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Advanced Candlestick Charting Techniques: Becoming a Samurai Trader

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Advanced Candlestick Charting Techniques: Becoming a Samurai Trader Advanced Candlestick Charting Techniques: Becoming a Samurai Trader Steve Nison, CMT President: Candlecharts.com Web site: www. candlecharts.com E-mail: [email protected] Telephone: 732.254.8660 Evolution of the Candle Chart Stage 1- The line chart (closes only) Stage 2- The bar chart Stage 3- The anchor chart Stage 4- The candlestick chart high close open close close open open low 2 Constructing the Candle Line high Shadow close open Real Body open close low Real Bodies / Shadows Doji 3 3 LooksLooks goodgood onon thethe outsideoutside New high close for the move, but the doji is a warning 4 Spinning Tops Bears’ losing force 5 5 Using the size of real bodies to gauge force The shrinking size of the real bodies hint the bulls losing force 6 Doji after Tall White Can use for all time frames 7 NisonNison TradingTrading PrinciplePrinciple CandleCandle signalssignals mustmust bebe evaluatedevaluated andand actedacted uponupon withinwithin thethe marketmarket’’ss contextcontext 8 WhenWhen notnot toto useuse dojidoji OMNICARE INC 27.5 27.0 26.5 26.0 25.5 25.0 24.5 24.0 23.5 This stock has so many doji that they have little market implication 23.0 22.5 22.0 21.5 11 18 25 1 815 April 9 Doji in Context ¾¾ SpinningSpinning topstops andand dojidoji ¾¾DojiDoji inin contextcontext ofof priceprice -- isis thethe dojidoji atat aa newnew highhigh closeclose forfor thethe move?move? ¾¾DojiDoji inin contextcontext ofof direction:direction: doesdoes thethe dojidoji followfollow aa rally?rally? isis therethere aa trendtrend toto reverse?reverse? [email protected] 732.254.8660 USA SpinningSpinning topstops andand dojidoji [email protected] 732.254.8660 USA SpinningSpinning toptop andand dojidoji If a spinning top is small enough we can view it as a doji 12 Doji as Resistance Criteria: Use the highest high of those two sessions (top of upper shadow) as resistance Implication: Close over that area: market is “refreshed” 13 Doji as Resistance 14 DojiDoji asas resistanceresistance S&P DEPOS RECPTS 118.5 118.0 117.5 117.0 116.5 116.0 115.5 115.0 114.5 114.0 113.5 113.0 112.5 112.0 111.5 Using candles to exit 111.0 or, for momentum 110.5 110.0 traders, let the bulls 109.5 prove their mettle by 109.0 closing above the 108.5 108.0 resistance area. 107.5 107.0 26 3 10 17 24 31 7 14 22 28 4 11 19 25 4 11 18 25 1 81522 December 2002 February March April 15 DojiDoji asas resistanceresistance 16 DojiDoji inin contextcontext ofof priceprice -- isis thethe dojidoji atat aa newnew highhigh closeclose forfor thethe move?move? [email protected] 732.254.8660 USA Doji in Context Which of these scenarios is a more likely top reversal? Scenario 1 Scenario 2 18 Doji in Context Concept: Need a If a doji makes a new high close under close for the move, wait for here to turn bearish confirmation with a bearish close under the doji’s close 19 Nison Trading Principle If a doji session makes a new high for the move, then wait for bearish confirmation by a close under the doji’s close 20 Doji,Doji, butbut NewNew HighHigh CloseClose 21 Doji,Doji, butbut newnew highhigh closeclose Doji, but new high close for the move. 22 DojiDoji –– butbut alsoalso aa newnew highhigh closeclose Because this doji was also a new AMER EAGLE OUTF high close we should wait for 31.0 bearish confirmation. This 30.5 occurred the next session 30.0 29.5 29.0 28.5 28.0 27.5 27.0 26.5 26.0 25.5 25.0 24.5 24.0 23.5 23.0 22.5 10 17 24 31 7142228411 2002 February 23 CandlesCandles inin ContextContext A) New high close for this doji, nonetheless why would you view this as a warning signal 1 B) Two southern doji at 1 and 2. Normally such doji don’t work well as bottom reversals. Therefore would you view either as more likely a turning signal? 2 24 Flexibility with Candles (and Confluence) Sell here? or sell here? 25 Nison Trading Principle A candlestick line or pattern requires two criteria: •• TheThe shapeshape ofof thethe lineline oror patternpattern •• TheThe precedingpreceding trendtrend 26 Doji and Trend Concept: Doji in a “Box Range” is To use a northern doji as not a trading signal a signal we need to have an uptrend to reverse 27 DojiDoji inin boxbox rangerange There is no trend to reverse with this doji– thus we ignore it. 28 DojiDoji andand trendtrend A doji in the middle of a trading range has no trend change implications Doji “Box Range” 29 Hammer Criteria: • Small real body at, or near top, of range • Lower shadow at least 2x real body • Market in down trend Implication: ‘Groping for a bottom” black or white 30 30 Shooting Star •Criteria: • Small real body at, or near bottom, of range • Upper shadow at least 2x real body black or white • Market in an up trend •Implication: ‘Signaling Trouble Overhead” 31 CandlesCandles inin ContextContext 32 HighHigh WaveWave CandlesCandles Criteria: very long shadows and lower small real body - color not important Implication: Trend is losing force 33 High Wave Candle Who’s in Charge? Who’s in Charge Now? 34 34 High Wave Candle METTLER TOLEDO 30.9 Resistance Zone 30.8 30.7 30.6 30.5 30.4 30.3 30.2 30.1 30.0 29.9 29.8 29.7 29.6 29.5 29.4 29.3 29.2 29.1 29.0 28.9 28.8 28.7 28.6 28.5 28.4 This high wave candle 28.3 28.2 reflects a “confused” 28.1 28.0 market 27.9 27.8 27.7 27.6 27.5 27.4 19 20 21 22 23 26 27 28 29 30 3 4 5 6 9 10111213161718192023 September 35 35 High Wave Candle New High Close,but?? 36 36 High Wave Candle Gap higher on surprise news, but high wave candle shows market is “confused”. Not a good sign for he bulls 37 37 Long Legged Doji – “Rickshaw Man” Criteria: very long shadows and lower small real body - color not important Implication: “Market has lost it’s sense of direction” 38 High Wave Candle PHARMACIA 46.5 “Long legged doji” 46.0 45.5 45.0 44.5 44.0 43.5 43.0 42.5 42.0 41.5 41.0 40.5 19 25 4 11 18 25 1 8 March April 39 39 TheThe CheckmateCheckmate Principle:Principle: WhenWhen therethere isis aa seriesseries ofof talltall whitewhite candlescandles followedfollowed byby blackblack candlescandles oror smallsmall realreal bodiesbodies nearnear thethe samesame resistanceresistance levellevel itit revealsreveals thatthat thethe bullsbulls’’ drivedrive isis beingbeing ““checkmatedcheckmated”” WhenWhen therethere isis aa seriesseries ofof longlong blackblack candlescandles followedfollowed byby whitewhite candlescandles oror smallsmall realreal bodiesbodies nearnear thethe samesame supportsupport levellevel itit revealsreveals thatthat thethe bearsbears’’ drivedrive isis beingbeing ““checkmatedcheckmated””40 TheThe CheckmateCheckmate PrinciplePrinciple What happened after each white candle? When there is a series of tall white candles followed by black candles or small real bodies near the same resistance level it reveals that the bulls’ drive is being “checkmated” 41 TheThe CheckmateCheckmate PrinciplePrinciple What happened after each black candle? When there is a series of long black candles followed by white candles or small real bodies near the same support level it reveals that the bears’ drive is being “checkmated 42 HammerHammer asas supportsupport 43 Using Candles in a “Box” Range 44 BoxBox rangerange Do the bears or bulls have the greater control? 45 CandlesCandles inin aa BoxBox RangeRange Candles in a Box Range Do the bears or bulls have the greater control? 46 Engulfing Patterns Bearish Criteria: • White real body wraps around Engulfing preceding black real body Pattern • Market in down trend •Implication: Market bottoming out Criteria: • Black real body wraps around preceding white real body Bullish • Market in up trend Engulfing Pattern Implication: ‘Bulls have been 47 constrained” Bullish Engulfing Pattern doji Sell off that began with the doji ended with a Bullish Engulfing Pattern 48 Bullish engulfing pattern as support ORACLE 10.3 10.2 10.1 One of most powerful aspects of 10.0 9.9 the bullish engulfing pattern is 9.8 their use as support. 9.7 9.6 9.5 9.4 9.3 9.2 9.1 9.0 8.9 8.8 8.7 8.6 8.5 8.4 8.3 8.2 8.1 8.0 7.9 7.8 7.7 7.6 7.5 7.4 16 23 30 71421 October 49 Bullish engulfing pattern as support While the low of the bullish engulfing pattern is support, for those who are more eager to buy you can use the center Center tall of the tall white real body as white an entry point. Keep in the mind the risk –reward of the trade. 50 LastLast EngulfingEngulfing PatternPattern Bullish Engulfing Pattern Last Engulfing Pattern 51 51 Last Engulfing Pattern 52 52 Engulfing pattern – comparing size of real bodies SIERRA WIRELESS 10.6 10.5 10.4 10.3 10.2 10.1 10.0 9.9 9.8 9.7 9.6 9.5 9.4 9.3 9.2 9.1 9.0 8.9 8.8 Consider the relative size of 8.7 8.6 the real bodies. Here they are 8.5 equal size, so reversal is less 8.4 8.3 likely. Final confirmation of 8.2 it’s failure comes with the close 8.1 8.0 under its support area.
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