Training Video_13

 

Introduction to candle charts PART 1

Technical Analysis training course learning video part13 an introduction to candlestick charts. We go into the candles format, naming and meaning, psychological background, basic rules and compare candle charts with bar charts.

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Hi there, Sylvain Vervoort here with technical analysis part 13. With this video I will introduce you to candlestick charts, their format, naming and meaning. Because of the 10 minutes time limit on youtube video’s I have to split this introduction in two parts. This is part 1. In following videos we will have a look at candlestick patterns. Pay a visit to my website at stocata dot org and have a look at my new book “Capturing Profit with Technical Analysis”. The purpose of this video series is to teach you how to trade successfully applying technical analysis techniques.

Let’s start by saying that the candlestick patterns in candlestick charts should be part of any stock buying or selling strategy. Steve Nison introduced the candlestick techniques to the Western world in his first book, Japanese Candlestick Charting Techniques in 1991. The advantage of using candles on charts is that single or multiple candle patterns give early and reliable reversal signals.
The horizontal reference points of the candle represent the opening price, the highest price, the lowest price, and the closing price of the considered period. The rectangular portion of the candle, or the body, represents the range between the opening and the closing prices. If the closing price is higher than the opening price, the body is white or not filled. If the closing price is lower than the opening price, the body is black or filled.

 

A candle consists of either just a body or a body with an upper and/or a lower shadow. A candle with an opening and closing price at almost the same price level is called a doji. The candlewicks are called shadows, and they extend up to the highest price and down to the lowest price. Let’s have a look at the format, the naming and the meaning of the single candles. In this figure we have:

Nr.	Name	Interpretation
1	Big white body	Very positive
2	Big black body	Very negative
3	White opening body	Quite positive
4	White closing body	Positive
5	Black closing body	Negative
6	Black opening body	Quite negative
7	White candle	No direction
8	Black candle	No direction
9	Dragonfly doji	Reversal?
10	Doji star	Reversal?
11	Gravestone doji	Stable/Reversal
12	Long-legged doji	Reversal?
13	Four price doji	Reversal?
14	Hammer (white) Hanging man	Bottom reversal Top reversal
15	Hammer (black) Hanging man	Bottom reversal Top reversal

 

What is the psychological background of single candles with no shadows or with only upper or lower shadows? A white candle with no shadows is pure rising power. A black candle with no shadows is pure falling power. A white candle with an upper shadow shows weakening rising power. A black candle with an upper shadow shows that there is increasing falling power. A white candle with a lower shadow shows increasing rising power and a black candle with a lower shadow shows weakening falling power.

 

Looking at candles with an upper and lower shadow, we can say that candles with a larger lower shadow and a smaller upper shadow represent rising power and the same for a normal sized white candle with small upper and lower shadows. On the other hand candles with a larger upper shadow and a smaller lower shadow represent falling power just like a normal sized black candle with smaller upper and lower shadows.

Candles with reversal power are all of the doji formations indicating that price acceleration is slowing down with bulls and bears in balance. A doji at a top or bottom of a price move is often the first signal of a price reversal. The same is valid for small white or black bodies, mostly more of them together, indicating that buyers or sellers are trying to take power. A small body with a large lower shadow is a hammer and many times a reversal signal both for a downtrend or an uptrend reversal. A small black or white body with a large upper shadow is a shooting star at a top or an inverted hammer at the bottom. Again, probably the first sign of a reversal.

Candle sticks give you more information. When comparing the commonly used bar charts in Western technical analysis to the Eastern candle charts, it is evident that candle charts have a bigger visual impact. Look at this bar chart. Do you expect price to go up or down? Note the triangle formation in this chart. A triangle formation often is a continuation pattern, but sometimes it can be a reversal pattern. The bar chart does not give you any clue about which side of the triangle the pattern will be broken.

 

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But in this candle chart, we see in the triangle pattern almost only candles with rising power in the last couple of weeks. The break to the upper side was, therefore, no big surprise, and we broke out to the upper side for a continuation of the uptrend.

This is the end of the first part of the Candle charts introduction. Look for the second part now.

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