CANDLE CHARTS: Lighting the Path in VS .NET

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CANDLE CHARTS: Lighting the Path
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I also had Steve on my radio show to help shed light on how he first learned about this advanced and unique method of charting. He explained that a broker in his office at Merrill Lynch had been receiving a chart book from Japan, and he became extremely curious about the formations that the candles made. He took it from there, going to Japan to learn more about charting and devoting many hours to studying this form of technical analysis. Candle charting originated in Japan centuries ago. It is a method of looking at data differently than what had been developed in western cultures. The advantage of using candle charts in place of bar charts is that you can use the same techniques and analysis as you do on bar charts, and you can enhance that analysis with the diverse and unique signals that candles generate with their more sophisticated, graphic style that allows a quick visual analysis of price action. More and more analysts have turned to candles, so you should at least become aware of what this three-dimensional approach to charting is all about.
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ANY MARKET, ANY TIME FRAME
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Like a bar chart, each time period produces a price bar called a candle. Each candle has a different characteristic that represents the difference or distance between the high, low, open, and close. Candle charting techniques can be used on data from whatever time period you choose minutes, hours, days, weeks, or months. It lends itself to pattern recognition, trend lines, support and resistance, channel lines, and all the other typical technical analysis features. Candle analysis usually is not limited to a single candle but is based on several bars forming a pattern and on the location of that candle or pattern within overall market action. First, however, you have to learn how to read one candle. The key feature of the candle is the body, the difference between the open and close prices. Using the conventional way of displaying candles, a dark body indicates that the closing price was below the opening price (Figure 4.1), and a white or hollow body indicates that the closing price was higher than the opening price (Figure 4.2). (Note: Some software vendors use the color red instead of black to designate candles that have a close lower than the open and the color green instead of white or hollow candles that have a close higher than the open. Many software programs allow you to adjust these colors and styles yourself. Check with your software provider.) A single candle does not tell you if the close is higher or lower than the previous time period, indicating only whether the close is higher or lower than the open for each candle. The emphasis on the body is based on the belief that the most important price action for the period takes place between
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Candle Patterns
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High Open Upper shadow Black real body Close Low Lower shadow
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High Close Upper shadow White real body Open Low Lower shadow
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FIGURE 4.1
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the open and close while the price action outside the body, the upper and lower shadows, is less important.
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CANDLE PATTERNS
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Individual candles and formations have some very interesting and descriptive names. The hammer (Figure 4.3) indicates a reversal or a bottom is near after a downtrend. When a similar candle formation appears after an uptrend, the name transforms into hanging man and indicates a top is near. Three main characteristics are needed to hammer in a bottom:
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1. The real body is at the upper end of the trading range. The color (white
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or black) is not important. 2. The lower part, or the shadow, should be at least twice the length of the real body. 3. The body should have little or no upper shadow and look like a shavedhead candle.
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FIGURE 4.3
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CANDLE CHARTS: Lighting the Path
The star (Figure 4.4) appears at the top of an uptrend and can signal a reversal. Again, the color does not matter, but the body should be at the lower end of the trading range with a long upper shadow. The significance here is that it shows the market opened near the low of the day, then had an explosive rally that failed, and closed back down near the low of the day. Usually there is little or no lower shadow, looking like a shaved bottom. When this pattern is at the bottom of a downtrend, it is called an inverted hammer. The color (white or black) is not important. This is not a tremendously reliable candle as a bottom indicator on its own. Usually a white candle opening above the inverted hammer s body in the next trading session can verify the potential buy signal. Spinning tops (Figure 4.5) have small real bodies usually with small upper and lower shadows. These formations indicate a tug-of-war occurring between buyers and sellers The doji (Figure 4.6) has nearly the same opening and closing price. This candle typically indicates a change of direction. Doji are more powerful as an indicator of a market top, especially after a long white or hollow candle, meaning the market closed above the open during the previous period. Doji signify indecision and uncertainty. They can also indicate bottoms, but more signals are needed to confirm a bottom than just using a doji. There are several types of doji: the gravestone (Figure 4.7), dragonfly (Figure 4.8), and rickshaw (Figure 4.9). An evening star (Figure 4.10) is a three-candle formation that signals a major top. The first candle normally has a tall white or hollow real body. The second candle has a small real body (white or black) that gaps higher and can be a star candle. A doji can also be in the middle; that is considered even more bearish. The third candle has a black body, and the important point here is that it should close well into the first candle s real body.