2. CANDLESTICK BASICS
• JAPANESE RICE TRADERS CREATED THEM OVER 400 YEARS AGO
• STEVE NISON IS CREDITED WITH INTRODUCING THEM INTO THE U
S MARKETS
• GREGORY MORRIS AND STEPHEN BIGALOW ARE THE OTHER 2
MAJOR CANDLESTICK GURU’S
• THERE ARE OVER 100 CANDLESTICK PATTERNS
• CANDLESTICKS SHOW INVESTOR SENTIMENT MORE VISUAL THAN
OHLC BARS
5. INDECISIVE CANDLES
• DOJI AT THE TOP SHOULD NEVER BE IGNORED
• THE SMALLER THE BODY THE MORE INDECISION
DOJI BODY IS VERY SMALL 10% OF DAILY RANGE
• DRAGON-FLY TOMBSTONE LONG-LEGGED
6. INDECISIVE CANDLES (CONT)
• SPINNING-TOP
– NO ONE WON THE BATTLE OF THE BULLS AND BEARS
– BODY IS LESS THAN 1/3RD OF THE CANDLE RANGE H – L
– THE TAILS ARE LONGER THAN THE BODY
8. BULLISH ENGULFING DEFINITION
Bullish Reversal 63% of the time HOW TO IDENTIFY IT
CANDLE 1 IS A BEARISH CANDLE
CANDLE 2 COMPLETELY ENGULFS THE
BODY OF THE CANDLE 1
STOCK IN A DOWNTREND OR
CONSOLIDATING
PATTERN SUGGESTS DOWNTREND HAS
LOST MOMENTUM AND THE BULLS MAY
BE GAINING STRENGTH
ENGULFING PATTERN IS ALSO THE
FIRST TWO CANDLES OF THE THREE
OUTSIDE PATTERNS.
CONFIRMATION IS SUGGESTED
13. MORNING STAR
Bullish Reversal 78% of the time How to Identify it
• First candle is a long black candle
• Second candle gaps down and trades within a
small range and closes at or near its open.
• The third candle is a white candle
• Stock has in a downtrend or consolidating
• Pattern suggests the trading sentiment has
changed and trend reversal is a high probability
• No confirmation is required or suggested
• Note:
• The second candle can be a Doji or spinning
top
16. HAMMER
Bullish Reversal 60% of the time How to Identify it
• Single candle pattern
• Candle can be bullish or bearish
• Signal considered stronger if candle is bullish
• Candle body is less than 1/3 of the range H – L
• Stock is in a downtrend
• Long tail implies sharp sell-off after open but
the bulls rallied and won the battle
• suggest more buying to come
• Requires confirmation
17. THREE WHITE SOLDIERS
Bullish Reversal 82% of the time How to Identify it
Three white candles occur, each with a
close above the previous candle
each candle opens within the body of the
previous candle
Each candle closes near or at its high
stock is in a downtrend
Pattern suggests the market has been
selling of for too long, and buyers are
beginning to come back into it
No confirmation is required or suggested
20. BULLISH KICKER
Bullish Reversal 53% of the time How to Identify it
The first candle’s open and the
second candle’s open are the same.
The price movement is in opposite
directions from the opening price.
The trend has no relevance in a
Kicker situation.
The signal is usually formed by
surprise news before or after market
hours.
The price never retraces into the
previous candle's trading range.
No confirmation is required or
suggested
The first day is a Black Marubozu day
The second day is a White Marubozu
day that gaps upward
24. BEARISH ENGULFING
Bearish Reversal 79% of the time • How to Identify it
• First candle is a white candle
• Second candle is Bearish and its
body completely “Engulfs” the first
candle’s candle body
• Stock has been in an uptrend
• Pattern suggests the bears have
taken control and the trend is about
to reverse.
• Confirmation is suggested
COPYRIGHT 2007, TRADINGOURWAY,
PREPARED BY KERMIT PRATHER
25. BEARISH ENGULFING - BAD
Copyright 2007, TradingOurWay, Prepared
by Kermit Prather
27. EVENING STAR
Bearish Reversal 72% of the
time
How to Identify it
• First candle is a long white candle
• Second candle trades within a small range and
closes at or near its open.
• The third candle is a black candle
• Stock is in an uptrend
• Pattern suggests the trading sentiment has
changed and trend reversal is high probability
• No confirmation is required or suggested
• Note:
• The second candle can be a Doji or spinning
top
30. HANGING MAN
Bearish Reversal 59% of the time How to Identify it
• Single candle pattern
• Candle can be bullish or bearish
• Signal considered stronger if candle
bearish
• Candle body is less than 1/3 of the range
H – L
• Stock is in an uptrend
• Long tail implies sharp sell-off after open
and suggest more selling to come
• Requires confirmation
31. THREE BLACK CROWS
Bearish Reversal 78% of the time How to Identify it
• Three black candles occur, each with a
close below the previous candle
•
• Each candle opens within the body of the
previous candle
• Each candle closes near or at its lows
• Stock is in an uptrend
• Pattern suggests the market has been at a
high price for too long, and investors are
beginning to compensate for it.
• No confirmation is required or suggested
32. THREE BLACK CROWS - BAD
Copyright 2007, TradingOurWay, Prepared
by Kermit Prather
33. THREE BLACK CROWS - GOOD
Copyright 2007, TradingOurWay, Prepared
by Kermit Prather
34. BEARISH KICKER
Bearish Reversal 54% of the time How to Identify it
• The first candle’s open and the second
candle’s open are the same.
•
• The price movement is in opposite
directions from the opening price.
• The trend has no relevance in a Kicker
situation.
• The signal is usually formed by surprise
news before or after market hours.
• The price never retraces into the previous
candle's trading range.
• No confirmation is required or suggested
35. BEARISH KICKER - BAD
Copyright 2007, TradingOurWay, Prepared
by Kermit Prather
41. HOW TO ENHANCE PROBABILITIES
• VISUALLY OBSERVE THE CHART FOR PROPER TREND
• UP-TREND MOVING AVERAGES ALIGN TOP-DOWN
20, 40, 50
• DOWNTREND FROM TOP-DOWN 50, 40 ,20
• TRENDLINE
• LINEAR REGRESSION SLOPE
• PATTERN OCCURS AT OR NEAR A MAJOR MA
COPYRIGHT 2007, TRADINGOURWAY,
PREPARED BY KERMIT PRATHER
42. USE EFFICIENCY RATING
• VAN THARP USES AN EFFICIENCY RATING
CREATED FROM PRICE CHANGE DURING 4 TIME
PERIODS
• PICK ANY 4 PERIODS SUCH 20, 45, 90, & 180
• TC2007 FORMULA USING DAILY RANGE
(((C – C180) / (AVGH180 – AVGL180)) +
((C – C90) / (AVGH90 – AVGL90)) +
((C – C45) / (AVGH45 – AVGL45)) +
((C – C20) / (AVGH20 – AVGL20))) / 4
• RATING > + 7 ARE IN AN UPTREND WHILE < -7 IN A DOWNTREND
• THARP USES AN ATR BUT DAILY RANGE WORKS AS WELL
• STOCKFETCHER RESULTS
COPYRIGHT 2007, TRADINGOURWAY,
PREPARED BY KERMIT PRATHER
43. HOW TO ENHANCE PROFITABILITY
• USE OVERBOUGHT / OVERSOLD INDICATORS
– STOCHASTICS 12.3.3 OR 14.5.5 CROSSOVER
– WILDER’S RSI 5 OR 14
• RELATIVE STRENGTH
• COMPARISON TO ITS INDEX
• USE STOCKS THAT HAVE MADE AN EXTENDED
MOVE
COPYRIGHT 2007, TRADINGOURWAY,
PREPARED BY KERMIT PRATHER
44. CANDLESTICK WEB SITES
• WWW.TRADINGOURWAY.COM
• WWW.CANDLESTICKFORUM.COM - STEVE BIGALOW
• WWW.CANDLESTICKCHART.COM/GLOSSARY.HTML - LITWIT.COM
• WWW.THEPATTERNSITE.COM - TOM BULKOWSKI
• WWW.STOCKCHARTS.COM - JOHN MURPHY’S
• WWW.TRADEON.COM FOR TC2007USERS
• WWW.STOCKFETCHER.COM SCANS FOR CANDLESTICK PATTERNS AND
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