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Introduction to candle charts PART 2

Technical Analysis training course learning video part13 an introduction to candlestick charts. We go into the candles format, naming and meaning, psychological background, basic rules and compare candle charts with bar charts.

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This is the start of the second part of the introduction to candlestick charts.

In this second part let’s start by looking at what the influence is of size, shape, position and volume on candles. One or more bigger white candles with no or just little shadows mean that the trend is accelerating up and that there is accumulation of the stock.

One or more bigger black candles with no or just little shadows mean that the trend is accelerating down and that there is distribution of the stock.

When you see an increasing number of smaller candles, after an up move or a down move, it means that the trend is decelerating and distribution is ongoing. It is possibly a sign for a trend reversal. You should look for other signs to find a confirmation.

Shape and size go hand in hand. Larger size has more meaning. In this chart at 1 an uptrend move with white candles and doji’s or smaller black candles confirm the uptrend. At 2 small bodies with large shadows, confirmed by a bigger black candle down confirm a reversal. During 3 a down move is confirmed with black candles, doji’s or smaller white candles. At 4 in the downtrend you can see a white candle with only weak rising power. At the end of the downtrend at 5 you can see a bigger white candle with strong rising power.

The place in the chart where a candle appears indicates whether it is a usable signal.  A reversal pattern after an up-move is a strong reversal signal. The same pattern in a sideways price move has only limited meaning as a support or resistance level. Any pattern within a sideways move has no meaning at all. Here at 1, price started an up move with a very large candle at the bottom after a correction. Price moved up about 20% and started a consolidation phase at 2. Now at 3 we have a lower top than the previous one, so, we may have a head and shoulder top reversal pattern in the making and we have a big black candle now. Should we sell here? Another price pattern that has been formed already, is a diamond pattern. This can be a continuation pattern. So, either you would wait for a breakout out of the diamond pattern, or you could stay in or open a long position here because it gives you the advantage of a very good risk-to-reward ratio with an initial stop that can be placed very close by at the support level around $46.5.

So, apparently the big black candle at 1 was at the wrong place because price went up. After moving up further, we are now at 2 with another big black candle. Should we sell here? It is clear that the diamond pattern was a continuation pattern. The first big gap at 3 is then a continuation window. 3 candles ago we had another smaller gap. So, there is a fair chance that this is an exhaustion window. As we will see later, the 2 candles at the top are a bearish engulfing reversal pattern. So, yes here I would sell and go short, with a stop at the highest price.

And yes it was clearly a good decision! So, it should be clear that, where a candle or candle pattern appears is most important for interpreting that pattern.

 

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Remember the big white candle where the up move was started? Look at the volume as another factor that should influence your decision. A higher than usual volume is an extra indication to take into account when making up your mind about a candle or candle pattern.

This is the end of part 2 of the introduction to candlestick charts. The Eastern candle chart tells you much more than the Western bar chart. So, you should always have a look at the candles before making a buy or sell decision. Tell your friends about these videos and while visiting my website you may want to order my new book “Capturing Profit with Technical Analysis” with a complete trading system based on technical analysis. Until the next video, have a nice time.

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