Candlestick charting explained pdf download

It features updated charts and analysis as well as new material on integrating Western charting analysis with Japanese candlestick analysis, grouping candlesticks into families, detecting and avoiding false signals, and more. Additional information and insights present different interpretations of candlesticks based on intraday instead of end-of-day events and action, improving signal reliability.

This reliable resource covers thirty of the most widely recognized candlestick patterns and includes real-world charting examples backed by informative commentary. This book should be in the library of every technical analyst who shows even the slightest interest in Japanese candlestick analysis. Morris, author of Candlestick Charting Explained and Chief Technical Analyst and Chairman of the Investment Committee for Stadion Money Management All About Candlestick Charting covers all of the basics of this year-old Japanese trading method and explains how to combine it with contemporary Western technical analysis tools.

The result is a powerful trading synergy that gives you an edge over the competition every minute of the trading day. Even if you have no experience with candlesticks, this guide will open your eyes to a style of trading that will greatly enhance your understanding of the markets.

All About Candlestick Charting provides all there is to know about: Candlestick construction, analysis, reversal patterns, and continuation patterns Combining candlestick patterns with Western technical analysis tools, such as trends, support and resistance, momentum indicators, and volume Alternative charting methods, including Three-Line Break charts, Renko charts, and Kagi charts. Encyclopedia of Candlestick Charts also includes chapters that contain important discoveries and statistical summaries, as well as a glossary of relevant terms and a visual index to make candlestick identification easy.

Candlesticks are a fantastic way of getting a clear idea of market direction, and any changes that may be taking place in price trends. A Doji occurs when the open and close for that day are the same, or certainly very close to being the same.

The lengths of the shadows can vary. Requiring that the open and close be exactly equal would put too much of a constraint on the data and there would not be many Doji. If the difference between the open and close prices is within a few ticks minimum trading increments , it is more than satisfactory. Determining a Doji day is similar to the method used for identifi- cation of a long day; there are no rigid rules, only guidelines. Just like the long day, it depends upon previous prices.

If the previous days were mostly Doji, then the Doji day is not important. In almost all cases, a Doji by itself would not be significant enough to forecast a change in the trend of prices, only a warning of impending trend change. A Doji preceeded by a long white day in an uptrend would be meaningful. This particular combination of days is referred to as a bearish Doji Star Chapter 3.

An uptrend that, all of a sudden, ceases to continue, would be caused for concern. A Doji means that there is uncertainty and indecision. According to Nison, Doji tend to be better at indicating a change of trend when they occur at tops instead of at bottoms. This is related to the fact that for an uptrend to continue, new buying must be pre- sent.

A downtrend can continue unabated. Throughout the day the market moved higher and then sharply lower, or vice versa. It then closed at or very near the opening price. It develops when the Doji is at, or very near, the low of the day. The Gravestone Doji, like many of the Japanese terms, is based on various analogies.

In this case, the Gravestone Doji represents the graves of those who have died in battle. If the upper shadow is quite long, it means that the Gravestone Doji is much more bearish. Prices open and trade higher all day only to close where they opened, which is also the low price for the day. This cannot possibly be interpreted as anything but a failure to rally. The only difference is the that the Shoot- ing Star has a small body and the Gravestone Doji, being a Doji, has no body.

Some Japanese sources claim that the Gravestone Doji can occur only on the ground, not in the air. It certainly portrays a sense of indecision and a possi- ble change in trend. Dragonfly Doji tonbo The Dragonfly Doji, or Tonbo pronounced Tombo , occurs when the open and close are at the high of the day Figure Like other Doji days, this one normally appears at market turning points.

You will see in later chapters that this Doji is a special case of the Hang- ing Man and Hammer lines. A Tonbo line with a very long lower shadow tail shitahigi is also called a Takuri line.

A Takuri line at the end of a down trend is extremely bullish. Four Price Doji This rare Doji line occurs when all four price components are equal. That is, the open, high, low, and close are the same Figure This line could occur when a stock is very illiquid or the data source did not have any prices other than the close. Futures traders should not confuse this with a limit move.

It is so rare that one should sus- pect data errors. However, it does represent complete and total uncertainty by traders in market direction. Ideally, the gap should encom- pass the shadows, but this is not always necessary. A Star indicates some uncertainty in the marketplace. Stars are part of many candle patterns, primarily reversal patterns.

Like the previously mentioned candle lines, the Umbrella lines have strong reversal implications. There is strong similarity between the Dragonfly Doji and this candle line. Two of the Umbrella lines are called the Hammer and Hanging Man, depending upon their location in the trend of the market.

When they are used by themselves, and then in combinations with other candle lines, a complete psyche of the market unfolds. However, this book will go beyond the Sakata Method with additional patterns and methods.

Some of these patterns are new; some are variations of the originals. In Japanese literature, there is occasional reference to patterns that use even more candlesticks, but they will be included in the chapter on candle formations.

The order in which the candle patterns are discussed does not reflect their importance or predictive ability. They are listed based upon the num- ber of days or periods required for each pattern, with the one-day patterns first. Generally, within each category the patterns are then arranged based upon their frequency of occurrence.

Most of the candle patterns are inversely related. That is, for each bullish pattern, there is a similar bearish pattern. The primary differ- ence is their position relative to the short-term trend of the market. The names of the bullish and bearish patterns may or may not be dif- ferent.

So that this chapter can serve as a reference, each pattern set will be covered using the same basic format. Some patterns retain their Japanese name while others have been given English interpreta- tions. A few are identical in construction, but have different names. Any differences will be dealt with in the individual discussions.

Three small vertical lines will precede the pattern drawing. This chapter covers the reversal patterns and Chapter 4 covers the continuation patterns. This separation was done to add convenience and simplify future reference. This is mentioned here because the determination of bullish or bearish implications has to do only with continued price action and not with previous action.

Previous price movement helps to determine only the pattern, not its ability to foresee or anticipate future price movement. Whether a reversal pattern or a continuation pattern, investment and trading decisions still need to be made, even if it is the fact that you decide to do nothing.

Chapter 6 deals with this concept at length. There is a normal expectancy to have a bullish pattern or situation prior to a bearish counterpart. That tendency will continue here, ex- cept when one counterpart tends to exhibit greater prevalence; then it will be covered first. A number of new patterns are introduced with this edition of this book. Many were created to serve as a comple- mentary pattern to those that only had a bullish or bearish version, but not both.

In those cases, the original is always presented first. Some candle patterns will not be covered as thoroughly as others because of their simplicity or similarity to other patterns.

Because many pat- terns have a counterpart reflecting the other side of the market, some of the scenarios will contain only one example. Additionally, some repetition may seem to occur. This too is so that later reference will be both easy and thorough. Those that never seemed to work well need confirmation Required. It is boldly stated later in this book that all candle patterns should be confirmed with other technical methods.

A few good ones are mentioned herein. The components of the Pattern Detail Information are further explained in later chapters. They have long lower shadows and small real bodies that are at or very near the top of their daily trading range. These were first introduced as paper umbrellas in Chapter 2. The Hammer occurs in a downtrend and is so named because it is hammering out a bottom.

The Japanese word for Hammer ton- kachi also means the ground or soil. A Hanging Man occurs at the top of a trend or during an uptrend. The name Hanging Man kubitsuri comes from the fact that this candle line looks somewhat like a man hanging. Another candle line similar to the Hammer is the Takuri pro- nounced taguri line.

This Japanese word equates with climbing a rope or hauling up. The motion is not smooth and could be related to pulling up an anchor with your hands: as you change hands; the upward move- ment is interrupted momentarily.

A Takuri line has a lower shadow at least three times the length of the body, whereas the lower shadow of a Hammer is a minimum of only twice the length of the body. Rules of Recognition 1. The small real body is at the upper end of the trading range.

The color of the body is not important. The long lower shadow should be much longer than the length of the real body, usually two or three times. There should be no upper shadow, or if there is, it should be very small. Scenarios and Psychology behind the Pattern Hammer The market has been in a downtrend, so there is an air of bearishness. The market opens and then sells off sharply. However, the sell-off is abated and the market returns to, or near, its high for the day.

The failure of the market to continue the selling reduces the bearish sen- timent, and most traders will be uneasy with any bearish positions they might have. If the close is above the open, causing a white body, the situation is even better for the bulls. Confirmation would be a higher open with yet a still higher close on the next trading day.

Hanging Man For the Hanging Man, the market is considered bullish because of the uptrend. In order for the Hanging Man to appear, the price action for the day must trade much lower than where it opened, then rally to close near the high. This is what causes the long lower shadow, which shows how the market just might begin a sell-off. If the market opens lower the next day, there would be many participants with long posi- tions that would want to look for an opportunity to sell.

Steve Nison claims that a confirmation that the Hanging Man is bearish might be that the body is black and the next day opens lower. This trait, when used on the Hammer, will change its name to a Takuri line.

Takuri lines are generally more bullish than Hammers. A Hanging Man with a black body is more bearish than one with a white body.

Like- wise, a Hammer with a white body would be more bullish than one with a black body. As with most single candlestick patterns like the Hammer and the Hanging Man, it is important to wait for confirmation. This confir- mation may merely be the action on the open of the next day. Many times, though, it is best to wait for a confirming close on the follow- ing day. That is, if a Hammer is shown, the following day should close even higher before bullish positions are taken.

The lower shadow should be, at a minimum, twice as long as the body, but not more than three times. The upper shadow should be no more than 5 to 10 percent of the high-low range. The low of the body should be below the trend for a Hammer and above the trend for a Hanging Man. Pattern Breakdown The Hammer and the Hanging Man patterns, being single candle lines, cannot be reduced further. See Paper Umbrella in Chapter 2.

In most instances, the Dragonfly Doji would be more bearish than the Hanging Man. Fleetwood 6. Chevron Remem- ber that the opening marubozu does not have a shadow extending from the open end of the body. The bullish Belt Hold Figure is a white opening marubozu that occurs in a downtrend.

It opens on the low of the day, rallies significantly against the previous trend, and then closes near its high but not necessarily at its high. The bearish Belt Hold Figure is a black opening marubozu that occurs in an uptrend. Similarly, it opens on its high, trades against the trend of the market, and then closes near its low.

Longer bodies for Belt Hold lines will offer more resistance to the trend that they are countering. Belt Hold lines, like most of the single-day patterns lose their importance if there are many of them in close proximity. The Japan- ese name of yorikiri means to push out. Steve Nison coined the name of the Belt Hold. The Belt Hold line is identified by the lack of a shadow on one end.

The bullish white Belt Hold opens on its low and has no lower shadows. The bearish black Belt Hold opens on its high and has no upper shadows. Scenarios and Psychology behind the Pattern The market is trending when a significant gap in the direction of trend occurs on the open. From that point, the market never looks back: All further price action that day is the opposite of the previous trend.

This causes much concern, and many positions will be covered or sold, which will help accentuate the reversal. Like the Masubozu, the Belt Hold will form the first day of many more advanced candle patterns. Williams The shadows are not considered in this pattern. When this occurs near a market top, or in an uptrend, it indicates a shifting of the sentiment to selling. A yin Tsutsumi after an uptrend is called the Final Daki line and is one of the Sakata tech- niques discussed in a later chapter.

If the bearish Engulfing pattern appears after a sustained move, it increases the chance that most bulls are already long. In this case, there may not be enough new money bulls to keep the market uptrend intact. An Engulfing pattern is similar to the traditional outside day. Just like the Engulfing pattern, an outside day will close with prices higher and lower than the previous range with the close in the direc- tion of the new trend. A definite trend must be underway. This does not mean, however, that either the top or the bottom of the two bodies cannot be equal; it just means the both tops and both bottoms cannot be equal.

The second real body of the engulfing pattern should be the opposite color of the first real body. Scenarios and Psychology behind the Pattern Bearish Engulfing Pattern An uptrend is in place when a small white body day occurs with not much volume.

The next day, prices open at new highs and then quickly sell off. The sell-off is sustained by high volume and finally closes below the open of the previous day. A similar, but opposite, scenario would exist for the bullish En- gulfing pattern. Pattern Flexibility The second day of the Engulfing patterns engulfs more than the real body; in other words, if the second day engulfs the shadows of the first day, the success of the pattern will be much greater.

The color of the first day should reflect the trend of the market. In an uptrend, the first day should be white, and vice versa. The color of the second, or the engulfing day, should be the opposite of the fist day. Pattern Breakdown The bullish Engulfing pattern reduces to a Paper Umbrella or Ham- mer, which reflects a market turning point Figure The bearish Engulfing pattern reduces to a pattern similar to the Shooting Star or possibly a Gravestone Doji, if the body is very small Figure The bullish Engulfing pattern would become the Three Outside Up pattern if the third day closed higher.

Likewise, the bear- ish Engulfing pattern would make up the Three Outside Down pat- terns if the third day closed lower. The Engulfing pattern is also a follow-through, or more advanced stage, of the Piercing Line and the Dark Cloud Cover.

Because of this, the Engulfing pattern is considered more important. Rowan Costco Harami is a Japan- ese word for pregnant or body within.

You will find that in most instances the real bodies in the Harami are opposite in color, also like the Engulfing pattern. You will probably note that the Harami is quite similar to the tra- ditional inside day. The difference, of course, is that the traditional inside day uses the highs and lows, whereas the Harami is concerned only with the body open and close.

The Harami requires that the body of the scond day be completely engulfed by the body of the first day. A long day is preceded by a reasonable trend. The color of the long first day is not as important, but it is best if it reflects the trend of the market. A short day follows the long day, with its body completely inside the body range of the long day.

Just like the Engulf- ing day, the tops or bottoms of the bodies can be equal, but both tops and both bottoms cannot be equal. The short day should be the opposite color of the long day. Scenarios and Psychology behind the Pattern Bullish Harami A downtrend has been in place for some time.

A long black day with average volume has occurred, which helps to perpetuate the bearish- ness. The next day, prices open higher, which shocks many compla- cent bears, and many shorts are quickly covered, causing the price to rise further.

The price rise is tempered by the usual late comers seeing this as an opportunity to short the trend they missed the first time. Volume on this day has exceeded the previous day, which suggests strong short covering.

A confirmation of the reversal on the third day would provide the needed proof that the trend has reversed. Bearish Harami An uptrend is in place and is perpetuated with a long white day and high volume. In view of this sudden deterioration of trend, traders should become concerned about the strength of this market, especially if volume is light.

It certainly appears that the trend is about to change. Confirmation on the third day would be a lower close. Pattern Flexibility The long day should reflect the trend. In an uptrend the long day should be white and a downtrend should produce a black long day. The amount of engulfing of the second day by the first day should be significant.

The long day should engulf the short day by at least 30 percent. Remember that long days are based upon the data preceding them. The bearish Harami reduces to a Shooting Star line, which also is a bearish line Figure Both the bullish and the bearish Harami are supported by their single-line breakdowns.

Time Warner Anheuser Busch It is the relative size of these two bodies that make the Harami important. Remember that Doji days, where the open and close price are equal, represent days of indecision. Therefore, small body days that occur after longer body days can also represent a day of indeci- sion.

The more the indecision and uncertainty, the more likelihood of a trend change. The Harami Cross is a better reversal pattern than the regular Harami. A long day occurs within a trending market. The second day is a Doji open and close are equal. The second-day Doji is within the range of the previous long day. Scenarios and Psychology behind the Pattern The psychology behind the Harami Cross starts out the same as that for the basic Harami pattern. A trend has been in place when, all of a sud- den, the market gyrates throughout a day without exceeding the body range of the previous day.

Volume of this Doji day also drys up, reflecting the complete lack of decision of traders. A significant reversal of trend has occurred. Pattern Flexibility The color of the long day should reflect the trend. The Doji can have an open and a close price that are within 2 to 3 percent of each other if, and only if, there are not many Doji days in the preceding data. Pattern Breakdown The bullish and bearish Harami Crosses reduce to single lines that sup- port their interpretation in most instances Figure and The body of the single-day reduction can be considerably longer than what is allowed for a Paper Umbrella or Hammer line.

The fact that the breakdown is not contrary to the patter is supportive. The Rising and Falling Three Method patterns are continuation pat- terns, which are in conflict with the signal given by the Harami Cross.

ADP Check Point Similar to its cousin the Hammer, it occurs in a downtrend and represents a possible reversal of trend. Common with most single- and double- candlestick patterns, it is important to wait for verification, in this case bullish verification. Additionally, there is little ref- erence to this pattern in Japanese literature. Shooting Star The Shooting Star Figure is a single-line pattern that indicates an end to the upward move.

It is not a major reversal signal. The Shooting Star line looks exactly the same as the Inverted Hammer. The difference, of course, is that the Shooting Star occurs at market tops. A rally attempt was completely aborted when the close occurred near the low of the day.

Rules of Recognition Inverted Hammer 1. A small real body is formed near the lower part of the price range. No gap down is required, as long as the pattern falls after a downtrend. The upper shadow is usually no more than two times as long as the body. The lower shadow is virtually nonexistent.

Shooting Star 1. Prices gap open after an uptrend. The upper shadow is at least three times as long as the body. A rally throughout the day fails to hold and the market closes near its low. Similar to the scenario of the Hammer and the Hanging Man, the opening of the following day is crucial to the success or fail- ure of this pattern to call a reversal of trend.

Similarly, an Inverted Hammer could easily become the middle day of a more bullish Morning Star pattern. Shooting Star During an uptrend, the market gaps open, rallies to a new high, and then closes near its low. This action, following a gap up, can only be considered as bearish. Certainly, it would cause some concern to any bulls who have profits.

Pattern Flexibility Single-day candlesticks allow little flexibility. The length of the shadow will help in determining its strength. The upper shadow should be at least twice the length of the body.

There should be no lower shadow, or at least not more than 5 to 10 percent of the high- low range. Like most situations, the color of the body can help, if it reflects the sentiment of the pattern. The Inverted Hammer pattern reduces to a long black candle line, which is always viewed as a bearish indica- tion when considered alone Figure The Shooting Star pattern reduces to a long white candle line, which almost always is consid- ered a bullish line Figure Both of these patterns are in direct conflict with their breakdowns.

This indicates that further confirma- tion should always be required before acting on them. Jones Apparel Reebok This pattern occurs in a downtrending market and is a two-line or two-day pat- tern. The first day is black, which supports the downtrend and the second day is a long white day, which opens at a new low and then closes above the midpoint of the preceding black day. Kirikomi means a cutback or a switchback. The first day is a long black body continuing the down- trend.

Scenarios and Psychology behind the Pattern A long black body forms in a downtrend, which maintains the bear- ishness. However, the market rallies all day and closes much higher. In fact the close is above the midpoint of the body of the long black day. This action causes concern to the bears and a poten- tial bottom has been made. Candlestick charting shows this action quite well, where standard bar charting would hardly discern it.

There is no flexibility to this rule with the Piercing pattern. Both days of the Piercing pattern should be long days. The second day must close above the midpoint and below the open of the first day, with no exceptions. Pattern Breakdown The Piercing Line pattern reduces to a Paper Umbrella or Hammer line, which is indicative of a market reversal or turning point Figure The single candle line reduction fully supports the bullishness of the Piercing Line.

Related Patterns Three patterns begin in the same way as the Piercing Line. However, they do not quite give the reversal signal that the Piercing Line does and are considered continuation patterns. The bullish Engulfing pattern is also an extension, or more mature situation, of the Piercing Line. Because this pattern only occurs in an uptrend, the first day is a long white day.

This is one of the few times that the high or low is used in candle pat- tern definitions. Trading lower throughout the day results in the close being below the midpoint of the long white day. This reversal pattern, like the opposite Piercing Line, has a marked effect on the attitude of traders because of the higher open followed by the much lower close. There are no exceptions to this pattern. Kabuse means to get covered or to hang over.

The first day is a long white body, which is continuing the uptrend. The second black day closes within and below the mid- point of the previous white body. Typical in an uptrend, a long white can- dlestick is formed. The next day the market gaps higher on the open- ing, however, that is all that is remaining to the uptrend. The market drops to close well into the body of the white day, in fact, below its midpoint.

People who were bullish would certainly have to rethink their strategy with this type of action. Like the Piercing Line, a sig- nificant reversal of trend has occurred. The first day should be a long day, with the second day opening significantly higher. This merely accentuates the reversal of sentiments in the market. Because of this, it would make the bearish Engulfing pattern a more bearish reversal signal than the Dark Cloud Cover. Atmel 7. It is a long real body, which should reflect the previous trend.

A downtrend should produce a black body, an uptrend, a white body Figures and The next day, prices gap in the direction of the trend, then close at the opening. This deterioration of the previous trend is immediate cause for concern. The clear message of the Doji Star is an excellent example of the value of the candlestick method of charting. If you were using close only or standard bar charts, the deterioration of the trend would not quite yet be apparent.

Candlesticks, however, show that the trend is abating because of the gap in real bodies by the Doji Star. The first day is a long day. The second day gaps in the direction of the previous trend. The second day is a Doji. The shadows on the Doji day should not be excessively long, especially in the bullish case. Scenarios and Psychology behind the Pattern Considering the bearish Doji Star, the market is in an uptrend and is further confirmed by a strong white day.

The next day gaps even higher, trades in a small range, and then closes at or near its open. This will erode almost all confidence from the previous rally. Many positions have been changed, which caused the Doji in the first place. The first day should also reflect the trend with its body color. Pattern Breakdown The bullish Doji Star reduces to a long black candlestick, which does not support the bullishness of the pattern Figure The bearish Doji Star reduces to a long white candle line, which puts it in direct conflict with the pattern Figure These breakdown conflicts should not be ignored.

Disney Aetna Some literature refers to Meeting Lines as Counterattack Lines. Deaisen means lines that meet and gyaku- shusen means counteroffensive lines. The first day of this pat- tern is a long black candlestick Figure The next day opens sharply lower and puts the downtrend into a compromising position.

The bullish Meeting Line is somewhat similar in concept to the bullish Piercing Line, with the difference being the amount the second day rebounds. The bullish Meeting Line is not as significant as the Piercing Line. Also, do not confuse this with the On Neck Line covered in Chapter 4.

The bearish Meeting Line Figure opens at a new high and then closes at the same close of the previous day, while the Dark Cloud cover drops to below the midpoint. The lines have bodies that extend the current trend. The second body is the opposite color.

The close of each day is the same. Both days should be long days. Scenarios and Psychology behind the Pattern Bullish Meeting Line The market has been in a downtrend when a long black day forms, which further perpetuates the trend. The next day opens with a gap down, then rallies throughout the day to close at the same close as the previous day.

This fact shows how previous price benchmarks are used by traders: the odds are very good that a reversal has taken place. If the third day opens higher, confirmation has been given. Pattern Flexibility The Meeting Line pattern should consist of two long lines. However, many times the second day is not nearly as long as the first day.

It is also best if each day is a Closing Marubozu. Pattern Breakdown The Meeting Lines break down into single candle lines that offer no support for their case Figure and The single lines are similar to the first line in the pattern, with a shadow that extends in the direction of the second day.

Again, the breakdown neither con- firms the pattern nor indicates lack of support. One can also see the potential for these lines to become a Dark Cloud Cover or a Piercing Line, if there is any penetration of the first body by the second. Gap Motorola A long black body occurs in a downtrend. Scenarios and Psychology behind the Pattern The market is in a downtrend, evidenced by a long black day.

Depending upon the severity of the previous trend, this shows a deterioration and offers an opportu- nity to get out of the market. Pattern Flexibility Two-day patterns do not offer much flexibility. Confirmation would definitely be suggested. Related Patterns The Harami is similar in its candle line relationship, but both of its days must be black. Schlumberger This pattern was created to provide a complementary pattern to the bull- ish Homing Pigeon.

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