CANDLESTICK & CHART PATTERNS

FOREX | TRADER
 NTRODUCCION

CONTENT
Content ................................................................................................................................................................................... 2
What is a candlestick? ............................................................................................................................................................. 3
Use of Candlesticks ................................................................................................................................................................. 4
Candlestick Patterns ............................................................................................................................................................... 4
................................................................................................................................................................................................ 5
 Importance of Support and Resistance........................................................................................................................... 6
The Importance Of Volume..................................................................................................................................................... 7
What is Volume? ..................................................................................................................................................................... 7
Why Volume is Important? ................................................................................................................................................ 7
Volume and Chart Patterns................................................................................................................................................ 7
Technical Analysis: Chart Patterns .......................................................................................................................................... 8
 Head and Shoulders ................................................................................................................................................... 8
 Cup and Handle .......................................................................................................................................................... 9
 Double Tops and Bottoms ........................................................................................................................................ 10
 Flags & Pennants ...................................................................................................................................................... 13
 Wedges ..................................................................................................................................................................... 14
 Gaps .......................................................................................................................................................................... 15
 Triple Tops & Bottoms.............................................................................................................................................. 15
Conclusion ............................................................................................................................................................................. 17
Market structure ................................................................................................................................................................... 18

Attachments and entries .............................................................................................................................................. 20

.............................................................................................................................................................................................. 29

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"Taking responsibility means recognizing and accepting, deep within your identity, that you, not the market,
are completely responsible for your success or failure as a trader." (Mark Douglas)

WHAT IS A CANDLESTICK?

The representation of Japanese candle charts is an important method of technical analysis developed by the
Japanese. The Japanese candles show the opening price, maximum price, minimum price and closing price of a
certain period, which is indicated in intervals formed by "one day" in this website. A Japanese candle is made
up of a bar called a body whose length represents the difference between the opening and closing price and
thin vertical lines in the upper and lower parts of the body, called shadows. A bullish day, in which the closing
price is higher than the opening price, is represented by a white body (unfilled bar), while a bearish day, in which
the closing price is lower than the Opening price, is represented by a black body. If the opening price and closing
price are the same, the body of the Japanese sail is represented by a short vertical line. In this case, the velase
is called Doji. The Doji candle, in general, is a sign of indecision in the market.
A Japanese candle can convey fairly useful information about changes in the supply and demand balance in the
market. However, the use of patterns formed by a set of successive Japanese candles is more relevant for that
purpose. The superiority of Japanese sails versus other technical analysis tools used in the medium-term and
particularly short-term stock price forecast has been recognized and empirically demonstrated. The forecasts
made with the Japanese candles require the correct identification of more than eighty different patterns and
count on a continuous database without observations omitted. Although the patterns shown in graphs can be
more or less readable by the naked eye, today, computers can perform this task more efficiently and accurately.
This is a compilation of candles obtained from different sources that mention the main notions of each one, a
magnificent reference book is that of the author Steve Nison "Beyond the candles"

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USE OF CANDLESTICKS
Single candlesticks give valuable information about the psychology and underlying price dynamics of the market,
especially when they are interpreted in the light of all the possible news and fundamental facts about a security.
Candlesticks observed at significant support and resistance levels particularly deserve serious consideration as
bullish or bearish reversal signals. However, due attention to the direction of the prior trend is always
warranted.
Experienced technical traders prefer to rely more on patterns of two or more successive candlesticks rather
than single candlesticks in assessing the likelihood of a reversal. Successful trading also requires waiting for the
confirmation of a pattern before an act of buying or selling, even in cases in which the patterns have a high
success ratio of reversal prediction. This patience is required because sometimes a pattern can emerge as a
result of a very short trend or a horizontal move and it may never be confirmed. In such cases of non-
confirmation, it is better to wait in order to avoid a losing trade and until the emergence of a new pattern (if the
stop loss was not triggered during this period).

CANDLESTICK PATTERNS
Inverted Black Hammer
Bearish 3 Inverted Hammer
Bearish Harami Long Legged Doji
Bearish Harami Cross Long Lower Shadow
Big Black Candle Long Upper Shadow
Big White Candle Morning Doji Star
Black Body Morning Star
Bullish 3 On Neck-Line
Bullish Harami Piercing Line
Bullish Harami Cross Rising Window
Dark Cloud Cover Separating Lines
Doji Shaven Bottom
Doji Star Shaven Head
Engulfing Bearish Line Shooting Star
Engulfing Bullish Line Spinning Top
Evening Doji Star Three Black Crows
Evening Star Three White Soldiers
Falling Window Tweezer Bottoms
Gravestone Doji Tweezer Tops
Hammer White Body
Hanging Man

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  IMPORTANCE OF SUPPORT AND RESISTANCE

Support and resistance levels are a critical part of trend analysis because it can be used to make specific trading
decisions and identify when a trend is about to reverse. For example, a trader might identify an upcoming
support level and decide to start buying the stock as it approaches knowing that it will likely rebound higher.
These levels both test and confirm trends and should be closely monitored by anyone using technical analysis.
As long as the price remains between these two levels, the trend is likely to continue in the prevailing direction.

However, a break beyond support or resistance does not always indicate a reversal. For example, a breakout
higher may be the start of a faster bullish trend and vice versa for a breakdown below trendline support. There
are also instance of ‘false breakouts’ when a price may breakout higher on low volume and then fall back into a
price channel.

Traders should be aware of support and resistance levels and avoid placing orders at these major points since
they’re usually characterized by a lot of volatility. If you feel confident about making a trade near these levels,
it’s important to avoid placing orders directly at the level since they are rarely reached. This is because the price
never actually reaches the whole number, but rather, flirts with the levels before rebounding. Traders may also
place stops or short selling orders around these levels to capitalize on a breakdown or breakout.

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THE IMPORTANCE OF VOLUME

WHAT IS VOLUME?

Volume is simply the number of shares or contracts that trade over a given period – usually a day. Often times,
volume is expressed as a bar chart directly below the price chart with the bars height illustrating how many
shares have traded per period. Volume charts can also be analyzed to show trends of increasing or decreasing
volume over time.

WHY VOLUME IS IMPORTANT?

Volume is used by technical analysts to confirm trends and chart patterns. The strength of any given price
movement is measured primarily by the volume. In fact, a 50% rise in a stock price may not be all that relevant
at all if it occurs on very little volume – just look at penny stocks.

For example, suppose that a stock jumps 5% in one trading day after being in a long-term downtrend. Is this a
reversal of the long-term trend? The answer depends on whether there was a substantial amount of volume
behind the move. If the volume was below average, the move was likely a fluke and the downtrend is likely to
continue. On the other hand, if the volume was significantly higher than average, then it could be the start of a
reversal. (To read more, check out Trading Volume – Crowd Psychology).

In addition to single day moves, the trend in volume over time can be related to price trends to determine if a
stock is gaining or losing momentum. An example might be a stock that has been trending higher with declining
volume, which suggests that the rally may be losing momentum. In that case, traders may want to be on the
lookout for a reversal and perhaps reduce or sell their long positions in preparation. This is known as divergence.
(For additional insight, read Divergences, Momentum, and Rate of Change).

VOLUME AND CHART PATTERNS

Volume is invaluable when confirming chart patterns, such as head and shoulders, triangles, flags, and other
patterns. These chart patterns will be discussed in greater detail later on, but for now, know that chart patterns
try to predict pivotal moments – like reversals. If volume isn’t present alongside these chart patterns, then the
resulting trading signal isn’t as reliable.

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TECHNICAL ANALYSIS: CHART PATTERNS

There are millions of different investors transacting billions of dollars’ worth of securities each day and it’s nearly
impossible to decipher everyone’s motivations. Chart patterns look at the big picture and help to identify trading
signals – or signs of future price movements.

One of the three assumptions discussed earlier in this tutorial was that history repeats itself. The theory behind
chart patterns is based on this assumption – that certain patterns consistently reappear and tend to produce
the same outcomes. For example, as market sentiment shifts from optimism to fear, a certain pattern might
emerge before traders and investors start selling and send the stock price lower.

Chart patterns have an established definition and criteria, but there are no patterns that tell you with 100%
certainty where a security is headed. After all, the richest man in the world would be a trader in that case rather
than an investor! The process of identifying chart patterns based on these criteria can be subjective in nature,
which is why charting is often seen as more of an art than a science. (For more insight, see Is finance an art or
science?).

The two most popular chart patterns are reversals and continuations. A reversal pattern signals that a prior
trend will reverse upon completion of the pattern, while a continuation pattern signals that the trend will
continue once the pattern is complete. These patterns can be found across any timeframe. In this section, we
will review some of the more popular chart patterns.

 HEAD AND SHOULDERS

The Head and Shoulders is a reversal chart pattern that indicates a likely reversal of the trend once it’s
completed. A Head and Shoulder Top is characterized by three peaks with the middle peak being the highest
peak (head) and the two others being lower and roughly equal (shoulders). The lows between these peaks are
connected with a trend line (neckline) that represents the key support level to watch for a breakdown and trend
reversal. A Head and Shoulder Bottom – or Inverse Head and Shoulders – is simply the inverse of the Head and
Shoulders Top with the neckline being a resistance level to watch for a breakout higher.

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Example technical analysis used pattern shoulder head shoulder.

XAUUSD – 1M The price moves between zones.

 CUP AND HANDLE

The Cup and Handle is a bullish continuation pattern where an upward trend has paused, but will continue when
the pattern is confirmed. The ‘cup’ portion of the pattern should be a “U” shape that resembles the rounding of
a bowl rather than a “V” shape with equal highs on both sides of the cup. The ‘handle’ forms on the right side
of the cup in the form of a short pullback that resembles a flag or pennant chart pattern. Once the handle is
complete, the stock may breakout to new highs and resume its trend higher.

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  DOUBLE TOPS AND BOTTOMS

The Double Top or Double Bottom pattern are both easy to recognize and one of the most reliable chart
patterns, making them a favorite for many technically-orientated traders. The pattern is formed after a
sustained trend when a price tests the same support or resistance level twice without a breakthrough. The
pattern signals the start of a trend reversal over the intermediate- or long-term.

Example –

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Example technical analysis used pattern double top a double bottom.

Triangles

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Triangles are among the most popular chart patterns used in technical analysis since they occur frequently
compared to other patterns. The three most common types of triangles are symmetrical triangles, ascending
triangles, and descending triangles. Symmetrical triangles occur when two trend lines converge toward each
other and signal only that a breakout is likely to occur – not the direction. Ascending triangles are characterized
by a flat upper trend line and a rising lower trend line and suggest a breakout higher is likely, while descending
triangles have a flat lower trend line and a descending upper trend line that suggests a breakdown is likely to
occur. The magnitude of the breakouts or breakdowns is typically the same as the height of the left vertical side
of the triangle.

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  FLAGS & PENNANTS

Flags and Pennants are short-term continuation patterns that represent a consolidation following a sharp price
movement before a continuation of the prevailing trend. Flag patterns are characterized by a small rectangular
pattern that slopes against the prevailing trend, while pennants are small symmetrical triangles that look very
similar.

The short-term price target for a flag or pennant pattern is simply the length of the ‘flagpole’ or the left vertical
side of the pattern applied to the point of the breakout, as with the triangle patterns. These patterns typically
last no longer than a few weeks, since they would then be classified as rectangle patterns or symmetrical triangle
patterns.

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  WEDGES

The Wedge pattern is a reversal or, less commonly, continuation pattern that’s similar to the symmetrical
triangle except that it slants upward or downward. Rising wedges are bearish chart patterns that occur when
trend is moving higher and the prices are converging and the prevailing trend is losing momentum. Falling
wedges are bullish chart patterns that occur when the trend is moving lower and prices are converging, which
signifies that the bearish trend is losing momentum and a reversal is likely.

The wedge pattern can be very difficult to identify and trade, which means it’s important to look for
confirmations in other technical indicators, as we’ll learn about in the next section. For example, most traders
watch for a diverging relative strength index or moving average convergence-divergence trend line that confirms
a reversal is likely to occur.

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  GAPS

Gaps occur when there is empty space between two trading periods that’s caused by a significant increase or
decrease in price. For example, a stock might close at $5.00 and open at $7.00 after positive earnings or other
news. There are three main types of gaps: Breakaway gaps, runaway gaps, and exhaustion gaps. Breakaway
gaps form at the start of a trend, runaway gaps form during the middle of a trend, and exhaustion gaps for near
the end of the trend. (For more insight, read playing the Gap).

 TRIPLE TOPS & BOTTOMS

Triple Tops and Triple Bottoms are reversal patterns that aren’t as prevalent as Head and Shoulders or Double
Tops or Double Bottoms. But, they act in a similar fashion and can be a powerful trading signal for a trend
reversal. The patterns are formed when a price tests the same support or resistance level three times and is
unable to break through.

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Example:

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CONCLUSION
Chart patterns are a valuable part of technical analysis – even if they are more art than science. Many traders
use them to identify potential trades that they can confirm using other forms of technical analysis to maximize
their odds of success. You should now be able to recognize some of these chart patterns as we move on to other
forms of technical analysis.

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MARKET STRUCTURE

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ATTACHMENTS AND ENTRIES

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