Candlestick charts have been used by Japanese traders since the 1700s but only gained popularity in the Western world in the last 20-30 years. Candlestick charts present the same price data as bar charts but in a way that provides additional visual clues about market psychology and momentum. The document discusses the construction of candlestick charts and different candlestick patterns such as hammers, shooting stars, and doji that can indicate reversals or continuations in trends. It also provides examples of these patterns in currency markets and recommendations for effectively incorporating candlestick analysis into trading strategies.

1. Using Candlestick charts with Support and
Resistance as the basis for a trading
strategy.
Part 2 – Candlestick Charts – Introduction
ShowFx World Expo – Kiev – 20th May 2017
Written and presented by Clive Lambert MSTA MCSI, Director - FuturesTechs

2. Clive Lambert
• 31 years market experience including 10 years on
LIFFE Floor
• Founding director of FuturesTechs in 2000
• Leading figure in UK Society of Technical Analysts
• - Board Member from 2004 to 2011, 2013 - present
• - Regular speaker on yearly Diploma Courses
• - Spoke at IFTA Conference on 2011
• Author of “Candlestick Charts”, published in 2009
• Appearances on CNBC, Reuters TV. Regularly
quoted on DJ Newswires, Bloomberg and Reuters
• 6 times winner at the Technical Analyst Awards

3. Agenda
Candlestick Charts
• Introduction
– History
– Construction
– Day Types – Doji vs Marabuzo
• Basic Patterns
– Hammer
– Shooting Star
• Some recent examples of using Candlesticks and Support and Resistance
together
• More Patterns / My 10 rules / Recommended Reading / Final thoughts*
*Time permitting!

4.  Candlestick Charts have only become popular in the Western World in
the last 20 or so years, however this is not a passing “fad”
 The psychology behind Candlesticks has been used by Japanese traders
as far back as the 1700’s
 Charts similar to those that we see Today probably came into use in the
late 1800’s
A brief history

5. Until the mid 1980’s candlesticks were only used by
Japanese traders. Then Steve Nison kindled an interest in the
Western world which he ignited with the publication of his book
“Japanese Candlestick Charting Techniques”.
In January 2009 my book; “Candlestick Charts – An
Introduction to using Candlestick Charts” was published by
Harriman House
A brief history

6.  Based on the fact that Candles use the same data as the
traditional western “Bar Charts” – what is the attraction?
 Candlesticks present the basic data set in a different way to Bar
Charts. The briefest of glances instantly gives a clue as to how
they can aid us in looking at charts
Construction

7. Bar Chart
Construction

8. Candlestick Chart
Construction

9. close
high
open
low
Open/White/Green candle - Bullish Filled/Black/Red candle - Bearish
open
high
close
low
Construction

10. close
high
open
low
Open/White/Green candle - Bullish Filled/Black/Red candle - Bearish
open
high
close
low
Construction

11. open
high
close
low
Real Body
Lower Shadow
Upper Shadow
Construction

12. • The Japanese used Candlesticks as a graphical representation of the
psychology of the market. It is important to think of them in this way
• Candlesticks give you a graphical representation of the state of mind of
each group
- Who is winning the battle?
- In an uptrend are the Bulls in charge or are the Bears emerging from the
sidelines?
- In a downtrend are the Bears running out of steam, finding it hard to continue
relentlessly selling?
Day Types – Marabuzo vs Doji

13. Doji = Indecision Marabuzo = Conviction
O C
O
C O
C
Day Types – Marabuzo vs Doji

14. • Candles with small real bodies are the result of a session where the market
opened and closed at similar prices
• A large bodied candlestick is formed when the market closes a long way
away from the opening price
• REMEMBER: The real body of a Candlestick merely represents the
difference between the open and the close
Day Types – Marabuzo vs Doji

15. In an uptrend the Buyers are running out
of steam, the sellers are starting to make
themselves heard
Day Types – Marabuzo vs Doji

16. In a downtrend the sellers, who have
previously dominated, are now meeting
an equal and opposite force (in this case
at a previous support levels)
Day Types – Marabuzo vs Doji

17. Dow Jones Futures Candle Chart
Nov 02-Feb 03 showing 3 “Doji”, all
at/near the key turning points
Day Types – Marabuzo vs Doji

18. • There are a myriad of patterns which occur time and time again and
signal either a reversal or a continuation of the current trend
• We’ve already looked at a strong continuation candlestick - the
“Marabuzo” line
• We’ve also looked at an example of a reversal in the Doji

19. • The Hammer is the simplest and probably one of the
more potent Candlestick Reversal Patterns
• Every Candlestick Pattern has a set of rules:
• Hammer “rules”:
1. Small Real Body
2. Real Body is at the top end of the day’s range with very little
upper shadow present
3. The lower shadow must be at least twice the length of the
real body
4. Seen during a downtrend
Hammer

20. This one stopped the 2007 “sub-
prime” sell-off, bang on the 200 day
MA
Hammer

21. E-mini S&P 5000 Futures Candle Chart,
Summer 2010 showing several
“Hammer” Reversals
Hammer

22. • In the same way that every candlestick pattern has a set
of rules there is also a “psychology” behind each pattern
• The best way to think through this psychology is by
thinking about the intra-day price action that gave us the
formation in the first place
Hammer

23. Mini S&P 500 Futures 10
Minute chart for 1st July
2010 “Hammer” day.
O
L
C
H
Hammer

24. Psychology
• At the start of the session in question the market was
travelling lower, as it had been doing in preceding
sessions. This was no surprise to anyone, then
• But then there was a change: Buyers came into the
market and pushed prices higher
• By the end of the session we were right back up where
we started the day, on the highs
• This is a significant change from what has gone before
and suggests that the market has found support
• In this instance the Hammer did indeed stop the rot and a
few days later we started a rally that added over 10% in a
month.
Hammer

25. Note the level at which this reversal
occurred…
Hammer

26. Weekly Chart for Euro/USD: May ’00-October ‘01
Hammer

27. • This chart shows clearly the importance of waiting for confirmation, either in
the form of further subsequent gains, or another form of analysis – like Slow
Stochastics, for example
Hammer

28. A filter of “Slow Stochastics must be coming
out of oversold” would have negated the
signals from the first two Hammers
Hammer

29. We gapped lower on this day, then posted a
Hammer on the 10 minute chart…
Hammer

30. …which was also a Hammer on the 30
minute chart…
Hammer

31. …and the 60 minute chart
Hammer

32. • So we had this strong reversal pattern on three different short term
timeframes
• This would really boost confidence that we’ve seen a bottom
• As you will have noted, the key resistance was the same whatever the
timeframe, though
• All three time-frames had Hammers, but most traders would have still been
waiting to see whether gap resistance would break to confirm the pattern,
and when it did we went on a strong run, accompanied by strong volume
Hammer

33. • Remember! Whatever the timeframe the message was the same: We just
saw a sell-off then a recovery
• Candlesticks merely map what’s just happened, but if on all time frames you
are being told that things are bouncing, it’s a pretty compelling argument for
higher prices going forward
Hammer

34. • Common question – Does the colour of the
real body matter?
• Answer: NO!
Hammer

35. • The Shooting Star is pretty much the opposite pattern to
the Hammer
• Shooting Star “rules”:
1. Small real body
2. Real body at the bottom end of the candle with little or no lower
shadow
3. The long upper shadow must be at least twice the length of the real
body
4. Shooting Stars are reversal patterns when seen in an Uptrend
Shooting Star

36. Gold Futures Daily Chart, April
2006 - June 2006 showing 12th and
17th May
“Shooting Stars”
Shooting Star

37. Psychology
• At the start of the session the buyers come in, just as
they have done in previous sessions during the uptrend.
Nothing new there, then!
• But this buying is met by sellers, and this selling
continues into the close, with the market closing near it’s
lows
• The Bears win the battle for that day with the negative
close. The Bull’s could not sustain the push higher
Shooting Star

38. O
L
H
C
Gold Futures 15 minute
Candle Chart for 12/05/06
“Shooting Star” day
Shooting Star

39. Psychology
• This is a significant change from what has gone before
and suggests that the market has hit strong resistance,
or found a level where the sellers are attracted to enter
the fray
• This was the top of the move on Gold, a failure right on
a resistance level from, 26 years earlier!
Shooting Star

40. Gold, Quarterly chart going back to the
1980’s “boom and bust” move!
Shooting Star

41. Shooting Star

42. Shooting Star

43. • Does the colour of the real body
matter?
• Answer: NO!
• Shooting Star is about the shape,
and the length of the upper shadow
Shooting Star

44. Shooting Star
Sep 17th 2015 –
Shooting Star at
resistance

45. Notes
• The strength of these patterns is increased if the shadow
has breached a major level (Support for a Hammer,
Resistance for a Shooting Star)
Shooting Star and Hammers

46. Shooting Star

47. Examples
USDCAD 30 Minute chart - 5th - 11th May 2017

48. Examples
GBPUSD Daily - Feb - May 2017

49. Examples
GBPUSD 4 Hourly – 13th April - 12th May

50. Examples
GBPUSD 15 Min Chart – 11th and 12th May

51. Star
A small real body gapping away
from a larger real body signals a
reversal. Shown is a Bearish
Star, can also be seen in a
downtrend with the second small
candle gaping lower
Doji Star
So called if the second Candle of
a Star is a Doji –an even more
potent reversal than a normal
“Star”. Shown is a Bullish Doji
Star
Morning Star
A significant reversal if seen in
a downtrend. It has three
candles, the first two are a “Star”,
the third confirms, closing well
into the real body of the first
candle
Evening Star
An important Bearish Pattern if
seen in an uptrend. The middle
candle has a small real body
which gaps way from the first.
The third candle confirms the
change of sentiment
Other Candlestick Patterns

52. Morning/Evening Stars

53. Abandoned Baby
A major reversal with a name that often prompts a frown!
A small candle that gaps away from the candles either side and
is left “abandoned” above or below the rest of the chart.
Morning Doji Star
A Morning Star with a Doji for a
middle candle.
Obviously a reversal!
Evening Star
An Evening Star where the
middle candle is a Doji.
Again, clearly a reversal!
Other Candlestick Patterns

54. Piercing Pattern
Bullish if seen during a
downtrend. The second
open/green candle closes well
into the real body of the first
candle (Above the Marabuzo line)
Dark Cloud Cover
Bearish when you’re in an
Uptrend. The real body of the
second filled/dark candle closes
well into the real body of the first
day (below it’s Marabuzo line)
Bullish Harami
A small real body contained
within the previous day’s real
body signals a reversal if the
first real body is in line with the
underlying trend. Shown is a
Bullish Harami. Not a strong
signal
Bearish Harami
A small real body contained
within the previous day’s real
body signals a reversal if the
first real body is in line with the
underlying trend. Shown is a
Bullish Harami. Not a strong
signal
Other Candlestick Patterns

55. My top ten rules for charting and trading using (candlestick) charts
• An excerpt from “Candlestick Charts”
1.Never use candlestick charts to bat against established, obvious trends
Some people like to use a chart as a way of backing up their view of a particular stock or market. You need to be
totally objective when viewing charts. I have worked with people before who have asked me to look at charts for this
and that. I’ve always requested that they don’t tell me what their view is at this point. I prefer the question “What do
you think of Vodafone?” rather than “I think Vodafone is going up, what does the chart say?” I’m a big believer that
the best traders and money managers in the world have a strong fundamental background and they use technicals
to back this up and to help them time their trades. If they believe something’s undervalued and should go up they
wait until the chart agrees!
2. Never use candlesticks in isolation
I think this has been drummed home enough in the last few chapters; you need to combine candlesticks with at
least one method of confirmation. Using candles on their own is unlikely to reap rewards.
3. Don’t restrict yourself to one time frame
You can get different information from different time frame charts, and it adds an extra dimension to your reading of
the markets. Short term time frames can be good for entering into trades, while longer term time frames can remove
the apparent volatility from your viewing of the chart once you’re in a position.
4. Remember your support and resistance levels
Looking for candlestick reversal patterns at former highs and lows, or near to an important level like a well watched
moving average can be extremely effective.
5. Do your homework and find the patterns that work well for the chart you use
If Shooting Stars have hardly ever worked in the past on your chart, it’s probable that that poor run will continue - so
don’t use them as reversal signals! Back-testing is so important when you’re searching for the candlesticks worth
looking out for on your charts.

56. My top ten rules for charting and trading using (candlestick) charts
• An excerpt from “Candlestick Charts”
6. Don’t kid yourself when back-testing
There’s nothing worse than thinking you’ve got the best system in the world, then finding out once you’re putting
your money where your mouth is that you messed up when back-testing because you weren’t honest about entry
and exit points. A “worst case scenario” approach towards where you get in and out of trades serves one well as this
should mean results actually improve in the real world.
7. Don’t enter into a trade without knowing where your stop is
I’ve seen this in many a “trading rules” list. It’s nothing new, and it’s essential! Having a stop is paramount in trading.
Hopefully you can move your stop after a short time, so it’s no longer a Stop Loss but becomes a Stop Profit! I
recommend you try to develop a trailing stop strategy.
8. Keep the “Cheat Sheet” handy until you’ve learnt the patterns off by heart
This can save you from continually having to flick through the book.
9. Don’t bother with bar charts ever again
Why would you want to look at charts in “black and white”, when the candle chart can add so much extra information
even at the first glance.
10. Always make sure you look at the candlestick chart in future when checking out a stock or a market
Even if you don’t want to learn the patterns (see rule number 8), surely you’re now going to afford yourself a brief
glance at a chart from now on every time you’re thinking of doing something with a stock or a market. The chart can
quickly give you an idea of the market’s overall thinking, and you can stop yourself from batting against an obvious
trend. It can stop you buying a “dog” stock, or can stop you from jumping out of something that’s quite obviously
heading in the right direction.

57. So what makes a good trader?
EDUCATION
Fundamentals
Psychology/Behaviour
- Discipline & patience
Technical
Analysis
Trade and Money
Management

58. Technical Analysis
Candlestick charts – Clive Lambert
Technical Analysis of the Financial Markets – John J Murphy
Japanese Candlestick Charting Techniques – Steve Nison
Cloud Charts – Trading success with the Ichimoku Technique – David Linton
Mind over Markets – Dalton/Jones/Dalton
The Definitive Guide to Point and Figure – Jeremy du Plessis
Other reading/non Technical
Reminiscences of a Stock Operator – Edwin Lefevre
Market Wizards – Interviews with top traders – Jack Schwager
The Financial Spread Betting Handbook - Malcolm Pryor
Extraordinary Popular Delusions and the Madness of Crowds – Charles Mackay
When Money Dies – Adam Fergusson
Books Shameless plug ALERT!

59. www.sta-uk.org

60. Contact Details
web:
www.futurestechs.co.uk
e-mail:
info@futurestechs.co.uk
twitter:
@futurestechs
linkedin:
Clive Lambert
ipad/iphone/Android App:
App Store