nusinvest workshop series session two candlesticks patterns

NUSInvest Workshop Series

Session Two

Candlesticks Patterns

NUS Students’ Investment Society

Workshops Syllabus – Sem 1

LT18, 6-7PMWeek Lesson Topic

Week 4 Introduction to FA & TA

Week 5 Japanese Candlesticks & Charts (E-learning Week)

Week 6 Annual Reports

Week 7 NIL (Mid-terms Week)

Week 8 Support & Resistance

Week 9 Valuation Methodology

Week 10

Exams PreparationWeek 11

Week 12

PROFILE

• NUS Invest Research Analyst, Acting FA Director

• Year 2 BBA (Finance)

• First trading experience in 2010

• Does both FA & TA, mostly FA

DISCLOSURES & DISCLAIMERSThis research material has been prepared by NUS Invest.

NUS Invest specifically prohibits the redistribution of this material in whole or in part without the written permission of NUS Invest.

The research officer(s) primarily responsible for the content of this research material, in whole or in part, certifies that their views are accurately expressed and they will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this research material.

Nothing in this research material constitutes a representation that any investment strategy or recommendation contained herein is suitable or appropriate to a recipient’s individual circumstances or otherwise constitutes a personal recommendation. It is published solely for information purposes, it does not constitute an advertisement and is not to be construed as a solicitation or an offer to buy or sell any securities or related financial instruments.

No representation or warranty, either expressed or implied, is provided in relation to the accuracy, completeness or reliability of the information contained herein. The research material should not be regarded by recipients as a substitute for the exercise of their own judgement. Any opinions expressed in this research material are subject to change without notice.

Background

Japanese Candlestick

• Stresses relationship between open and close prices

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PATTERN2-BARS PATTERN

3-BARS PATTERN

PRICE TRADING STRATEGIES

Candle Anatomy• Body: Distance between open and closing

• Tip of upper wick/shadow: Highest price of that

period

• Bottom of lower wick/shadow/hair: Lowest

price of that period

• Range (length) of candle stick indicates volatility

• Upward candlestick usually white or green or

blue

• Downward candlestick usually black or red

BullishCandle

BearishCandle

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3-BARS PATTERN


Gaps/ Windows• Gap: Current open is not the same as

prior closing price

• No price and no volume transacted hands between the gap (area on price chart where there is no trades)

• Effect of news after stock market closed for the day (e.g. earnings report)

• Psychology: Can act as resistance/ support (news that sparked the gap is still in play)

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3-BARS PATTERN


Daily Chart – Wal-Mart (WMT)

Gaps

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3-BARS PATTERN


1-Price Bar Patterns

1-Bar Pattern• Long Lower Shadow

- Bullish signal

- Lower shadow must be at least the size of the real body

- Longer lower shadow: more reliable that it is a bullish trend

• Long Upper Shadow

- Bearish signal

- Upper shadow must be at least the size of the real body

- Longer upper shadow: more reliable that it is a bearish trend

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3-BARS PATTERN


Marubozu• White Marubozu

– Long white body, no wicks– Bullish candle– Open equals low, closing equals high– Indicates buyers in control during entire period

• Black Marubozu– Long black body, no wicks– Bearish Candle– Indicates sellers in control during entire period

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3-BARS PATTERN


Hammer

• Found in downtrend• Short body at the top of price range• Little to no upper shadow• Lower shadow must be at least

twice the length of real-body• Signals: Reversal pattern when

found in a downtrend• Short-term outlook indication• Real body can be black or white

(white: stronger signal)

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3-BARS PATTERN


Hammer

• Low reliability, requires confirmation– Bullish gap for next session– Subsequent session shows white real body above that of

the hammer’s real body

• Significance/ Strength:– Length of Lower Shadow– Colour

Long lower wick indicates initial selling prices

Buyers drive prices back upto close near the highs

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3-BARS PATTERN


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3-BARS PATTERN


Hanging Man

• Found in uptrend• Short body at the top of price range• Little to no upper shadow• Lower shadow must be at least

twice the length of real-body• Warning of a potential downward

trend• Short-term outlook indication• Also requires confirmation

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3-BARS PATTERN


1. Uptrend2. Gap Up3. Lower Shadow at least twice as big as Real Body4. Real Body Bullish or Bearish; better if Bearish5. Confirmation Candle

Greater gap: Higher likelihood of reversal

Hanging Man

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3-BARS PATTERN


Shooting Star• Found in uptrend• Short body at the bottom of price

range• Little to no lower shadow• Upper shadow must be at least

twice the length of real-body• Signals: Reversal pattern• Short-term outlook indication• Real body can be black or white

(black: stronger signal)

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3-BARS PATTERN


Shooting Star• Low reliability, requires confirmation

– Bearish gap for next session– Subsequent session shows black real body below that of

the shooting star’s real body

• Significance/ Strength:– Length of Upper Shadow– Colour

Long upper wick indicatesinitial buying prices

Bears were able to rejectbulls completely (or push prices evenlower by closing below open)

Open

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3-BARS PATTERN


Shooting Star

1. Uptrend2. Upper shadow at least twice as big as real body3. Real body bullish or bearish (bearish: stronger indication)

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3-BARS PATTERN


Inverted Hammer

• Found in downtrend• Short body at the bottom of price

range• Little to no lower shadow• Upper shadow must be at least

twice the length of real-body• Signals: Reversal pattern• Short-term outlook indication• Real body can be black or white

(white: stronger signal)

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3-BARS PATTERN


Inverted Hammer

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3-BARS PATTERN


Spinning Top & Doji• Short body in the middle of two long

wicks• Market closed relatively unchanged• Indicates indecision (‘standoff’ after

significant price movement)• Trend losing momentum; possible

turning point

• Doji/ Long-legged Doji: stronger signal

• Open and close are the same• Insignificant in sideway markets

Buyers in control

Sellers in control

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3-BARS PATTERN


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3-BARS PATTERN


Dragonfly Doji Gravestone Doji Four Price Doji

• Long lower, no upper

• Long upper, no lower

• Same upper, lower, open & close• Very rare• Low volume situations

More Doji Patterns

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3-BARS PATTERN


Bullish Engulfing Candle

Gap down

When found in a downtrend:

• Bullish candle opens lower than previous candle’s close, closes higher than previous candle’s open

• Potential sign that trend is reversing

• Indicates control has shifted from sellers to buyers

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3-BARS PATTERN


Bullish Engulfing

1. Downtrend2. Bearish Candle3. Gap Down4. Bullish Candle5. Close above previous Bearish Candle

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3-BARS PATTERN


Bearish Engulfing Candle

When found in a uptrend:

• Gap up: Bullish sign• But: Bulls only push prices up

slightly before bears take over and push prices much lower

• Potential sign that trend is reversing

• Indicates control has shifted from buyers to sellers

Gap Up

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3-BARS PATTERN


Bearish Engulfing

1. Uptrend2. Bullish Candle3. Gap Up4. Bearish candle5. Close below previous Bullish Candle

Greater size difference: Increased significance

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3-BARS PATTERN


Dark Cloud Cover

• Bullish candle closes below the middle of previous candle

• Rejection of Gap: Bearish sign

• Retracement: Additional significance

Gap Up

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3-BARS PATTERN


Piercing Line Pattern

• Bearish candle closes below the middle of previous candle

• Rejection of Gap: Bullish Sign

• Retracement: Additional significance

Gap down

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3-BARS PATTERN


Harami

• Bearish Harami– Large bullish, followed by small bearish– Gap down, unable to retrace Uncertainty entering the market

• Bullish Harami– Large bearish, followed by small bullish– Gap up

Reversal Pattern

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3-BARS PATTERN


Harami

In a Downtrend1. Downtrend2. Bearish Candle3. Gap Up4. Small Bullish Candle

In an Uptrend1. Uptrend2. Bullish Candle3. Gap Down4. Small Bullish Candle

Tweezer Top & Bottom• Bearish Tweezer Top

– Day 1 Close about equal to Day 2 Open

– Occurs during an uptrend (closes near the high)

– Sentiments reverses completely the next day

• Bullish Tweezer Bottom– Occurs during downtrend (closing the

day near the lows)– Sometimes eliminates entire gains

from previous day

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3-BARS PATTERN


Tweezer Bottom

1. Downtrend2. Bearish Candle3. Day 1 Lows about equal to Day 2 Lows4. Bullish Candle

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3-BARS PATTERN


Tweezer Top

Resistance Line

High of Day 1High of Day 2(Bulls rejected)

High of Day 3Gap Up to Prior Highs;Bulls rejected again

• Consists of 3 candlesticks

• Bearish Gap: Bears are in control during opening

• Day 2: Prices are not pushed much lower (small / neutral candlestick)– Bullish: stronger sign

• Day 3: Bullish gap up• Prices pushed further upward,

sometimes eliminating all Day 1 losses

Morning Star

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3-BARS PATTERN


Morning Star

1. Downtrend2. Bearish Candle3. Gap Down4. Small Bullish/ Bearish Candle5. Gap Up6. Bullish Candle

Evening Star• Consists of 3 candlesticks:

- Bullish, Small/ Neutral, Bearish

• Presence of bullish gap & bearish gap

• Day 2: Prices are not pushed much higher– Bearish: stronger sign

• Day 3: Large bearish candlestick• Prices pushed further downward,

sometimes eliminating all of Day 1’s gains

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3-BARS PATTERN


Evening Star

1. Uptrend2. Bullish Candle3. Gap Up4. Small Bullish/ Bearish Candle5. Gap Down6. Bullish Candle

Morning Star PatternPowerful bearish reversal pattern!

Price Action Trading Strategies

Pin Bar Setup• Pin bar: middle of a 3-bar formation• Open and Close of pin bar is within (or very close)

price range of bar 1 and 3

• Shadow of pin bar sticks out– Longer, more significant

• Pin bars occurring at important support/ resistance level can be very accurate

• Can be taken as counter trend if well-defined and protrude significantly from surrounding price bars– Indicates strong rejection occurred– Preferably on daily chart time frame

Bullish Pin Bar

Bearish Pin Bar

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3-BARS PATTERN


Pin Bar Setup

Two large bullish pin bars bringan end to the previous downtrend

Obvious bullish pin bars with the overall uptrend

• Pin bars occurring the context of a trending market

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3-BARS PATTERN


Inside Bar Setup

• Inside bar: Bar (or series of bars) completely contained within preceding bar

• Not the same as harami

• Inside bars in strong trending markets breakout plays in that direction (‘pauses’)

Mother bar

Two inside bars contained within range of mother bar

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3-BARS PATTERN


Inside Bar SetupInside bar setups traded with the near-term momentum often give rise to large moves.

Daily AUDUSD chart

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3-BARS PATTERN


Fakey Setup

• Inside/Harami bar + False break, then closes back within range

• Fakey entry: triggered as price moves back up past the high of the inside bar (or the low in the case of a bearish fakey)

• Amateurs tried to pick market top, pros stepped in and flushed out amateurs in a flurry of buying

Fakey setup

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3-BARS PATTERN


Fakey SetupSubstantial push higher after false-break to the downside

False-break / Fakey setup

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• Background– Candlestick Anatomy– Gaps

• 1-Bar Pattern– Hammer/ Hanging Man– Shooting Star/ Inverted

Hammer– Spinning Top– Doji

• 2-Bars Pattern– Bullish/ Bearish Engulfing– Dark cloud cover/ Piercing Line– Harami– Tweezer Top/ Bottom

• 3-Bars Pattern– Morning/ Evening Star

• Price Trading Strategies– Pin Bar Setup– Inside Bar Setup– Fakey Bar Setup

Summary

Resources

• Babypips.com• Forexfactory.com

Ask Research!

Do email us at [email protected] if you

have any questions!

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Thank You!

nusinvest workshop series session two candlesticks patterns

Documents

background slide

fa slide

research material

price bar patterns

price chart

research analyst

research officers

bearish trend background