Candlestick Pattern Dictionary :-

Top ˆ

Candlestic History :

Candlesticks draw an inductive, as opposed to deductive, view of markets. Centuries ago, candlestick chartists drew their charts on a scroll of rice paper, from right to left, with a crow quill and India ink ground by hand. Yes, there was probably a Heron wading in a carp pond somewhere in the scene... Spend a bit of time analyzing traditional candlestick formations and you will begin to see how the patterns spell out market forces and investor psychology. Candlesticks have a rich history that extends far beyond their relatively short, 30-year period of popularity among today's traders.

The argot of candlestick charting is replete with war references, for at its advent in 16th and 17th century Japan, the Daimyo (feudal lords) waged constant war. This period is known as Sengoku Jidai, or "Age of Country at War," a time of turmoil that gradually came to order in the early 1600's under the leadership of Nobunaga Oda, Hideyoshi Toyotomi, and Leyasu Tokugawa. Their leadership remains legendary in Japanese folklore. The collective achievements of these Daimyo are summarized in the saying, "Nobunaga piled the rice, Hideyoshi kneaded the dough, and Tokugawa ate the cake." The effect of their leadership was a unified Japan. It was during this highly militaristic period that candlestick charting was developed. Hence the extensive military argot that characterizes investing as battle, a metaphor that is not difficult to justify. As a field general must draw on proven tactics, apply tested strategies, and face risk, so must an investor.

Osaka became Japan's capitol during the Toyotomi reign. As a sea port, it was an ideal commerce center. Land travel was slow and often dangerous, even if necessary for many, yet these land passages eventually converged on Osaka, and the port quickly emerged as a major trade hub. Warehousing and distributing commodities by sea and land, Osaka evolved into Japan's largest financial center, and in time, Osaka's financial influence stabilized regional imbalances in rice prices.

At this time, Japan's four social classes, the soldier, the farmer, the artisan, and the merchant, were ruled by a military government known as the Bakufu, who were growing increasingly weary of the merchant class. One merchant, Yodoya Keian, was a particularly successful rice trader due to his ability to transport, distribute and set the price of rice. He was so successful that his front yard became Japan's first rice exchange. The Bakufu charged Keian with living a life of luxury beyond his social rank, and "relieved" him of his fortune. With Keian out of the way, several competing rice merchants attempted to corner the rice market. The Bakufu upped the ante. They not only confiscated these merchants' wealth, they sent them into exile after executing their children. This discouraged greed in the merchant class for many years.

The Tokugawa Shogunate introduced greater stability to Japan and new opportunities emerged. Tokugawa centralized Japan's government, which slowly undermined the feudal system and made local rice markets national. The resulting economic expansion increased the use of candlestick charting as a tool for tracking rice price activity.

The Dojima Rice Exchange, its roots in Keian's front yard, was formally institutionalized in the late 1600's. Merchants graded rice and negotiated their fair market value. After 1710, rice trading expanded into the issuance of and negotiation for rice warehouse receipts, or rice coupons, the earliest form of modern futures, and rice became the bedrock of Osaka's economy. 1,300 rice dealers occupied seats on the Dojima Rice Exchange.

After a debasing of the Japanese currency, rice became the preferred currency. A Daimyo in need of money could send his surplus rice to Osaka, get a warehouse receipt, and sell it at a greater profit. Selling harvests and mortgaging future crops became commonplace.

The rice coupon made the Dojima Rice Exchange the world's first futures exchange. Rice coupons were known as "empty rice"--rice not in physical possession, or rice that had not been harvested. Rice coupon trading became so prominent that in 1749, 110,000 rice bales were freely traded while only 30,000 bales existed in all of Japan.

It was at this time that Candlestick trading became more refined. Until this time, candlestick analysis was merely a tool to track the price of rice. In the mid 1700's, however, Munehisa Homna inherited his family's trading business and applied candlestick charting in a new way. He researched the historic movement of rice prices in context of seasonal weather conditions. His research established interpretations that he applied with great success. His findings are known as the "Sakata Rules."

• Abandoned Baby: A rare reversal pattern characterized by a gap followed by a Doji, which is then followed by another gap in the opposite direction. The shadows on the Doji must completely gap below or above the shadows of the first and third day.
• Dark Cloud Cover: A bearish reversal pattern that continues the up trend with a long white body. The next day opens at a new high then closes below the midpoint of the body of the first day.
• Doji: Doji form when a security's open and close are virtually equal. The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.
• Downside Tasuki Gap: A continuation pattern with a long, black body followed by another black body that has gapped below the first one. The third day is white and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.
• Dragonfly Doji: A Doji where the open and close price are at the high of the day. Like other Doji days, this one normally appears at market turning points.
• Engulfing Pattern: A reversal pattern that can be bearish or bullish, depending upon whether it appears at the end of an up trend (bearish engulfing pattern) or a downtrend (bullish engulfing pattern). The first day is characterized by a small body, followed by a day whose body completely engulfs the previous day's body.
• Evening Doji Star: A three-day bearish reversal pattern similar to the Evening Star. The up trend continues with a large white body. The next day opens higher, trades in a small range, then closes at its open (Doji). The next day closes below the midpoint of the body of the first day.
• Evening Star: A bearish reversal pattern that continues an up trend with a long white body day followed by a gapped up small body day, then a down close with the close below the midpoint of the first day.
• Falling Three Methods: A bearish continuation pattern. A long black body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new low.
• Gravestone Doji: A doji line that develops when the Doji is at, or very near, the low of the day.
• Hammer: Hammer candlesticks forms when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during an advance, then it is called a Hanging Man.
• Hanging Man: Hanging Man candlesticks form when a security moves significantly lower after the open, but rallies to close well above the intraday low. The resulting candlestick looks like a square lollipop with a long stick. If this candlestick forms during a decline, then it is called a Hammer.
• Harami: A two-day pattern that has a small body day completely contained within the range of the previous body, and is the opposite color.
• Harami Cross: A two-day pattern similar to the Harami. The difference is that the last day is a Doji.
• Inverted Hammer: A one day bullish reversal pattern. In a downtrend, the open is lower, and then it trades higher, but closes near its open, therefore looking like an inverted lollipop.
• Long Day: A long day represents a large price move from open to close, where the length of the candle body is long.
• Long-Legged Doji: This candlestick has long upper and lower shadows with the Doji in the middle of the day's trading range, clearly reflecting the indecision of traders.
• Long Shadows: Candlesticks with a long upper shadow and short lower shadow indicate that buyers dominated during the session and bid prices higher. Conversely, candlesticks with long lower shadows and short upper shadows indicate that sellers dominated during the session and drove prices lower.
• Marubozo: A candlestick with no shadow extending from the body at either the open, the close or at both. The name means close-cropped or close-cut in Japanese, though other interpretations refer to it as Bald or Shaven Head.
• Morning Doji Star: A three-day bullish reversal pattern that is very similar to the Morning Star. The first day is in a downtrend with a long black body. The next day opens lower with a Doji that has a small trading range. The last day closes above the midpoint of the first day.
• Morning Star: A three day bullish reversal pattern consisting of three candlesticks - a long-bodied black candle extending the current downtrend, a short middle candle that gapped down on the open, and a long-bodied white candle that gapped up on the open and closed above the midpoint of the body of the first day.
• Piercing Line: A bullish two day reversal pattern. The first day, in a downtrend, is a long black day. The next day opens at a new low, and then closes above the midpoint of the body of the first day.
• Rising Three Methods: A bullish continuation pattern in which a long white body is followed by three small body days, each fully contained within the range of the high and low of the first day. The fifth day closes at a new high.
• Shooting Star: A single day pattern that can appear in an up trend. It opens higher, trades much higher, and then closes near its open. It looks just like the Inverted Hammer except that it is bearish.
• Short Day: A short day represents a small price move from open to close, where the length of the candle body is short.
• Spinning Top: Candlestick lines that have small bodies with upper and lower shadows that exceed the length of the body. Spinning tops signal indecision.
• Stars: A candlestick that gaps away from the previous candlestick is said to be in star position. Depending on the previous candlestick, the star position candlestick gaps up or down and appears isolated from previous price action.
• Stick Sandwich: A bullish reversal pattern with two black bodies surrounding a white body. The closing prices of the two black bodies must be equal. A support prices is apparent and the opportunity for prices to reverse is quite good.
• Three Black Crows: A bearish reversal pattern consisting of three consecutive black bodies where each day closes near below the previous low and opens within the body of the previous day.
• Three White Soldiers: A bullish reversal pattern consisting of three consecutive white bodies, each with a higher close. Each should open within the previous body and the close should be near the high of the day.
• Upside Gap Two Crows: A three day bearish pattern that only happens in an up trend. The first day is a long white body followed by a gapped open with the small black body remaining gapped above the first day. The third day is also a black day whose body is larger than the second day and engulfs it. The close of the last day is still above the first long white day.
• Upside Tasuki Gap: A continuation pattern with a long white body followed by another white body that has gapped above the first one. The third day is black and opens within the body of the second day, then closes in the gap between the first two days, but does not close the gap.
What Candlesticks Don't Tell You
Candlesticks do not reflect the sequence of events between the open and close, only the relationship between the open and the close. The high and the low are obvious and indisputable, but candlesticks (and bar charts) cannot tell us which came first.

With a long white candlestick, the assumption is that prices advanced most of the session. However, based on the high/low sequence, the session could have been more volatile. The example above depicts two possible high/low sequences that would form the same candlestick. The first sequence shows two small moves and one large move: a small decline off the open to form the low, a sharp advance to form the high, and a small decline to form the close. The second sequence shows three rather sharp moves: a sharp advance off the open to form the high, a sharp decline to form the low, and a sharp advance to form the close. The first sequence portrays strong, sustained buying pressure, and would be considered more bullish. The second sequence reflects more volatility and some selling pressure. These are just two examples, and there are hundreds of potential combinations that could result in the same candlestick. Candlesticks still offer valuable information on the relative positions of the open, high, low and close. However, the trading activity that forms a particular candlestick can vary.
Prior Trend
Bullish reversals require a preceding downtrend and bearish reversals require a prior up trend. The direction of the trend can be determined using trend lines, moving averages, peak/trough analysis or other aspects of technical analysis. A downtrend might exist as long as the security was trading below its downtrend line, below its previous or below a specific moving average. The length and duration will depend on individual preferences. However, because candlesticks are short-term in nature, it is usually best to consider the last 1-4 weeks of price action.

Bulls Versus Bears
A candlestick depicts the battle between Bulls (buyers) and Bears (sellers) over a given period of time. An analogy to this battle can be made between two football teams, which we can also call the Bulls and the Bears. The bottom (intra-session low) of the candlestick represents a touchdown for the Bears and the top (intra-session high) a touchdown for the Bulls. The closer the close is to the high, the closer the Bulls are to a touchdown. The closer the close is to the low, the closer the Bears are to a touchdown. While there are many variations, I have narrowed the field to 6 types of games (or candlesticks):
1. Long white candlesticks indicate that the Bulls controlled the ball (trading) for most of the game.
2. Long black candlesticks indicate that the Bears controlled the ball (trading) for most of the game.
3. Small candlesticks indicate that neither team could move the ball and prices finished about where they started.
4. A long lower shadow indicates that the Bears controlled the ball for part of the game, but lost control by the end and the Bulls made an impressive comeback.
5. A long upper shadow indicates that the Bulls controlled the ball for part of the game, but lost control by the end and the Bears made an impressive comeback.
A long upper and lower shadow indicates that the both the Bears and the Bulls had their moments during the game, but neither could put the other away, resulting in a standoff.

Doji and Trend
The relevance of a doji depends on the preceding trend or preceding candlesticks. After an advance, or long white candlestick, a doji signals that the buying pressure is starting to weaken. After a decline, or long black candlestick, a doji signals that selling pressure is starting to diminish. Doji indicate that the forces of supply and demand are becoming more evenly matched and a change in trend may be near. Doji alone are not enough to mark a reversal and further confirmation may be warranted.
After an advance or long white candlestick, a doji signals that buying pressure may be diminishing and the up trend could be nearing an end. Whereas a security can decline simply from a lack of buyers, continued buying pressure is required to sustain an up trend. Therefore, a doji may be more significant after an up trend or long white candlestick. Even after the doji forms, further downside is required for bearish confirmation. This may come as a gap down, long black candlestick, or decline below the long white candlestick's open. After a long white candlestick and doji, traders should be on the alert for a potential evening doji star.
Formation
In order to create a candlestick chart, you must have a data set that contains open, high, low and close values for each time period you want to display. The hollow or filled portion of the candlestick is called "the body" (also referred to as "the real body"). The long thin lines above and below the body represent the high/low range and are called "shadows" (also referred to as "wicks" and "tails"). The high is marked by the top of the upper shadow and the low by the bottom of the lower shadow. If the stock closes higher than its opening price, a hollow candlestick is drawn with the bottom of the body representing the opening price and the top of the body representing the closing price. If the stock closes lower than its opening price, a filled candlestick is drawn with the top of the body representing the opening price and the bottom of the body representing the closing price.