Module 8 - Further Charting

The Responsible Trader Lessons
The Responsible Trader’s - POV
Module 8 – Further Charting

The Responsible Trader’s - POV
• The Responsible Trader's POV (Point of View).
• These are my notes, my own additional research and studies on the
Topic that I posted, and my personal observations and opinions that I
am sharing to further enhance our knowledge and understanding.
• Some of these were previously posted on “The Responsible Trader”
thread, Stock Market Pilipinas (www.stockmarketpilipinas.com). This
is the latest version of previous posts I made.
• Some of these plus further explanations and discussions will be
appearing in my forthcoming book “The Responsible Trader.”

Our topic this week is a continuation of Module 2 –
Charting Basics where I suggested that you create your
own key words for remembering candlestick patterns.
Instead of doing a review of Module 7, let us go over what
we have learned so far about candlesticks.
Review of Module 2 – Charting Basics

A Japanese
candlestick
Is composed
of two lines.
A vertical
line called
the shadow
or wick and
the full
height
represents
the trading
range.
HIGH
LOW
Two Horizontal Lines representing
Open and Close For the period
Usually connected as Rectangle
CLOSE
OPEN
Shadow or Wick
Shadow or Wick
HIGH
LOW
OPEN
CLOSE

Japanese Candlesticks with Real Body and without or very little Wicks or Shadows are called Marubozu
Green Marubozu - Bullish Red Marubozu - Bearish
Close
Same as
High
Open
Same as
Low
Close
Same as
Low
Open
Same as
High

A Doji is a Candlestick with no Real body. Doji’s signify indecision on the
part of the Buyers and the Sellers. There are four of them:
Cross Doji 4-Price DojiGravestone DojiDragonfly Doji
.

Japanese Candlestick Charting is
better understood by looking at
the historical context when the
method was developed.
It became popular during the
16th and 17th centuries when
the feudal lords waged constant
wars with each other. In Japan
this era is known as Sengoku
Jidai or “Age of Country at War.”

This was also the time when the Ninjas were used for
stealth missions – to gather information and murder
Daimyos or warlords. As a natural consequence, most of
the terms used in candlestick charting refer to war,
military strategy and the martial arts.
You should not be surprised, therefore, when you see
terms like “Dark Cloud Cover, Morning Star, Evening Star,
Three White or Black Soldiers, Three Rising Methods,
Long White or Black Line,Piercing Lines, Three River
Bottoms, Advanced Block etc.

Steve Nison, learned about the method in Japan and brought it to the United
States.
The method became popular in the U.S. and other countries because it captures
market sentiment better than the line charts by providing deeper insight into the
direction of the market. It not only illustrates the trend but also the forces
underneath it.

The most significant candlestick patterns have been thoroughly discussed in the
MCTA video so I will no longer discuss them here. I will just focus on some salient
points.
There are three simple rules in detecting candlestick patterns and determining
possible actions to be taken
1. Size – Larger candles play an important role when identifying patterns.
2. Shape – The shape of the candlestick or pattern determines the type of pattern
generated, the possible trading signal and the potential direction of the trend.
3. Location – The location of a candlestick pattern assists in determining the
possible trading signal. The location also determines what the pattern is called.

1. Size – the larger and more solid the candles, the higher the sentiment
Increasing size of green candles
show bullish sentiment
Increasing size of red candles
show bearish sentiment
Charts courtesy of Amibroker Charting Software

2. Shape – The shape of the candlestick or pattern determines the type of pattern
generated, the possible trading signal and the potential direction of the trend.
Bullish engulfing – a large green candle
engulfing a small red candle in a downtrend
Bearish engulfing – a large red candle
engulfing a small green candle in an uptrend

Single Candle Patterns – the Hammer and the Hanging Man – both have the same shape but their names
vary depending on their location.
Hammer in a Downtrend, a Reversal Signal A Hanging Man in an Uptrend, a Reversal Signal
3. Location – determines what the Pattern is called

Candlestick Addition
Just identify the open. Here since the first candle in the series is green, the open for the whole series is
the bottom of the first candle’s body. Then you identify the highest in the series and it becomes the high,
the lowest in the series becomes the low. Since the last candle in the series is green, the close for the
series is at the top of the last candle’s body. The result is a green Marubozu with a small wick or shadow.
You can easily convert a series of candles into one. Below is an example for a series of
candles from a 30-minute chart of DNL from COL’s trading platform.

Candlestick Reading
In the absence of additional information , you can read a candlestick by starting with the open and ending with the close.
Where you go after the open depends on the color of the candle. If the candle is green you go to the highest price in the
trading range then proceed to the lowest of the trading range and vice versa. The candle we saw in the last slide is read
as follows:
1) Opened at 16.12
2) Buyers bought it as
High as 16.32
3) Sellers sold it as
Low as 16.12 same as open
4) But buyers were eventually
able to close it a16.30 showing that
Buyers are in control
DATA:
Open 16.12
High 16.32
Low 16.12
Close 16.30

1. Candlesticks should be used together with other forms of technical analysis, trendlines, support
and resistance.
2. Candlesticks should be used in connection with clear trends, whether uptrend or downtrend. The
candlestick patterns are not useful in a sideways market.
3. The more agreement between signals (candle patterns and technical analysis) the more likely the
reversal.
4. The candle line shows the force behind each move, as well as the price.
5. The candlestick pattern requires both the shape and the trend.
6. A candlestick pattern alone is not justification for a new trade.
7. Candlesticks do not give price targets.
8. Set stop loss levels by other means and know when you are wrong and must exit the trade.
Principles to be observed when using Japanese Candlesticks

Point and Figure Chart On a Point and figure chart, day-to-day price
movements are plotted without taking into
consideration the passage of time. Point and figure
charts are composed of a number of columns that
either consist of a series of stacked X's or O's. A
column of X's is used to illustrate a rising price,
while O's represent a falling price. As you can see
from the chart on the left, this type of chart is
used to filter out non-significant price movements,
and enables the trader to easily determine critical
support and resistance levels. Traders will place
orders when the price moves beyond identified
support/resistance levels.

Candle Volume Chart
CandleVolume charts merge volume into
candlesticks. This allows chartists to analyze both
price action and volume with one look at the
price chart.
The charts show candlestick patterns as well as
classical chart patterns, such as triangles and
wedges, to generate signals.
Charts courtesy of StockCharts.com

Three Line Break
Three Line Break charts ignore time and only change when prices move a certain
amount. In this regard, these charts are quite similar to Point & Figure charts.
Three Line Break charts show a series of vertical white and black lines. White lines
represent rising prices, while black lines portray falling prices. Prices continue in the
same direction until a reversal is warranted. A reversal occurs when the closing
price exceeds the high or low of the prior two lines.
Charts courtesy of StockCharts.com

Renko Invented in Japan, Renko charts ignore time and focus solely on
price changes that meet a minimum requirement. The chart got its
name from the Japanese word for bricks, "renga".
A renko chart is constructed by placing a brick in the next column
once the price surpasses the top or bottom of the previous brick by
a predefined amount. White bricks are used when the direction of
the trend is up, while black bricks are used when the trend is
down. This type of chart is very effective for traders to identify key
support/resistance levels. Transaction signals are generated when
the direction of the trend changes and the bricks alternate colors.
In this regard, these charts are quite similar to Point & Figure
charts. Instead of X-Columns and O-Columns, Renko charts use
price “bricks” that represent a fixed price move.

Kagi The Kagi is a type of chart developed by the Japanese in
the 1870s that uses a series of vertical lines to illustrate
general levels of supply and demand for certain assets.
Thick lines are drawn when the price of the underlying
asset breaks above the previous high price and is
interpreted as an increase in demand for the asset. Thin
lines are used to represent increased supply when the
price falls below the previous low.
An entry signal is triggered when the vertical line changes
from thin to thick and is not reversed until the thick line
changes back to thin.

For your information, in connection with my Advocacy, Responsible Trading, I have established the
following in order to reach out to you more effectively and serve you better.
Please visit, like and share:
My Blog:http://www.theresponsibletrader.com– where I write and share lessons on trading and my
thoughts about trading in particular and life in general
My Facebook Page: https://www.facebook.com/theresponsibletrader – where I share what’s on my
mind and make posts to groups where I am a member of
My YouTube Channel: https://www.youtube.com/theresponsibletrader – where you can view and
download my TRT-POV (The Responsible Trader’s Point of View) and other videos I intend to make
My Slideshare: http://www.slideshare.net/TheResponsibleTrader – where you can view and download
copy of the Powerpoint Presentation of my TRT-POV (The Responsible Trader’s Point of View) and other
presentations I intend to make

Module 8 - Further Charting

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