Candlestick Charting and Analysis

Introduction

• Understanding individual candles on candlestick charts.
• Candlesticks developed in the 1700s by a Japanese rice trader.
• Communicate four key data points: open, close, high, and low.

Anatomy of a Candlestick

• Reflects price action and sentiment.
• Open: the starting price for the period.
• Close: the ending price for the period.
• High: the peak price within the period.
• Low: the lowest price within the period.
• Green Candle: Close is higher than open (bullish).
• Red Candle: Close is lower than open (bearish).

Timeframes

• Historical candles often represented daily data.
• Active traders use shorter timeframes, such as 1-minute charts.

Candlestick Shapes and Their Meanings

• Long Body Candle: Represents strong sentiment.
• Short Body Candle: Represents weak sentiment.
• Upper Candle Wick: Indicates selling pressure (bearish).
• Lower Candle Wick: Indicates buying pressure (bullish).

Specific Candlestick Patterns

• Hammer: Bullish, found at a price decline's low.
• Hanging Man: Bearish, found at a price rise's high.
• Shooting Star: Bearish, indicates potential reversal.
• Doji:
  • Standard Doji: Signals indecision.
  • Gravestone Doji: Bearish reversal at the top.
  • Dragonfly Doji: Bullish reversal at the bottom.
  • Long-Legged Doji: Extended indecision.

Multi-Candlestick Patterns

• Candle over Candle: Bullish, first green candle breaks high of previous red candle.
• Candle under Candle: Bearish, confirms continuation of downtrend.

Trading Strategies

• Focused on patterns with clear sentiment indications.
• Emphasize practice and skill development for success.

Common Patterns

• Bull Flag: Consists of a few upward candles, a pullback, and a new high.
• ABCD Pattern:
  • A: Initial move.
  • B: Pullback.
  • C: Second pullback.
  • D: Breakout on second attempt.

Trading Tips

• Look for patterns with high visibility in popular stocks.
• Avoid sideways trends when trading patterns.
• Wait for confirmation before entering trades.

Advanced Concepts

• Importance of liquidity and volatility in day trading.
• U.S. markets are popular for their combination of both.
• Strategies should be practiced in simulated environments before using real money.

Conclusion

• Practice heavily in a simulated environment to develop pattern recognition skills.
• Candlestick charting offers insights into market sentiment and potential reversals.
• Embrace the learning process and manage risk effectively.