Candlestick Course

Back ground to Candlesticks

Candlestick charts have been with us for century’s, and was first used/discovered in Japan. In 1700s feudal Japan there were rice markets which acquired a limited number of people to amass a vast fortune in a warring environment. So much so that the dominate generals of the time confiscated all their riches to help finance the internal military conflict. Skills were need to win battles on the field, of these strategy, withdrawals and psychology were transferred into Candlestick terminology, and you can find many battlefield analogies, such as ‘counter attack lines’, ‘advancing three soldiers’ and ‘gravestone’ terms that are used. The generals took on board the fact that monies could be made through the trading of rice, and prompted the first futures market to be formed at this time, with views/positions being taken using Candlestick charts. These markets were originated in port towns of Osaka and then Edo (now called Tokyo) where these places of commerce have developed and flourished into international markets. Even though Candlestick techniques have this historical background, it was only in the 1980’s that it first came to the attention to us in the west. With terms such as ‘Dark Cloud Cover’, ‘Morning Star’ and ‘Tweezers Bottom’ it is immediately descriptive, and gives insight to the emerging movement. Candles used in conjunction with traditional charting patterns/technical studies can give a trader firm reasons through Candle recognition to be happy to initiate, and run with positions, as well as reversal patterns which would help the trader to decide to cut/close a position.

Up Day

Down Day

Reversals

T-Note Hammer: single Candle Long ‘Lower Shadow’ denotes downward rejection. Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be either red or green.

Euribor Hanging Man: Single Candle Market posting ‘last gasp’ recovery to the highs. Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be either red or green.

S&P Shooting Star: Single Candle Long ‘Upper Shadow’ denotes upward rejection. Length of ‘Lower Shadow’ should be 3 times that of size of body, body colour can be either red or green.

Dax Bullish Engulfing: Single Candle Body to body pattern. Second days body should engulf first days body, green body colour.

S&P Bullish Engulfing

Bund Bullish Engulfing

Bund Bearish Engulfing: Single Candle Body to body pattern. Second days body should engulf first days body, red body colour.

Schatz Bearish Engulfing

Jun5 – Mch6 Euribor spread Inverted Hammer: Single Candle Same shape as Shooting Star. But Shooting Stars should occur at market tops, whereas Inverted Hammers should occur at market bottoms. Length of ‘Shadow’ should be 3 times that of size of body, body colour can be either red or green. Bulls failed to sustain early gains as market closed on its lows, with the shorts supposedly still in control. But the fact that the market had produced, at one stage, a strong performance should act as a warning that prices are seeking the opportunity to consolidate. The opening the next day is all important. If the market posts a weak start then downward momentum is still in control and setbacks can extend. But if market marks an unchanged, or better start, and prices remain above the previous days close, then participants will be more inclined to cover their shorts and so help prices to grind higher.

Euribor

Crude

Dax Dark Cloud Cover: Single Candle Body to body pattern, red body colour. Market is in an uptrend, and prices make a better, possibly gap open higher start to keep long holders feeling comfortable. But this action is not maintained, and weakness sets in, prompting market to eat well into the previous days up session, overlapping the up days body by at least half way.

Bund Piercing Pattern: Single Candle Body to body pattern, green body colour. Opposite to Dark Cloud Cover. Market is in a down trend, and prices make a weaker, possibly gap open lower start to keep short holders feeling happy. But this action is not maintained, and strength creeps in, prompting market to eat well into the previous days down session, overlapping the down days body by at least half way.

Euribor

Ftse

Dax Bullish Counter Attack: Single Candle. Body to body pattern, green body colour. Market is in a downtrend, and gap opens appreciably lower to maintain the down move. But prices fail to maintain momentum and begin to grind up, pushing past the opening level, to close on/around the previous days close. Want a better start the next day to act as confirmation.

B.Pound

Bobl Bearish Counter Attack: Single Candle Body to body pattern, red body colour. Opposite to Bullish Counter Attack. Market is in an uptrend, and gap opens appreciably higher to maintain the up move. But prices fail to maintain momentum and begin to slip off, pushing past the opening level, to close on/around the previous days close. Want a weaker start the next day to act as confirmation.

Bund

Spot Eurodollar currency Doji: single Candle Pattern A Doji is a Candle with which the opening and the closing prices are the same (or very close to it). It signifies indecision, as prices attempted to go both up, and down, only to close where it began. This action should be given greater significance if it were to appear after an extended movement, as it could signal a change in trend. But be away that on instruments which normally post a narrow range, like Euribor, Short Sterling, Eurodollar’s (any STIR market), because of its propensity to produce small ranges it is more likely to deliver a Doji session, so thereby diminishes its influence.

Dax Spinning Top: Single Candle, either red or green body colour. Spinning Tops are very similar to Doji’s, as the same methodology applies, only that after attempting to go both up, and down, it closes with a small body. The small body with the upper and lower Shadows highlight markets indecision, and again, taken after an extended movement, it should be given greater significance as it could signal a change in trend.

Nikkei Grave Stone Doji: Single Candle Long ‘Upper Shadow’ denotes upward rejection. ‘Grave Stone’ implies death, death of the upmove. A rare Candle. Market is in an extended period of expansion, it opens on/close to the days low and rallies, preferably into new highs for the move before levels reverse and close, on/around its lows. The longer the ‘Upper Shadow’, the deeper the upward rejection.

Bobl Island Reversal: (minimum) 3 day pattern Island Reversals or Abandoned Babies are rare, though can occur at tops or bottoms. In this instance, advances are in force, and price gap opens higher (no overlap of Body or Shadow) to maintain the upmove. Market then gap opens lower (no overlap in Body or Shadow), to leave the previous days session untouched, or abandoned, as good retracements ensue. The above was a 2 day Island or Abandoned Baby, usually only a one day reversal occurs.

Pit only Eurodollars Upside Gap Two Crows: 2 day pattern, both red bodies. Body to body pattern. Another rare pattern, and only occurs in up trending markets. In an extended upmove, prices produce a noticeable gap open up start, but fails to hold and slips back, closing beneath its open to present a red Candle. But the second day produces a stronger start, and delivers a higher-high than that of the previous session, before slipping down to post a weaker close. Want a weaker start the next day to act as confirmation.

T-Notes Three Black Crows: Body to body pattern, 3 red bodies. Another rare pattern, only occurring in up trending markets. Prices have been in an extended uptrend, and then produces three consecutive black Candles emanating from the market highs. Size and shape of Candles should be similar, as one day opens around the previous days close to maintain uniformity of pattern. Pattern should be taken as initiating a change of trend, and so has longer-term consequences. Can appear on daily, weekly or monthly charts.

Weekly Dow

Dax Three Advancing White Soldiers: 3 day pattern, 3 white bodies. Body to body pattern. Candles should produce three consecutive days of gains, with each Candle opening near to the previous session close, and be similar in size and shape. Can occur at any stage of development in the market, though more can be gathered from it if it occurs from market lows or after a period of stable prices, as it can indicate a period of strength ahead. Once this action has occurred, due to the fact that prices had gained a lot of ground in a short space of time it is usual that period of consolidation can ensue.

Dow Stalled Pattern: 3 day pattern, 2 good size green bodies, 1 smaller size body. Pattern starts off just like the Three Advancing White Soldiers, but fails to improve much past the second days high as momentum falters and stalls, and can result in a period of consolidation.

Euro Stoxx Tweezers Top/Bottom: 2 day pattern A common pattern, it signifies (in this case) matching highs, taking its name from the two prongs of a tweezers. Tweezers occur on nearby (out to around 5 sessions) or consecutive sessions, and on their own do not hold particular weight. But when seen after an extended up/downmove or they contain other signals (Harami’s, Doji’s, Hammers, Shooting Star etc.) then they can take on greater importance.

Dax

Euribor Harami’s: 2 day pattern. Body to body pattern, opposite body colours. A common pattern. Taken literally, Harami means ‘pregnant’. How it transposes into Candlesticks is that the longer first Candle is the ‘mother’, the second shorter one is the ‘baby’, with the second days body range lying within the first days body, a western inside-day. On its own it is not a particularly powerful signal, but where the market has experienced a prolonged trend, and then prices provide a large ‘bodied’ day for the first day, and then the second day is a noticeably small session when the Harami is formed, it should signal to the trader that prices had ‘overcooked’ things in a particular direction, and that retracements are likely as a result.

Eurodollar

Morning & Evening Stars

T-Note Morning / Evening Star’s (minimum) 3 day pattern. Body to body pattern. A common reversal pattern. But should only be looked for after an extended movement/trend. In this instance, the market is in a downtrend and we see a red body at 1, as bears are still in control. 2 made a weak open, gap opened, when just looking at 2’s body in relation to the previous days body, then slid down before recovering to post a softer day close. On the third day, market gap opened up (in relation to the bodies). This is the signal that bulls have wrestled control away from the bears, holding prospects that good advances can ensue. By 2’s close the trader should be aware that momentum was beginning to wane, as in this case Candles had produced a Spinning Top/Tweezers Bottom image, and should be looking to see how market would react on the next days opening, with the knowledge that a better start would form a Morning Star.

Eurodollar Morning Star

Dax In this instance, Candles Doji/Hammer/Tweezers Bottom was the middle part of a 3 day Morning Star, where previously we had been looking at a 1 day Morning Star.

T-Note

Evening Star (minimum) 3 day pattern. Body to body pattern. The exact same theory apples to Evening Star patterns. In the above we can see that Notes are in an extended upmove and that a green Candled day is produced to maintain the trend. But the next day, Candles produces a Doji session that incites thoughts of indecision entering the market, and should prompt the trader to see whether a weaker start is delivered the next day to produce an Evening Star.

Euribor 4 day Evening Star