Advanced Technical Analysis

CONTENTS
3 CHART PATTERNS
4 Cup and Handle
5 Ascending and Descending Triangles
6 Rising and Falling Wedges
7 Triple Top and Bottom
8 Head and Shoulders
9 JAPANESE CANDLESTICK PATTERNS
10 History of Japanese Candlestick Analysis
11 Benefits of Using Candlesticks
12 Candlestick Structure
14 Doji
15 The Long-Legged Doji and the High Wave
16 The Gravestone Doji and the Dragonfly Doji
17 Shooting Star and Inverted Hammer
19 Dark Cloud Cover
20 Three White Soldiers and Three Black Crows
21 Morning Star and Evening Star
23 FIBONACCI TRADING
24 What is Fibonacci Trading?
25 How Reliable are Fibonacci Retracements
26 How to Trade Fibonacci Retracements
28 How to Trade Fibonacci Extensions
29 Common Mistakes with Fibonacci Tools

Advanced Technical Analysis 2

CHART PATTERNS
Cup and Handle
The Cup and Handle is a bullish continuation pat-
tern. It consists of two parts: the cup and the handle.
Once the cup is completed, the handle is formed on
the right side of it. If it is followed by a breakout from
the resistance line, traders consider it a signal of an
uptrend.

This pattern can only be recognized on long-term

charts. The cup takes one to six months to be formed,
while the handle’s formation spans from one week to
a month.

Advanced Technical Analysis 4

Ascending and Descending Triangles
The Ascending Triangle is a bullish pattern that usu-
ally forms during an uptrend while the Descending
Triangle is its bearish counterpart.

For the pattern to be complete, the price needs to

bounce twice off the support level and twice off the
resistance level. When it subsequently breaks out of
the triangle, the price is assumed to continue in that
direction. It is important to note that the resistance
line for an Ascending Triangle and the support line for
a Descending Triangle must be horizontal and not in-
clined.

The strongest signals come from triangles that take

three to four weeks to form, however they could ap-
pear in shorter time frames.

Advanced Technical Analysis 5

Rising and Falling Wedges
Wedges are reversal patterns that form when price
waves move within a narrowing range. They are sim-
ilar to Ascending and Descending Triangles with the
fundamental difference being that, with the Trian-
gles, one of the two lines has to be horizontal. In a
Wedge, both lines must be inclined.

As with the Triangle, the pattern completes with a

breakout, which indicates that the price is going to
continue in that direction. If a Wedge is angled down-
ward, it is called a Falling Wedge and the prices are
expected to break out of its top line. The opposite is
known as a Rising Wedge and the breakout is typically
on the downside.

Advanced Technical Analysis 6

Triple Top and Bottom
A Triple Top and a Triple Bottom are reversal pat-
terns. A Triple Top starts when the price subsequently
bounces off a resistance level three times after being
in an uptrend. The pattern completes when the price
drops below the latest pullback low. That is consid-
ered a signal to sell, as the uptrend is over and lower
prices are on the way.

A Triple Bottom is the opposite of a Triple Top. It oc-

curs after a downtrend and indicates that the price is
no longer falling and a reversal is about to begin.

Advanced Technical Analysis 7

Head and Shoulders
Head and Shoulders is believed to be one of the most
reliable reversal patterns. It starts after a long bullish
trend when the price rises to a peak and pulls back.
Then, the price soars again to a significantly higher
peak, but declines again. Finally, the price goes up
for a third time, but only reaches the level of the first
high. It subsequently pulls back, completing the pat-
tern, which signals that the uptrend is ending and the
price is about to decline.

The first and third peaks are shoulders, while the sec-
ond peak is the head. The support level is called the
neckline.

As with other patterns, there could also be an inverse

Head and Shoulders, which occurs after an extended
downward trend and indicates that the price will go
up.

Advanced Technical Analysis 8

JAPANESE CANDLESTICK PATTERNS
History of Japanese Candlestick Analysis
One of the first people known to use past prices to
predict future price movements was Japanese mer-
chant Munehisa Homma. He raised his fortune trad-
ing in the rice market in the 18th century. Homma's
family had a huge rice farming estate which meant
that the information about the rice market was al-
ways available to them.

In order to learn about the psychology of investors,

Homma kept and analyzed records of yearly weather
conditions going back more than a hundred years.

To receive the market news faster, Homma set up his

own communications system. He placed men on roof-
tops to send signals using flags at prearranged times.
These men stretched all the way from Osaka to Saka-
ta, covering more than 600 kilometres.

Over his lifetime, Homma had written several books

and the candlestick patterns he described in them be-
came known as the Sakata Rules. They are believed to
have become the basis of modern candlestick charting.

You can spot the militaristic Japanese spirit in pattern

names, such as Night and Morning Attacks, Three Ad-
vancing White Soldiers, Counterattack Lines, Grave-
stone, and others.

Advanced Technical Analysis 10

Benefits of Using Candlesticks
Candlestick charts excel in visual appeal and readabil-
ity. A trader can glance at a candlestick chart and will
quickly understand what is going on with the price of
a security and who has dominated a given period —
buyers or sellers.

In addition, candlesticks form patterns that can be

used to identify suitable points to enter or exit the
market. Traders can use these patterns by themselves,
but usually they combine the patterns with technical
indicators to get more reliable predictions.

Advanced Technical Analysis 11

Candlestick Structure
The thick part of the candlestick is called the real
body. It represents the range between that session's
opening and closing prices.

When the real body is red, it means the closing price

of the session was lower than the opening price.

If the real body is green, it means the security price 1

went up over that time period.

The thin lines above and below the real body are
called the shadows. They represent the session's
price extremes.
2
The shadow above the real body is called the upper
shadow. The peak of the upper shadow is the highest
level the price has reached during the session.

The shadow under the real body is known as the low- 3

er shadow. The bottom of the lower shadow is the
lowest price of the session.

If a candlestick has no upper shadow, it is said to have

a shaved head. A missing lower shadow on the other
hand is called a shaved bottom.

Advanced Technical Analysis 12

Candlestick Structure
If a candlestick has a short real body positioned in the
middle, that means a struggle between the bulls and
the bears. Such a pattern is known as a spinning top.

Sometimes a trader can stumble upon a candlestick

where the real body is so short it is almost impossi-
ble to see. That means that the price returned to its
initial level over the course of the session and such a
candlestick is called a doji.

Advanced Technical Analysis 13

Doji
A perfect doji session has almost no difference be-
tween the opening and the closing prices. However,
if recently there’s been increased volatility on the
market, a candlestick with a real body a few ticks long
would still fall under the definition of doji.

A doji can be an important trend change indicator be-

cause it embodies traders’ indecision and a possibil-
ity that they will not be able to maintain the current
trend. The significance of a doji heavily depends on
the context, for example, if there is a series of small
real bodies preceding the doji, it would not be consid-
ered a valid signal. If, however, a doji is formed after
a very long trend or there are signs that a reversal is
due, it is deemed significant.

Some traders treat the doji as a warning that is better

to adhere to, so they choose to take their profits in
case it’s a sign of a prior trend losing its strength.

Advanced Technical Analysis 14

The Long-Legged Doji and the High Wave
The Long-Legged Doji pattern can be identified as
having long upper and lower shadows and a nearly
non-existent real body located near the middle of
the candle. The pattern, also known as the Rickshaw
Man, indicates a period of indecision in the market as
during the trading session the price has risen, then
plummeted before returning to the opening level.

The Long-Legged Doji plays a particularly important

role when it appears during a strong trend as the in-
decision could result in a price reversal. Traders can
enter the market right after the candle closes, or wait
for a confirmation. The signal could be considered
valid if in an uptrend the following candlestick closes
below the pattern’s lower shadow. During a down-
trend, the next candle needs to close above the upper
shadow of a Long-Legged Doji.

The Long-Legged Doji can be confused with a candle-

stick pattern called the High Wave. It also has long
shadows from both sides, but the body of the High
Wave is slightly bigger. This pattern indicates the mar-
ket's confusion about where prices are heading as
well, so you should wait for the next candle to con-
firm whether the trend will continue or reverse.

Advanced Technical Analysis 15

The Gravestone Doji and the Dragonfly Doji
The Gravestone Doji is formed when the opening and
closing prices are at the level of the daily minimum
with a long upper shadow. Most of the time the pat-
tern appears after an uptrend, but occasionally it can
be encountered after a downtrend as well. In either
case, it signals a reversal.

The pattern starts with the price going up sharply after

the trading session opens. Then for those who have
opened long positions, trouble begins: by the end of
the session, prices drop straight to the session’s mini-
mum. The higher the upper shadow, the stronger the
bearish potential of the doji.

The opposite of the Gravestone Doji is the Dragonfly

Doji. It’s a bullish pattern that looks like a reversed
Gravestone Doji and can usually be found during a
downtrend, but sometimes appears during an up-
trend. The Dragonfly Doji also marks a potential re-
versal, but both patterns require volume and the next
candle for confirmation.

Some traders argue that the Gravestone Doji and the

Dragonfly Doji should be seen simply as indicators of
indecision in the market rather than strong bullish or
bearish signals.

Advanced Technical Analysis 16

Shooting Star and Inverted Hammer
The shooting star is a one-candle pattern encountered
after an uptrend that can signal a reversal. It has a long
upper shadow and a small real body located at the bot-
tom of the candle. Similar to other star patterns, the
color of the body is insignificant. An ideal shooting star
has a gap between its body and the body of the previ-
ous candlestick, but a gap is not necessary.

If the price drops over the next session, it could be

considered a confirmation of the reversal and traders
may open a sell position. But if the price rises after a
shooting star, then its upper shadow could become a
resistance level. If it continues to rise further, the signal
should be deemed false as the uptrend is still ongoing.

A similar pattern to the shooting star is the invert-

ed hammer. Visually, they’re identical — both have
long upper shadows and small real bodies near the
bottom of the candle, with little or no lower shadow.
The difference lies in the context. While the shooting
star occurs after an uptrend, the inverted hammer is
a bullish pattern that is formed after a downtrend and
signals a potential bottom reversal. To validate the
pattern, a confirmation is required as well. It can be
a gap up while the volume is high, or a bullish candle
with a higher price level.

Advanced Technical Analysis 17

Shooting Star and Inverted Hammer
To explain why this pattern is considered a signal of
a reversal, let’s look at the session of the following
day. If the opening price is higher than the body of the
inverted hammer, those who have taken short posi-
tions at the opening or closing prices of the previous
day start to lose money. The longer the market holds
above the body of the inverted hammer, the more
likely it is that these short positions will be closed.
This may cause a jump in price which will encourage
traders who are waiting for the end of the downtrend
to open long positions, which in turn will lead to fur-
ther price increase.

Advanced Technical Analysis 18

Dark Cloud Cover
The dark cloud cover is a top reversal pattern that
consists of two candles, appearing after an uptrend
or at the upper border of a price range.

The first session needs to be a candlestick with a

strong real body. The next day the opening price must
be above the upper shadow of the first candle, but at
the end of the day the candlestick must close below
the midpoint of the previous bullish candle. It is pre-
ferred for the body of the second candlestick to cover
more than 50% of the first one and if there is a bear-
ish candle right after the pattern, it can be considered
a confirmation.

Most traders also look to other indicators for addi-

tional confirmation. For example, if RSI is greater than
seventy, it means the asset is overbought and a rever-
sal is more likely.

Advanced Technical Analysis 19

Three White Soldiers and Three Black Crows
Three White Soldiers is a group of three bullish can-
dlesticks with consistently rising closing prices. The
opening price of each candlestick is within or near
the real body of the preceding candle and the closing
prices are equal to the maximum prices or trying to
reach them. When this pattern appears after a down-
trend, it’s a sign of a potential bullish dominance on
the market.

To be considered a reliable reversal signal, the Three

White Soldiers pattern needs to be confirmed by tech-
nical indicators like the RSI. Sometimes, there is a
short consolidation period following the pattern even
though overall market sentiment remains bullish. Con-
solidation could also take place if a significant move to
the upside reaches major resistance levels.

The opposite of the Three White Soldiers is the Three

Black Crows pattern; it indicates that an uptrend
might have just reversed into a downtrend. Volume
and technical indicators should also be looked at for
confirmation in this case.

It’s worth noting that in both the Three White Soldiers

and the Three Black Crows, all three candles must have
long bodies. If the bodies get progressively shorter
with each candle, that is known as either the Advance
Block pattern, or the Stalled pattern.

Advanced Technical Analysis 20

Morning Star and Evening Star
The morning star is a bottom reversal pattern that
evolves over a three-day period and signals that the
bulls have seized the initiative. It starts with a can-
dle with a long bearish body, followed by a gap and a
candle with a small body. On the third day, a bullish
candle appears. It needs to have a body almost as big
as the first candle’s to finish the pattern.

An ideal morning star pattern contains price gaps

both before and after the middle candlestick, but
in fact the second gap can be observed quite rare-
ly. However, real-world experience proves that its
absence does not diminish the significance of this
model.

To understand the logic of the pattern, let’s go over

each of its stages. The first candle with a red body
means that the price is falling and the bears rule the
market. Then there is a candle with a small body, which
shows that the sellers are running out of the forces
necessary to further move the market down. Finally,
the appearance of a strong green body the next day
proves that bulls are starting to seize the initiative.

Advanced Technical Analysis 21

Morning Star and Evening Star
The counterpart of the morning star is the evening
star. It you see it after an uptrend, it can be consid-
ered a signal of a reversal. It consists of a long bullish
candle, followed by a small bullish or bearish candle,
and finalised by a red candle that’s similar in size to
the first candlestick.

Like a morning star, the perfect evening star has two

gaps, but an instance with a gap only between the
first two candles is also considered valid.

Advanced Technical Analysis 22

FIBONACCI TRADING
What is Fibonacci Trading?
Fibonacci tools are based on the series of numbers
identified in the 13th century by mathematician Leon-
ardo Bonacci, commonly known as Fibonacci. The se-
quence is infinite and each number is the sum of the
two numbers before it, so 3 comes from adding up 2
0,1,1,2,3,5,8,13,21,34
and 1, and 21 is a sum of 13 and 8. The main charac-
teristic of the sequence is that each number is approxi-
mately 61.8% of the next number, 38.2% of the follow- 8/13 = ~ 61.8%
ing number, and 23.6% of the number after that.
8/21 = ~ 38.2%
Trading platforms usually offer several Fibonacci draw- 8/34 = ~ 23.6%
ing tools: retracement, extension, fan, arcs, and time
zone. We’ll focus on retracements and extensions as
they are the most popular among traders. The concept
behind Fibonacci retracements is based on a theory that
after a significant movement the price will pull back to a
previous price level before continuing in the original di-
rection, which means the Fibonacci levels can act as sup-
port and resistance. The opinions regarding which levels
to use differ, but the three most common Fibonacci re-
tracements are 38.2%, 50%, and 61.8%. The 50% level
is not derived from a Fibonacci number, but is included
because assets tend to continue moving in a certain di-
rection after they complete a 50% retracement.
Fibonacci extensions are used to identify Take Profit levels,
anticipate how far the price can reach once a retracement
is finished, and establish potential reversal levels. The most
common Fibonacci extensions are 61.8%, 100%, and 161.8%.

Advanced Technical Analysis 24

How Reliable are Fibonacci Retracements
All Fibonacci tools are based on ratios that are derived
from what is essentially a mathematical irregularity
without any logical foundation. While not fundamen-
tally wrong, some traders would like to understand
the logic a trading strategy is built upon.

There is also an opinion that Fibonacci levels work

only because many traders use the same levels to en-
ter and exit the market which makes them a self-ful-
filling prophecy. However, this argument can be ap-
plied to all universal trading strategies, if not technical
analysis in general.

Another argument against Fibonacci retracements

is that they can only point to potential reversals and
corrections, not providing easily identifiable signals.

All of that said, plenty of traders have made profits

from Fibonacci retracements.

Advanced Technical Analysis 25

How to Trade Fibonacci Retracements
Fibonacci retracements work best during long-term
trends, so make sure you find the primary uptrend or
downtrend. Then identify Swing High and Swing Low
points. A Swing High is a peak reached by the price
that forms when the high of a price is greater than a
number of highs around it. A Swing Low is the oppo-
site of a Swing High, it appears when a low is lower
than surrounding prices.

When you’ve found the lowest Swing Low and the

highest Swing High of the main trend, use the Fibo-
nacci retracement tool to connect the starting point
with the end point. Once you’ve applied the Fibonac-
ci levels, simply treat them as potential support and
resistance levels. The most proven retracements are
38.2%, 50%, and 61.8%.

No matter which direction the current trend is go-

ing, wait for a pullback to complete and open a posi-
tion once you have a confirmation that the price has
bounced off a retracement level. Don’t forget to place
a stop loss slightly below that retracement level for an
uptrend and just above it for a downtrend, in case the
price breaks through it after all.

Advanced Technical Analysis 26

How to Trade Fibonacci Retracements
The commonly monitored levels for a strong trend
are 38.2% and 50%, while in a weak trend the price
could retrace to the 61.8% level.

If you decide to use Fibonacci retracement levels,

keep in mind that they are not to be treated as hard
reversal points, but rather as levels to be aware of.
You should always wait for a confirmation of a rever-
sal from technical indicators.

Advanced Technical Analysis 27

How to Trade Fibonacci Extensions
While Fibonacci retracements show where the price
could stop its pullback and revert to the original trend
direction, Fibonacci extensions help establish how far
the price can reach before another retracement.

To add the extension tool on the chart, you need to

choose three points. The first point should be placed
at the start of a price move, the second point at the
end of it, and the third point at the end of the retrace-
ment. Subsequently you will see extensions levels ap-
pear over the chart.

Common Fibonacci extension levels are 61.8%, 100%,

and 161.8%. They act as potential resistance levels so
traders can use them to place Take Profit orders or
open positions in the opposite direction of the trend.

Fibonacci extensions alone are not supposed to be

used for making trading decisions. It is recommended
to combine them with other indicators or patterns to
confirm that a reversal is indeed about to take place.

Advanced Technical Analysis 28

Common Mistakes with Fibonacci Tools
When applying Fibonacci tools to the chart, be consis-
tent with choosing the reference points: connect either
wick to wick, or candle body to candle body. Also make
sure you correctly identify the main long-term trend as
less experienced traders tend to measure pullbacks in
the short term which leads to weak signals.

Another common mistake is using Fibonacci tools on

short time frames. High volatility during day trading
means that support and resistance levels are less
reliable which makes it hard for a trader to pick re-
tracement levels and set stop losses and take profits,
although it’s worth noting that some traders don’t
see it this way and apply Fibonacci tools even to tick
charts.

Finally, do not make trading decisions based on Fi-

bonacci tools alone. Waiting for a confirmation from
technical indicators like MACD and stochastic oscil-
lators will help you avoid false alerts, increasing the
probability of a successful trade.

Advanced Technical Analysis 29

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