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1.
What is Technical Analysis?
2.History of Candlesticks
3.
How to Read Candlesticks
4.
Candlestick Patterns
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What is Technical
Analysis?
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▪ A method of evaluating securities by analysing statistics generated by market activity (e.g. past prices and volume).
▪ Technical analysts do not attempt to measure a security's intrinsic value, but instead use charts and other tools to identify patterns that can suggest future activity.
▪ Technical analysts believe that the historical performance of stocks and markets are indications of future performance.
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It is crucial to keep in mind that Technical
Analysis is not an exact science.
Rather, Technical Analysis deals with
probability distributions.
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▪
Market Action Discounts Everything
▪
Prices move in Trends
▪
History tends to repeat itself
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1.
Market Action Discounts Everything
▪ Cornerstone of Technical Analysis
▪ The technical analyst believes that anything can possibly affect the price and is actually reflected in the price of that market
▪ Anything can be political, psychological or natural
disasters, etc.
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2. Prices move in Trends
▪ The concept of Trend is essential to Technical Analysis
▪ Believe that market prices do exhibit Trends
▪ Purpose of charting price action is to identify Trends
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3 Basic Trends of the Market
Uptrend Downtrend Sideways
▪ Uptrend has a pattern of rising peaks and troughs ▪ Downtrend has a pattern of lower peaks and troughs
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Uptrend has a pattern of rising peaks and troughs
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Downtrend has a pattern of lower peaks and troughs
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Sideways has a pattern of horizontal peaks and troughs
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3. History tends to repeat itself
▪ The study of Human psychology
▪ Chart patterns reflect Bullish / Bearish psychology of the market
▪ Key to understanding the future lies in the study of the past or that “The future is just a repetition of the past”
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• Candlesticks are a type of charting technique
• Other techniques include Bar Charts and Line Charts
• Candlestick charts are used in Technical Analysis to
deduce trends and predict price movements
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Advantage of Candlestick Chart
• Easy to understand – offer a much more appealing chart
• Information displayed is easily interpreted and analysed
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History of Candlesticks
• Developed by the Japanese for rice trading in
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thcentury
• Popularised by Steve Nison after his publication of
“Japanese Candlestick Charting Techniques” in 1991
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How to Read Candlesticks
High Close Low Hollow Body Lower Shadow Upper Shadow Open
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How to Read Candlesticks
Price: Close below Open
High Open
Low Filled Body
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Rising Window
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Rising Window
• Bullish sign
• Opens above Previous Period’s High
• Remains above Previous Period’s High for Entire Period
• Closes above Previous High
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Falling Window
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Falling Window
• Bearish sign
• Opens below Previous Period’s Low
• Remains below Previous Period’s Low for Entire Period
• Closes below Previous Low
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Doji
Price: Close = Open
High
Low
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Doji
• Neutral pattern
• No real body
• Indecision signal
• Requires prior trend and future confirmation to determine
type of signal
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Spinning Top
• Signal indecision
• Small bodies
• Upper and lower shadows exceed length of the body
• Upper and lower shadows of approximately equal length
• Require confirmation
Length of Body Lower Shadow Upper Shadow
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Doji and Spinning Top
Similarities
• Represent indecision
• Warn of reversal after strong move
• Rely on confirmation
Differences
• Doji has no body
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Umbrella Group or “karakasa”
• Definition: small real body (open, close range small)
• Shadows > 2 times the length of real body
• Colour is not important
• Location is important; their names are given based on location
• There are only 4 patterns in umbrella group
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Hammer
• Bullish reversal pattern
• Single candle with long lower shadow and small real body • Forms after a decline
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body • Confirmation is required
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Hanging Man
• Bearish reversal pattern
• Single candle with long lower shadow and small real body • Forms after an advance
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body • Confirmation is required
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Inverted Hammer
• Bullish reversal pattern
• Single candle with long upper shadow and small real body • Forms after a decline
• Colour of real body is not important
• Length of shadow must be greater than 2x the real body • Confirmation is required
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Shooting Star
• Bearish reversal pattern
• Single candle with long upper shadow and small real body • Forms after an advance
• Colour of real body is not important
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Quiz
What is the candlestick shown on the right?
A.Shooting Star
B.Morning Star
C.Inverted Hammer
D.Hammer
✔ (forms after downtrend) ✔ (forms after uptrend)
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Quiz
What is the candlestick shown on the right?
A.Shooting Star
B.Hanging Man
C.Inverted Hammer
D.Hammer
✔ (forms after uptrend) ✔ (forms after downtrend)
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