Enlighten Your Trading with Candlestick Charts WHATHAVE WE LEARNT? *Introduction to candlestick — A Japanese Technique — Candlesticks have originated from Japan. A Commodities trader, Munechisa Homma started trading based on Candlesticks around 150 years back. @Type of a chart — Candlestick is a type of chart where every candle tells us the price action for a specific timeframe. Like, western technical tools (Le. Supports & Resistances, Moving averages, etc.) the candlestick charting techniques are also universal in nature, we can use them across timeframes (Intraday charts, daily charts, weekly charts, monthly charts, etc) and on any asset class (Equities, commodities, currency, futures, etc.) as per our trading style. Different parts of the Candlestick — oReal Body — The rectangular body consisting of the Open and the close price of a particular time action. oUpperShadow/Wick/ Tail — Distance between the high and the open/close oLower shadow / Wiek/Tail - Distance between the low and the open/close. Wicks are considered emotional extremes.Enlighten Your Trading with Candlestick Charts ‘Types of Candlesticks — Sesadeeeeyerees Green candle (Real body) — When the close price is above the opening price for the specific time period, the colour of the candle becomes green showing the strength in the price. Bulls have the control of the price. Red Candle (Real body) — When the close price is below the opening price for the specific time period, the colour of the candle becomes red showing the weakness in the price. Bears have the control of the price Doji Candle — This is a type of candle where the prices open and clog almost at the same rate. This candle shows a lot of indecision wheq neither bulls nor the bears are in control of the price. Candlestick Psychology — eDrawing out the story — Candlesticks help us in understanding the winner of the battle between the bulls and the bears so that we can select the direction for our trade. They help us in looking at the buying pressure (Power of bulls) and the selling pressure (Power of bears) for a particular candle which will tell us who was stronger. A huge buying pressure (From low to the close) as compared to the selling pressure (From high to the close) suggests a possible bounce back in the price after a downtrend.Enlighten Your Trading with Candlestick Charts eCheck the colour — The colour of the candlestick is one of the important factors which tell us the strength or weakness in the price. A green colour candle is a sign of strength as the bulls were able to close the prices above the opening rate, where as a Red Colour candle points out at the weakness in the price. *Size does Matter - Size of the candle is another important factor. Bigger the real body of a candle stronger the price action and vice versa. An uptrend can be called as a strong uptrend when there are lots of green candles with sizable real bodies. Where as a downtrend will be strong when there are lots of red candles with big real bodies. Big real bodies indicate the strength of a particular trend where as small real bodies show the weakening of the trend. ®Tale of Tails - Shadows / tails are one of the most important factors for understanding the psychology of the market participants. Long lower shadows (shadow below the real body) indicate the amount of buying pressure where as long upper shadows (shadow above the real body) indicate the amount of selling pressure. Im portant Candlestick patterns — A candlestick pattern is a formation of one of more candlesticks where the colour, size and shadows of the candle/candles indicate the probable future price action. There are more that 70-80 patterns which are categorized mainly in two types, Bullish Patterns and Bearish Patterns. In this candlestick charting course we have discussed 4 Bullish patterns which are very popular, effective and are easy to recognize. The illustrations to other important patterns have also been included in the training material for future referenceEnlighten Your Trading with Candlestick Charts Patterns which we are going to use for trading are — Hammer, Dragonfly Doji. reing Line and Bullish Engulf,Enlighten Your Trading with Candlestick Charts Bullish (bottom) reversal patterns - Hammer — It is a single candlestick pattern which appears after a downtrend which can be treated as a potential Bullish reversal signal. lease a aier. SUPPORT INSIGHTS How to trade Hammer - Pee Moderate Trader - Buy above the high Cau CRUE PenaEnlighten Your Trading with Candlestick Charts Sharekhan + Dragonfly Doji (Bullish) — It is a single candlestick pattern where the open, high and the close are almost at the same level. The long lower shadow indicates a potential trend reversal. Support How to trade Dragonfly Doji- red at an area of s YES (15' Rule) Cesc NeNPLEE PME !oderate Trader ~ — Buyon the opening a eee relates CORTE eT) | lee ll Cle een closing basisEnlighten Your Trading with Candlestick Charts Sharekhan + Piercing Line — This is 2 2 candle pattern where the 1st candle is big red candle whereas 2nd candle is a green candle which after opening below the close of the red candle closes above the half of the red candle’s real body. y should be relatively long How to trade Piercing Line Pattern - I at an area of support? YES (15¢ Rule) BUY AT CLOSE Er rons Ce No (2 Rule) ES ie Sed ae oC eter RE Cee cy closing basisEnlighten Your Trading with Candlestick Charts Sharekhan + BullishEngulf — This is a2 candle pattern where the 1 candle is a red candle whereas 24 candle is a comparatively bigger green candle whose real body entirely wraps around the real body of the first candle. How to trade Piercing Line Pattern - Occurred at an area of su YES (15! Rule) BUY AT CLOSE Ca) NORPIUE CEE Moderate Tracer - — Buy above a Re rae STOP LOSS ~ Conservative Trader Buy onaclose above § LOowof the patternona Cera eterEnlighten Your Trading with Candlestick Charts ullish Harami— Harami, in Japanese means a pregnant woman. The combined shape of 2 candles of these pattern looks like a pregnant YES (1st Rule) a Cues peed Eee ea) ees nd NO (2"4 Rule) STOP LOSS - Area of SupportEnlighten Your Trading with Candlestick Charts Shooting Star (Bearish) — It is a single candlestick pattern which appears after an uptrend which can be treated as a potential bearish reversal signal. Resistance How to trade Shooting Star r 2 Cella Occurred at an area of resistance? 7 Green / Red ——> YES (1st Rule) RRR og id NO (2"4 Rule) Pec STOP LOSS - Pere See ea Dee sd EresEnlighten Your Trading with Candlestick Charts Gravestone Doji (Bearish) — It is a single candlestick pattern where the open, low and the close is almost at the same level. The long upper shadow indicates a potential top reversal signal. Pattern Related to Shoot Top reversal (Bearish) Pattern How to trade Gravestone Doji- Resisearioe | Occurred at an area of resistance? YES (1°* Rule) er NO (2"4 Rule) pony a nea ea ny Breatecces eee De oe Peer eee Cee conEnlighten Your Trading with Candlestick Charts Bearish Harami — Harami, in Japanese language means a pregnant woman. The combined shape of 2 candles of these pattern looks like aptegnant woman. (Exactly opposite of the Bullish Harami Pattern) \ corr 2nd real body to the Ist candle better Pesce Cees Peete etotinliieeainded ert eA YES (15' Rule) Rae Raa Cu NO (24 Rule) STOP LOSS —a Enlighten Your Trading with Candlestick Charts Dark cloud Cover (Bearish) — This is a2 candle pattern where the 1st candleis big green candle whereas Ind candle is a red candle which after opening above the close of the green candle closes below the half of green candle’s real body. (Exactly opposite of Piercing line Ist candle is a candle > 2nd candle’s should open above the close of 1 candle e's should close hali © real body of the I* Highest high of the pattern Green real body should be tively long How to trade Dark Cloud Cover- Occurred at an area of resistance? YES (15* Rule) Peco NO (2"4 Rule) Se Pee een) STOP Loss — Dey eS aaa ererroiennEnlighten Your Trading with Candlestick Charts Sharekhan + Bearish Engulf — A 2 candle pattern where the 1st candle is a green candle whereas 2nd candle is 4 comparatively bigger red candle whose real body entirely wraps around the real body of the first candle. I* candle can also be a Doii How to trade Bearish Engulf - Resistance lat an area of resistance? YES (15t Rule) AT CLOSE Ea NO (2™ Rul ee ee one eae ped onserwative Trader — Sell on aclose below Dueck) Cierra COUEnlighten Your Trading with Candlestick Charts \Candlesticks—A Guide for a trades — In this section we will look at all those spects of candlesticks which we need to know before trading based on andlestick charting techniques. *Early trend reversal signals — Candlesticks are early trend reversal signals. This enables traders to catch the trend at the earliestand make the most of it. However not every time we can expect to have candlestick signals at every top and bottom. Also every pattern may not always give us the movement in our desired direction. \, Need to have prior teend — Majority of Candlestick patterns are reversal patterns so every pattern which we learnt in the course needs to havea prior trend. We should look at the immediate price action before the candlestick pattern was formed. A movement of around 4-5 candles in one direction can be called as a trend from a candlestick perspective. If these patterns occur in a sideways market then they should not be considered as trend reversals. So for every bullish reversal signal there should have beena prior downtrend whereas every bearish reversal signal should have had a prior uptrend. The candle should be completed — We should not be calling a candlestick line as a pattern unless and until it is completed. So a pattern on an hourly chart will be confirmed only when we get a full candle after an hour, a daily chart signal can be valid only at the end of the day, and so on.Enlighten Your Trading with Candlestick Charts Candlesticks cannot be a system on their own — For a successful trading system a trader needs to know the price to enter, the stop loss, the target and the target time frame before taking any trade. Out of these 4 elements candlestick patterns can only give us the entry and the stop loss levels, Candlesticks on their own cannot provide targets and the time frame for the trade. Used in conjunction with western technical tools — As these patterns cannot be used as a trading systern on their own it is really very important to use candlesticks along with other western technical tools like supports, resistances, Moving averages, Fibonacci retracements, Bollinger bands, etc. Combining candlesticks along with any of the other technical tools will produce better results. @Risk Reward if of Prime importance — Any trade without a favorable risk reward is not worth taking, Risk is the difference between the initiation price and stop loss where as reward is the difference between the target and the initiation price. We should not be taking a trade if the risk is higher than reward. 1:2 is a commonly followed risk reward ratio, ic. if the risk is of Rs.5 the reward should of Rs.10 (Risk: Reward — 5:10 — 1:2). With a risk reward of 1:2, the trading activity will be profitable in spite of being wrong 50% of the time. {Out of 10 trades, if 5 are stopped out and 5 achieve targets, there would be net profit of Rs.5 with a risk reward of 1:2 (Profit = Rs2*5 profitable trades = 10) - (Loss = Rs.1 * 5 loss making traces = 5)}RAL «Ne = 2 Enlighten Your Trading with Ss 8 £ Candlestick Charts * Sharekhan + Checklist for making money — This is a rule based approach for taking trades based on candlesticks. Request you all to adhere to it for a successful trading activity. Every trade should be taken after following the checklist shown below The trade should be based on the following important factors oCandlestick Pattern — refer various patterns discussed in the course oCheck the prior trend —A trend of around 4-5 candles before the pattern should be as per the criteria of the respective pattem. oConfirmation with the western technical tools — It's vital to check whether the pattern is supported by other Western technical tools like, Supports, Resistances, Moving Averages, ete. oRisk Reward — And last but not the least factoris Risk Reward. If every other rule of the checklist is satisfied but the risk rewardis not favourable, the trade should not be taken. We should understand that not taking a trade can also be a part of a successful trading strategy.Enlighten Your Trading with Candlestick Charts ing money Pre amr ed plea: pola) pati