Part 13 Technical Analysis – Sitting candles

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Part 13: Technical Analysis – Sitting candles

This article was not written by me, I have received it as an e-mail written by one of the traders using BERSI 2.0 STRATEGY. I liked it a lot, therefore, I have decided to edit it a little bit and share it with you (with author’s blessing, of course �� ) Let me know if you liked this article!

Using BERSI 2.0 strategy

I would like to dedicate this article to candles and their analysis for better trading. Methods, which I will explain today, can be used with BERSI 2.0 but also for drawing trend lines, lines of support and resistance, or Fibonacci lines.

Some of you may have experienced, that even if the indicator for trade seemed strong, the trade was not successful. Since I’ve backtested BERSI strategy for a long time and used other methods to raise its success rate, I have to say that after few weeks I’ve finally made it.

Personally, I search for trades in M5 timeframe and then open trades with 10 – 15 minutes expiration time. I’ve decided to share my experience with all of you – fans of Step’s website and his BERSI strategy.

Sitting candles

We now focus on what I call „sitting candles“: candles with a tall body but without wick and touching IB Weekly or Daily lines.

Sitting candle example

And what does this mean? As we can see, there has been an occurrence of Three Line Strike, but the price has reverted and went downwards even if the expectation was for the candle to go up.

This is an example of a sitting candle. This candle is rare and usually appears before the candle with an arrow (see picture for the illustration). In this situation, I do not trade as I do not know which way the price will go, because it is sitting on the daily line. And it could be broken (breakout) or the price might reverse. The exception is an IB Weekly, from which the price almost always reverses.

This is just a theory, but it has helped me to avoid many bad investments and thus saved my money. Therefore, a sitting candle is ideal for trading with Weekly IB, but not for Daily IB.

Weekly line breakouts

Another strong indicator is weekly line breakouts. This formation occurs often, but I think many traders don’t trade it because of the breakouts.

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I do not trade this formation because of the breakouts and candle types. We could expect growth and reverse downwards, but this does not happen often.

Wickless candle

Finally, what is a wickless candle? This formation occurs from time to time and I do not recommend to make trades even if the arrow is present. The wickless candle may indicate that price does not know yet which way to go and trading is, therefore, risky.

The trade might be successful, but in many cases is not. This is confirmed fact from my analyst as opposed to the previous two pictures �� .

My trades

Ans how do I trade? I like trading Weekly line reverses the most. It is probably the strongest and best indicator of the overall strategy. It may be traded with or even without an arrow.

That’s all for today. And for those who do not have this excellent strategy: At least try it. Lines, not only arrows, play an important role in this strategy which will help you navigate the market.

Download BERSI 2.0 strategy

Author

More about the author Step

I’ve wanted to build a business of some kind and earn money since I was in middle school. I wasn’t very successful though until my senior year in highschool, when I finally started to think about doing online business. Nowadays I profitably trade binary options full-time and thus gladly share my experiences with you. More posts by this author

Technical Analysis: Introduction to Candlesticks

Technical Analysis: Introduction to Candlesticks

This is the perfect Introduction to Candlesticks for beginners.

Having perceived that the Open (O), high (H), low (L), and close (C) is the ideal approach to outline the trading activity, we require a diagramming strategy that shows this data in the most understandable way.

If a good charting technique is not used charts can get quite complicated to understand. The standard charts such as a column, area, pie chart do not work in the technical analysis of stocks.

It is primarily because they can only show one data at a time whereas we need four data points to be displayed simultaneously for technical analysis.

You can solve this problem by the use of Japanese Candlesticks. Hence it is most preferred for technical analysis of stocks by the traders.

Structure of Japanese Candlestick

In a candlestick chart, candles can be classified as a bullish or bearish candle represented by green and red candles respectively. On this website, we have opted for the green and red combination to represent bullish and bearish candles respectively. The structure of a candlestick is simple and can be understood well as you move ahead.

First, we shall look at a bullish candle.

The candlestick has three components:

  • The Central real body – The body, rectangular in shape connects the opening and closing price
  • Upper shadow – Joins the high point to the close
  • Lower Shadow – Joins the low point to the open

Similarly look at a bearish candle.

The candlestick has three components:

  • The Central real body – The body, rectangular in shape connects the opening and closing price
  • Upper shadow – Joins the high point to the open
  • Lower Shadow – Joins the low point to the close

Note: When close > open Bullish candle. When close Conclusion: Introduction to Candlesticks

Now that you know how to read a candlestick, In the next post, you will understand how candlesticks are used to identify patterns in candlesticks. These patterns will directly help you to set up a profitable trade.

Basic Chart Patterns

To learn more about technical analysis from books you can read the article on Best Books on Stock Market.

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Check SGX Nifty Live technical analysis chart to find the trend of the Indian stock market before opening.

Understanding Basic Candlestick Charts

Candlestick charts originated in Japan over 100 years before the West developed the bar and point-and-figure charts. In the 1700s, a Japanese man named Homma discovered that, while there was a link between price and the supply and demand of rice, the markets were strongly influenced by the emotions of traders. 

Candlesticks show that emotion by visually representing the size of price moves with different colors. Traders use the candlesticks to make trading decisions based on regularly occurring patterns that help forecast the short-term direction of the price.

Key Takeaways

  • Candlestick charts are used by traders to determine possible price movement based on past patterns.
  • Candlesticks are useful when trading as they show four price points (open, close, high, and low) throughout the period of time the trader specifies.
  • Many algorithms are based on the same price information shown in candlestick charts.
  • Trading is often dictated by emotion, which can be read in candlestick charts.

Candlestick Components

Just like a bar chart, a daily candlestick shows the market’s open, high, low, and close price for the day. The candlestick has a wide part, which is called the “real body.”

This real body represents the price range between the open and close of that day’s trading. When the real body is filled in or black, it means the close was lower than the open. If the real body is empty, it means the close was higher than the open.

Traders can alter these colors in their trading platform. For example, a down candle is often shaded red instead of black, and up candles are often shaded green instead of white.

Candlestick vs. Bar Charts

Just above and below the real body are the “shadows” or “wicks.” The shadows show the high and low prices of that day’s trading. If the upper shadow on a down candle is short, it indicates that the open that day was near the high of the day.

A short upper shadow on an up day dictates that the close was near the high. The relationship between the days open, high, low, and close determines the look of the daily candlestick. Real bodies can be long or short and black or white. Shadows can be long or short.

Bar charts and candlestick charts show the same information, just in a different way. Candlestick charts are more visual, due to the color coding of the price bars and thicker real bodies, which are better at highlighting the difference between the open and the close.

The above chart shows the same exchange-traded fund (ETF) over the same time period. The lower chart uses colored bars, while the upper uses colored candlesticks. Some traders prefer to see the thickness of the real bodies, while others prefer the clean look of bar charts.

Basic Candlestick Patterns

Candlesticks are created by up and down movements in the price. While these price movements sometimes appear random, at other times they form patterns that traders use for analysis or trading purposes. There are many candlestick patterns. Here a sampling to get you started.

Patterns are separated into bullish and bearish. Bullish patterns indicate that the price is likely to rise, while bearish patterns indicate that the price is likely to fall. No pattern works all the time, as candlestick patterns represent tendencies in price movement, not guarantees.

Bearish Engulfing Pattern

A bearish engulfing pattern develops in an uptrend when sellers outnumber buyers. This action is reflected by a long red real body engulfing a small green real body. The pattern indicates that sellers are back in control and that the price could continue to decline.

Bullish Engulfing Pattern

An engulfing pattern on the bullish side of the market takes place when buyers outpace sellers. This is reflected in the chart by a long green real body engulfing a small red real body. With bulls having established some control, the price could head higher.

Bearish Evening Star

An evening star is a topping pattern. It is identified by the last candle in the pattern opening below the previous day’s small real body. The small real body can be either red or green. The last candle closes deep into the real body of the candle two days prior. The pattern shows a stalling of the buyers and then the sellers taking control. More selling could develop.

Bearish Harami

A bearish harami is a small real body (red) completely inside the previous day’s real body. This is not so much a pattern to act on, but it could be one to watch. The pattern shows indecision on the part of the buyers. If the price continues higher afterward, all may still be well with the uptrend, but a down candle following this pattern indicates a further slide.

Bullish Harami

The bullish harami is the opposite or the upside down bearish harami. A downtrend is in play, and a small real body (green) occurs inside the large real body (red) of the previous day. This tells the technician that the trend is pausing. If it is followed by another up day, more upside could be forthcoming.

Bearish Harami Cross

A bearish harami cross occurs in an uptrend, where an up candle is followed by a doji—the session where the candlestick has a virtually equal open and close. The doji is within the real body of the prior session. The implications are the same as the bearish harami.

Bullish Harami Cross

A bullish harami cross occurs in a downtrend, where a down candle is followed by a doji. The doji is within the real body of the prior session. The implications are the same as the bullish harami.

Let’s look at a few more patterns in black and white, which are also common colors for candlestick charts.

Bullish Rising Three

This pattern starts out with what is called a “long white day.” Then, on the second, third, and fourth trading sessions, small real bodies move the price lower, but they still stay within the price range of the long white day (day one in the pattern). The fifth and last day of the pattern is another long white day.

Even though the pattern shows us that the price is falling for three straight days, a new low is not seen, and the bull traders prepare for the next move up.

A slight variation of this pattern is when the second day gaps up slightly following the first long up day. Everything else about the pattern is the same; it just looks a little different. When that variation occurs, it’s called a “bullish mat hold.”

Bearish Falling Three

The pattern starts out with a strong down day. This is followed by three small real bodies that make upward progress but stay within the range of the first big down day. The pattern completes when the fifth day makes another large downward move. It shows that sellers are back in control and that the price could head lower.

The Bottom Line

As Japanese rice traders discovered centuries ago, investors’ emotions surrounding the trading of an asset have a major impact on that asset’s movement. Candlesticks help traders to gauge the emotions surrounding a stock, or other assets, helping them make better predictions about where that stock might be headed.

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