Candlestick Charting For Dummies

Russell Rhoads, PhD, is head of research at EQDerivatives and an Associate Clinical Professor at the Kelley School of Business at Indiana University. He has over three decades of experience focusing on trading and the financial markets. Rhoads is the author of the previous edition of Candlestick Charting For Dummies.

Introduction 1

About This Book 1

Foolish Assumptions 2

Icons Used in This Book 2

Beyond the Book 3

Where to Go from Here 3

Part 1: Getting Familiar with Candlestick Charting and Technical Analysis 5

Chapter 1: Understanding Charting and Where Candlesticks Fit In 7

Considering Charting Methods and the Role of Candlesticks 8

Getting a feel for your options for charting 8

Realizing the advantages of candlestick charting 9

Understanding Candlestick Components 9

Working with Candlestick Patterns 11

Simple patterns 11

Complex patterns 12

Making Technical Analysis Part of Your Candlestick Charting Strategy 12

Trading Wisely: What You Must Understand Before Working the Markets 13

Trading can be an expensive endeavor 13

Paper trading costs you nothing but time 14

Develop rules, and stick to them 14

Chapter 2: Getting to Know Candlestick Charts 17

Recognizing the Many Benefits of Candlestick Charting 18

Seeing is believing: Candlesticks are easy to read 19

Spotting bears and bulls quickly 20

Seeing into the future (sort of) 21

Showing price patterns 23

Admitting Potential Candlestick Charting Risks 25

Comparing Candlestick Charts with Alternative Charting Methods 26

Line charts 26

Bar charts 27

Point and figure charts 28

Chapter 3: Building a Base of Candlestick Chart Knowledge 31

Constructing a Candlestick: A Core of Four 32

Price on the open 32

High and low prices for the session 35

Price on the close 37

Considering Additional Information Included in Candlestick Charts 39

Volume 39

Open interest 40

Technical indicators 42

Fundamental information 43

Chapter 4: Using Electronic Resources to Create Full Charts 49

Turning to the Web for Candlestick Charting Resources 50

Using Yahoo! Finance 50

Working with Barchart 53

Charting on CNBC.com 54

Creating Candlestick Charts with Microsoft Excel 55

Finding the data for your chart 56

Making sure that the data is in the correct format 56

Building an Excel candlestick chart 57

Adding a moving average to an Excel candlestick chart 58

Adding a trendline to an Excel candlestick chart 60

Adding volume data to an Excel candlestick chart 61

Selecting Charting Packages and Apps 63

Remembering a few key points when selecting charting software 64

Considering a few charting package options 65

Part 2: Working with Simple Candlestick Patterns 69

Chapter 5: Working with Straightforward Single-Stick Patterns 71

The Bullish Long White Candle 72

Understanding long white candles 72

Identifying the three variations of the long white candle 76

The Bullish Dragonfly Doji 78

Recognizing a dragonfly doji 79

Trading based on a dragonfly doji 80

The Bearish Long Black Candle 82

Understanding long black candles 82

Identifying the three variations of the long black candle 84

Trading based on long black candles 85

The Bearish Gravestone Doji 89

Identifying the gravestone doji 89

Trading based on gravestone dojis 90

Chapter 6: Single-Stick Patterns That Depend on Market Context 93

Understanding Market Environments 94

Recognizing the three market states 94

Identifying the market trend 94

Delving into Dojis 96

The long legged doji 96

Other dojis 101

Looking at Other Patterns: Spinning Tops 105

Identifying spinning tops 105

Using spinning tops for profitable trading 106

Discovering More about Belt Holds 109

Spotting belt holds on a chart 109

Buckling down for some belt hold-based trading 110

Deciphering the Hanging Man and the Hammer 113

Spotting the hanging man and the hammer 114

Trading on the hanging man and the hammer 114

Chapter 7: Working with Bullish Double-Stick Patterns 119

Bullish Reversal Patterns 120

Bullish engulfing pattern 120

Bullish harami 124

Bullish harami cross 127

Bullish inverted hammer 129

Bullish doji star 132

Bullish meeting line 135

Bullish piercing line 136

Bullish Trend-Confirming Patterns 139

Bullish thrusting lines 139

Bullish separating lines 142

Bullish neck lines 144

Chapter 8: Using Bearish Double-Stick Patterns 149

Understanding Bearish Reversal Patterns 149

The bearish engulfing pattern 150

The bearish harami pattern 153

The bearish harami cross pattern 155

The bearish inverted hammer pattern 158

The bearish doji star 160

The bearish meeting line 162

The bearish piercing line or dark cloud cover pattern 165

Making a Profit with Bearish Trend Patterns 168

The bearish thrusting lines 168

The bearish separating lines 171

The bearish neck lines 174

Part 3: Making the Most of Complex Patterns 177

Chapter 9: Getting the Hang of Bullish Three-Stick Patterns 179

Understanding Bullish Three-Stick Trend Reversal Patterns 180

The three inside up pattern 180

The three outside up pattern 183

The three white soldiers pattern 185

The morning star and bullish doji star patterns 188

The bullish abandoned baby pattern 191

The bullish squeeze alert pattern 193

Working with Bullish Three-Stick Trending Patterns 196

The bullish side-by-side white lines pattern 197

The bullish side-by-side black lines pattern 200

The upside tasuki gap pattern 203

The upside gap filled pattern 205

Chapter 10: Trading with Bearish Three-Stick Patterns 209

Understanding Bearish Three-Stick Trend Reversal Patterns 210

The three inside down pattern 210

The three outside down pattern 213

The three black crows pattern 215

The evening star and bearish doji star patterns 218

The bearish abandoned baby pattern 221

The bearish squeeze alert pattern 223

Forecasting with Bullish Three-Stick Trending Patterns 226

The bearish side-by-side black lines pattern 226

The bearish side-by-side white lines pattern 228

The downside tasuki gap pattern 231

The downside gap filled pattern 234

Part 4: Combining Patterns and Indicators 237

Chapter 11: Using Technical Indicators to Complement Your Candlestick Charts 239

Using Trend Lines 240

Drawing trend lines 241

Considering trend line direction 242

Taking advantage of automated trend lines 242

Using Moving Averages 243

Selecting appropriate moving average periods 244

Using simple moving averages 245

Using other types of moving averages: What have you done for me lately? 247

Combining two moving averages 248

Combining three moving averages 249

Examining the Relative Strength Index 251

Calculating the RSI 251

Reading an RSI chart 252

Cashing in on Stochastics 253

Grasping the math behind the stochastic oscillator 254

Interpreting the stochastic oscillator 254

Buddying Up with Bollinger Bands 256

Creating Bollinger bands 256

Chapter 12: Buy Indicators and Bullish Reversal Candlestick Patterns 259

Buying with the RSI and Bullish Reversal Candlestick Patterns 260

Using the RSI to pick a long entry point 260

Using the RSI to pick long exits 262

Buying with the Stochastic Indicator and a Bullish Reversal Candlestick Pattern 264

Using the stochastic indicator to pick a long entry point 264

Using the stochastic indicator to pick long exits 266

Chapter 13: Sell Indicators and Bearish Reversal Candlestick Patterns 269

Shorting with the RSI and Bearish Candlestick Patterns 270

Picking short entry points with the RSI and candlesticks 270

Using the RSI to help pick short entry and exit points 272

Using the Stochastic Indicator and Bearish Candlestick Patterns for Shorting 274

Picking short entry points 275

Deciding when to get in and out of shorts 276

Chapter 14: Using Technical Indicators Alongside Bullish-Trending Candlestick Patterns 279

Using Trending Patterns for Buying and Confirmation 280

Buying trend lines with bullish candlestick patterns 280

Determining sales and stop levels with trend lines 282

Combining Moving Averages and Bullish-Trending Candlestick Patterns 285

Using moving averages with bullish-trending candlestick patterns to confirm trends 285

Setting stops with the moving average and bullish-trending candlestick patterns 287

Chapter 15: Combining Technical Indicators and Bearish-Trending Candlestick Patterns 291

Combining Lines with Candles for Confirmation 292

Analyzing short trades with trend lines and bearish patterns 292

Bearish trend lines and candlestick patterns leading to short entries and exits 294

Combining Moving Averages and Bearish Patterns for Shorts 296

Pinning down short entry points and confirming trends 297

Picking shorts with moving averages and candlesticks 299

Part 5: The Part of Tens 301

Chapter 16: Ten Myths about Charting, Trading, and Candlesticks 303

There’s No Difference between Candlesticks and Bar Charts 304

Market Efficiency Makes It Impossible to Beat the Market over the Long Run 304

Only a Full-Time Professional Can Make Money in the Markets 305

Technical Analysis Is Nothing More than Reading Tea Leaves 305

Charting Is for Short-Term Traders Only 306

You Must Be Rich to Start Trading 306

Trading Is an Easy Way to Get Rich Quick 307

Candlestick Charts Require In-Depth Data and Are Difficult to Create 307

The Trading Game Is Stacked against the Small Trader 308

Selling Short Is for Professional Traders Only 308

Chapter 17: Ten Tips to Remember about Technical Analysis 309

Charts Can Give False Signals 309

You Will Run into Skeptics 310

There’s No Definite Right or Wrong Opinion of a Chart 310

A Single Chart Doesn’t Tell a Whole Story 310

Charting Is Part Science, Part Art 311

You Can Overanalyze 311

Develop a Backup System 312

Error-Free Data Doesn’t Exist 312

No System Is Silly as Long as It Works 313

Past Results Don’t Always Predict Future Performance 313

Index 315