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Louise Bedford

This Special Report is an extract from the ‘Candlestick Charting Home StudyCourse’. It is a handy, quick reference guide that you can refer to in order tohelp you remember and confirm the validity of any candlestick pattern thatyou come across. Part 1 provides you with diagrams of the most frequentlyoccurring candlestick patterns, as well as information on the formationdescription, location and psychology. Part 2 gives you a chance to practiceyour skills so that you can ensure correct identification of patterns on a seriesof charts. This will help you to consolidate your knowledge.

Although you may be familiar with the majority of candlestick patterns, thisSpecial Report is designed to act as a ‘refresher’. It is not intended to replacethe information presented in ‘The Secret of Candlestick Charting’. If you havenot yet read this book, it is highly recommended that you do so in order tofully grasp the principles behind each candlestick pattern.

Available on DVD and video is ‘The Secret of Candlestick Charting – VideoProgram’, a one-day course suitable for introductory to intermediate traders.The ‘Candlestick Charting Home Study Course’ is another more advancedreference for intermediate to advanced traders.

Happy Trading!

Louise Bedford

SPECIAL REPORT:CANDLESTICK PATTERN SUMMARY

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Index

Part 1 - Review

Candlesticks Review

Part 2 - Analysis

Westpac and Lion Nathan ExamplesRamsay Healthcare QuestionsRamsay Healthcare Answers

Disclaimer

The material in this publication is of the nature of general comment only, andneither purports nor intends to be advice. Readers should not act on the basisof any matter in this publication without considering (and if appropriate,taking) professional advice with due regard to their own particularcircumstances. The author, Trading Secrets Pty Ltd and any relativedistributing agents expressly disclaim all and any liability to any person,whether a purchaser of this publication or not, in respect of anything and ofthe consequences of anything done or omitted to be done by any such personin reliance, whether whole or partial, upon the whole or any part of thecontents of this publication.

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In this guide, the small bars before and after the candlestick formation show the direction of thepreceding and following prices on the chart.

Pattern Description Location Psychology

Shooting Star This pattern displays anupper tail length that istwo or more times thelength of the real body.Gaps increase theintensity of this pattern.Black Shooting Stars havegreater bearishsignificance.

Shooting Stars appear atthe top of a trend.Trading below the body ofthe Shooting Star isrequired to confirm thispattern.

The upper tail showsseller pressure andrejection of higher prices.The small body showsindecision, and suggeststhe trend is likely toreverse.

Hanging Man This pattern can appear ineither colour and displaysa long lower tail below thereal body. There is likelyto be no tail, or a veryshort tail on the otherside of the real body.

Hanging Men appear atthe top of a trend. Gapsincrease the significanceof the pattern. Tradingbelow the body of theformation will confirm theeffectiveness.

The lower tail shows thatthe bulls' confidence hasbeen shaken, whichincreases the likelihood ofa future downtrend. Ablack Hanging Man ismore bearish than a whiteHanging Man.

Hammer Hammers can appear ineither colour and displaya long lower tail below thereal body. There is likelyto be no tail, or a veryshort tail on the otherside of the real body.

Hammers appear at thebottom of trends. Gaps,and trading above thelevel of the Hammer,especially on heavyvolume confirm theefficacy of this pattern.

The lower tail shows thatbuyers are moving intothe market, and this maycreate an uptrend,particularly if heavyrelative volume ispresent. A white Hammeris more bullish than ablack Hammer. This is atypical rejection pattern.

Inverted Hammer This pattern can appear ineither colour and displaysa long upper tail abovethe real body. There islikely to be no tail, or avery short tail on theother side of their realbody.

Inverted Hammersappear at the bottom oftrends. Trading above thelevel of the body of thispattern shows that thepattern has beeneffective, especially onheavy relative volume.Gaps increase thesignificance of thepattern.

The upper tail shows thatbuyers are testing higherprices, and this maycreate an uptrend,particularly if heavyrelative volume ispresent. A white InvertedHammer is more bullishthan a black one. AHammer of either colouris more bullish than anInverted Hammer.

Spinning Top Spinning Tops display asmall real body. The taillength is largelyunimportant and thecandle can be either whiteor black, (white is morebullish, and black is morebearish).

This pattern appears atthe top or the bottom of atrend. Gaps before andafter its formationincrease its effectiveness.Gaps, or price movementabove (for bottomreversals) or below (fortop reversals) suggestconfirmation.

This represents a state ofbalance between the bullsand the bears, suggestinga trend reversal. For atrend to continue, animbalance of bulls andbears must be present eg.buyers must outnumbersellers for an uptrend tocontinue.

Part 1 – Review

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Doji The open and close are atthe same price (or nearlyat the same price) forthat period.

Doji can be found at thetops and bottoms oftrends. Adequateconfirmation shows pricesreverse quite dramaticallyafter the appearance ofthe Doji.

A Doji is one of thestrongest signals as itsuggests that thisparticular price representsa fair value in the mindsof the traders. The sharewill typically reverse it'sdirection the day after theappearance of a Doji.

Bearish Engulfing Pattern The second real body ofthis pattern (black) totallyengulfs the first real body(white) and is a bearishsign as the price hasclosed lower than itopened for that period.

This pattern is found onlyat the tops of uptrends.Trading below the mid-point of the secondcandle suggestsconfirmation. If heavyrelative volume is presenton the second candle, orthe confirmation, theeffectiveness of thepattern is increased.

The size of the firstcandle suggests that thebulls are weak. Thelength of the secondcandle, in addition to thefact that it closed belowthe body of the first,suggests that the bearsare stronger than thebulls, especially if thesecond candle has heavyrelative volume.

Bullish Engulfing Pattern The first candle must beblack and the secondcandle must be white.The second candle musttotally engulf and closeabove the body of thefirst.

These patterns are foundat the bottom ofdowntrends. Confirmationwould show trading abovethe mid-point of thesecond candle, preferablyon increased volumelevels.

The bulls haveoutnumbered the bearsas shown by the range ofthe second candle. It is aparticularly strong signalif the second candleoccurs on heavy relativevolume.

Dark Cloud Cover The second black candlemust penetrate 50% ormore into the body of thewhite candle.

This two-candle formationis a top reversal pattern.Trading below the secondcandle, or at least belowthe mid-point of the finalcandle, will confirm theeffectiveness of thispattern. A downward gapis also common.

The pattern is not quiteas significant as theBearish Engulfing Pattern.In candlestick philosophy,patterns that are moresignificant display greaterpenetration levels of onecandle into the body ofanother.

Piercing Pattern The 50% penetrationlevel of the second whitecandle into the body ofthe first black candle isessential to fulfil thedefinition of this pattern.

This is a bottom reversalpattern that lacks thepower of a BullishEngulfing Pattern. Priceshigher than the finalcandle are required toconfirm the effectivenessof the Piercing Pattern.

This pattern is usuallyonly effective if it occursduring an existingmedium term uptrend,where momentum willhelp drive prices higher.Increased volume on thesecond candle will add tothe effectiveness of thepattern.

Harami The second candle isengulfed by the first. Thefirst and second candlecan be either colour,including the same colour.This is a bottom and topreversal pattern thatusually suggests a trendsoftening rather than aviolent reversal.

Subsequent tradingwithin the body of thefirst candle suggests thetrend is softening.Trading above the patternconfirms a bottomreversal Harami andtrading below the patternconfirms a top reversalHarami.

The directionalimplications of the firstcandle have beenconfused by theappearance of a smallsecond candle, whichindicates indecision.

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Evening Star This bearish three-candletop reversal patternshows a long white realbody (1), a small star ofeither colour (2), then ablack real body (3). Thispattern is especiallysignificant if there aregaps between eachcandle.

This is a top reversalpattern. Confirmation ofthis pattern involvestrading below the mid-point of the final candle.If a Doji forms the secondcandle, the strength ofthis pattern is intensified.

This pattern displays'decision' (shown by theupward direction of thefirst candle), 'indecision'(shown by the small bodyof the second candle) and'confirmation' (depictedby the bearish location ofthe third candle).

Morning Star This bottom reversalpattern shows a longblack real body (1), asmall star of either colour(2), then a white realbody (3). Heightenedvolume on (3) will alsoincrease its effectiveness.

This is a bottom reversalpattern. Confirmation ofthis pattern involvestrading above the mid-point of the final candle.If a Doji forms the secondcandle, the strength ofthis pattern is intensified.

This pattern shows'decision' (shown by thedownward direction of thefirst candle), 'indecision'(shown by the small bodyof the second candle) and'confirmation' (depictedby the bullish location ofthe third candle).

Tweezer Top This pattern displays thehighs of two (or more)periods that form uppershadows with their peaksat exactly the same price.The candles can be ofeither colour.

The Tweezer Top will befound at the top ofuptrends, or within anuptick of an existingdowntrend. Eitherlocation has a bearishimplication. Confirmationis if the subsequentsessions trade below thelevel of the Tweezer Top.

The price has tried to rallyat least twice, yet hasbeen unable to sustainthis bullish push. Uppershadows were formed asa result.

Tweezer Bottom The Tweezer Bottomshows the lower shadowsof two or morecandlesticks at the sameprice point before a rally.

This pattern appears atthe bottom ofdowntrends. It can alsobe found within thedowntick of an existinguptrend. In this situation,a Tweezer Bottom maydemonstrate a pause inthe uptrend prior tofuture bullish behaviour.

The lower prices havebeen tested, and rejectedby the market. The colourof the bodies is notsignificant. The presenceof multiple lower shadowscreates the pattern.Higher prices are likely tofollow, especially ifvolume is significant onthe final candle(s) thatforms the TweezerBottom.

Upside Tasuki The initial white candle isfollowed by an upwardgap to the next whitecandle. The third sessionshows a black candle thatdoes not fully close thegap.

This pattern will addstrength to the existingupward trend. If this gapis closed, it is unlikelythat the uptrend will besustained in the shortterm at least.

A gap indicates apowerful move in marketsentiment and can form astrong barrier of supportor resistance. The finalbearish candle does notclose the gap, whichforms a level of support.

Downside Tasuki The first session is a blackcandle that gaps stronglydown at the opening ofthe next session. Thesecond candle is alsoblack. The third candle iswhite and doesn't closethe gap formed.

The share must alreadybe in downtrend andconfirmation consists oftrading at or below thelevel of the secondcandle.

The gap created by thefirst and third candlesacts as resistance. Ifsubsequent trading hadclosed the gap, thedowntrend would be morelikely to reverse.

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Rising Three Three central weakbearish candles are foundbetween two long whitecandles. The final candlecloses above the range ofthe previous candles.

This is a bullishcontinuation pattern andtrading above the mid-point of the final candlesuggests that the trend islikely to continue.

The strongest candles inthis pattern are the firstand last ones. Thissuggests that the overalltrend will continueupwards. The placementof the central candlesimplies a weak bearishdowntrend, which is nocompetition for thestrength shown by thebullish candles.

Falling Three The first black long candleprecedes three small-bodied candles. Theplacement of thesecandles implies a weakbullish uptrend, not theircolour. The final candlehas a long black real bodythat closes below thebody of the initial candle.

This pattern appearsduring existingdowntrends. Confirmationis if subsequent prices arebelow the mid-point ofthe final candle.

The close of the finalcandle at a lower pricelevel shows that thepattern has made a lowerlow, therefore it isbearish. The strength ofthe bearish first and finalcandle displays the mainsentiment behind thispattern.

This same information is also available as a full colour, laminated wall chart(A2 size - 594mm x 420mm). You can order ‘The Secret of CandlestickCharting Poster’ from www.tradingsecrets.com.au.

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Part 2 - Analysis

Have a look at the following charts and identify the main candlestick patternsthat are apparent. Feel free to refer to Part 1 of this report to assist you. Takelots of notes as you complete all of the exercises presented. This will assist inimproving your retention. There is plenty of room below and around thepresented charts for you to do this. For the best results, print out this entirefile before continuing, if you have not already done so.

Fig 1.1 WESTPAC BANK - Daily

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Fig 1.2 LION NATHAN - Daily

Have a look at how I’ve analysed these charts. (This type of analysis issomewhat subjective, so even if you haven’t identified exactly the samepatterns - that is fine).

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Fig 1.3 WESTPAC BANK - Daily

Fig 1.4 LION NATHAN - Daily

EveningStar

Bullish EngulfingPattern

Dark Cloud Cover &Spinning Top

SpinningTop

PiercingPattern

Doji

HangingMan

Harami

Harami orShooting Star

BearishEngulfing

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Let’s try that again. Have a look at the chart shown in Fig 1.5 and circle any ofthe patterns that you recognise. This time, try combining this identificationprocess with some brief comments about the share price direction. To help youdo this, I have set out some questions below each chart.

Fig 1.5 RAMSAY HEALTH CARE - Daily

1) Is the trend of Ramsay Health Care (Fig 1.5) up or down? What makes yousay that?

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2) Can you identify any Western based patterns on this chart? (eg triangularpatterns, double bottoms etc.) Circle these on the chart, as well as drawing inkey support/resistance and trend lines.

3) If the share is likely to maintain its bullish behaviour, where is it likely toretrace to before it meets support?

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4) Would this share be one that you would be likely to buy? What otherinformation would you like to know about this share before you purchased it?What specific indicator(s) would time your entry?

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ANSWERS

Have a look at the completed chart below (Fig 1.6) and see how you fared:

Fig 1.6 RAMSAY HEALTH CARE - Daily

1) Ramsay is displaying a series of higher lows. This fulfils the definition of anuptrend. It is also displaying a series of higher highs. This also suggests thatthe trend upwards is quite strong.

2) Of particular note is the ascending triangle and the double top. Traditionally,a double top is only confirmed after the ‘neck-line’ is broken (ie. after there istrading below the Harami pattern).

BearishEngulfing Pattern

AscendingTriangle

Double Top forming aResistance line

Uptrending Line

Support

TweezerTop

PiercingPattern

Harami

Hammer

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3) Ramsay is likely to drop to a previous level of support, or even a previouslevel of resistance. Resistance can be found at the top of a long or dominantcandle.

Fig 1.7 RAMSAY HEALTH CARE - Daily

The change of polarity principle suggests that once prices break a significantresistance line, then this line will act as support for future trading activity.Also, once a line of support has been broken, it is likely that this line will act asresistance.

This observation will assist with confirming breakouts and pattern detection. Itwill show the points where the share price action is likely to hesitate in thefuture, and the location of a potential reversal.

The line that initially offered resistance at the top of the white candle, quicklybecame a level of support as indicated by the Harami. A pattern of previouslevels of resistance that become support lines is bullish in nature. This level islikely to provide a springboard for future share price action. If share priceaction was to tumble through that foundation, it is likely that this price levelwill once again become resistance. (If this did occur, it would complete theformation of the double top pattern).

Resistance alongthe top of this

candle

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4) There are two broad maxims in trading. If the share is going up, you buy it.If it is going down, you sell it. The other major success principle is to haveproper money management so that you keep your position sizes small enoughto handle both a series of small losses, and where one position experiences acatastrophic loss. If it has been difficult for you to answer the questionregarding entry triggers, hopefully by the end of the course you will be able tospecifically respond and articulate your set-up and entry triggers with clarity.

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Special ReportNew Candlestick Patterns

Special ReportSuccessful Short Selling

For more information on the training courses andsharemarket services offered by Trading Secrets,check out www.tradingsecrets.com.au. You canalso order these other titles by Louise Bedford

online at this website.

The Secret ofCandlestick Charting

PosterThe Secret of

Pattern DetectionPoster

Valuable quick reference tools for the maincharting patterns using candlesticks and

technical analysis.

Video Program

This course is designed to be a complete introduction to theworld of Candlestick Charting. There are exercises to becompleted throughout the program and plenty of actualtrading examples to help cement your knowledge.

Whilst suitable for the novice trader, this course will also take themore experienced trader to a greater understanding of the marketsby delving into the psychology behind the price action.

Also available fromwww.tradingsecrets.com.auin the ‘Special Report’ range:

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