CANDLE STICK FORMATIONS

Candle sticks are a powerful tool used in charting and technical analysis. They deconstruct the share price data by displaying four different sets of data in one “candle”. The candle can be seen below. The four sets of data displayed are: high, low, open, and close. Candle sticks can cover different time periods - daily, weekly, monthly, etc - as long as the consistency of representation is the same. The placement of each can be seen in the pictures below. The green candle is termed a bullish candle and the red candle is termed a bearish candle.

---

---

Bullish Candle

A bullish candle occurs when the closing price of a share closes higher than the opening price. This means that the share price increased on a particular day or period. This can be seen in the picture where the close is above the opening price.

Bearish Candle

 A bearish candle occurs when the closing price of a share closes below the opening price. This means that the share price decreased on a particular day or period. This can be seen in the picture where the close is below the opening price.

---

---

Bullish Engulfing Pattern

The method to identify a Bullish Engulfing pattern is to ensure that the following entities are present: The first red bearish candle must be fully enclosed in the body of the green candle. There must be a confirmation candle to follow the middle bullish candle with a close above the close of the middle candle.

Bearish engulfing pattern.

The method to identify a Bearish Engulfing pattern is to ensure that the following entities are present: The first green bullish candle must be fully enclosed in the body of the red middle candle. There must be a confirmation candle to follow the middle bullish candle with a close above the close of the middle candle.

Bullish Harami Pattern 

The method to identify a bullish harami pattern is to ensure that the following entities are present: Two downward movement candles with the third being a bullish candle with a body located within the second candle's body. There must be a confirmation candle to follow the second bullish candle with a close above the close of the third candle.

Bearish Harami pattern 

---

---

The method to identify a Bearish Harami pattern is to ensure that the following entities are present: Two upward movement candles with the third being a bearish candle with a body located within the second candle's body. There must be a confirmation candle to follow the second bearish candle with a close below the close of the third candle

Shooting Star pattern

A Shooting Star pattern is a bearish pattern that indicates downward movement. The method to identify a shooting star pattern is to ensure that the following entities are present: The share price must be moving on an upward trend. The wick of the candle must be at least 2 times the body of the candle. A confirmation candle is needed with a close below the close of the close of the middle candle"

Bearish Hammer pattern

A Bearish Hammer pattern is similar to a the shooting star pattern and indicates downward movement but is less bearish than a shooting star formation. The method to identify a bearish hammer pattern is to ensure that the following entities are present: The share price must be moving on an upward trend. The tail of the candle must be at least two times the body of the candle. A confirmation candle is needed with a close below the close of the close of the middle candle.

---

---

Bullish Hammer pattern

A Bullish Hammer pattern indicates upward movement. The method to identify a bullish hammer pattern is to ensure that the following entities are present: The share price must be moving on a downward trend. The tail of the middle candle must be at least two times the body of the candle. A confirmation candle is needed with a close above the close of the middle candle.

Inverted Hammer Pattern 

An Inverted Hammer pattern indicates upward movement but is slightly less bullish than a bullish hammer pattern. The method to identify an inverted hammer pattern is to ensure that the following entities are present: The share price must be moving on a downward trend. The wick of the middle candle must be at least two times the body of the candle. A confirmation candle is needed with a close above the close of the middle candle.

---

---

Rising Sun 

The way to identify a Rising Sun is by looking at the following things and ensuring that they are present. The left most candle must have an opening price above that of the middle candles closing price. The left most candle must have a closing price within the middle candle and with the closing price no lower than half of the middle candles body. Lastly there must be a confirmation, this is where the candle on the right has a closing value above the body of the middle candle.

Morning Star pattern

The way to identify a Morning Star pattern is by looking at the following things and ensuring that they are present. 1st, a long red candle stick. 2nd, a small green candle stick, comprising of a small body or open equal to the close, which is below the close of the 1st candle. 3rd, a long green candle stick with an open above that of the middle candle stick which closes at or above the center of the first candle stick.

Evening Star pattern

The way to identify an Evening Star pattern is by looking at the following things and ensuring that they are present. 1st, a long green candle stick. 2nd, a small green candle stick, comprising of a small body or open equal to the close, which is above the close of the 1st candle. 3rd, a long red candle stick with an open below that of the middle candle stick which closes at or below the center of the first candle stick

Stochastic Indicator tutorial

This technical indicator measures a shares momentum. What momentum means is, what is the share price doing, in relation to past data. This is one of the most popular indicators that traders make use of, and can be highly effective if used in the right way. The indicators output can be seen below.

The stochastic oscillator its self is bound between 0 and 100 and moves within this range. In the picture above one can see two horizontal lines one red and one blue. These indicate the overbought and oversold regions. They are placed at the 20 and 80 mark on the vertical axis. When the stochastic oscillator moves below the blue line at 20 on the vertical axis a potential buying region is indicated to the investor as the share is becoming oversold. Likewise when the stochastic oscillator moves above the red line at 80 on the vertical axis, this indicates to a potential investor that the share is becoming overbought and this is not a good opportunity to enter into the trade.

---

---

The first technique that will be discussed is the application of the moving average to the stochastic to find potential trade entries and exits. In essence the moving average provides a smoothed version of the stochastic data as it takes the average of several values and uses that to create points which form the moving average version of the stochastic. The chart below makes use of a slow stochastic with a 7 day moving average applied. The different types of stochastics will be discussed in the latter of this page

The moving average is used to show the investor if the stochastic is increasing or decreasing relative to the past data. In an upward trend of the stochastic when the share price is above the moving average this indicates that there is an increase in momentum relative to past data, likewise when the stochastic data is below the moving average for an upward trend this indicates that the momentum is decreasing relative to past data. In the case of a downward stochastic movement. If the stochastic is below the moving average this means that the downward movement is strengthening relative to past data. However, if the stochastic is above the moving average this indicates that the momentum is decreasing relative to the moving average.

Thus far we have established what the buy and sell zones are and where they are placed, as well as establishing the application of the moving average to the stochastic. Using these tools the output is as seen in the graph below. 

As previously established when the stochastics are below the moving average in a downward trend this indicates that there is a strong movement down but when the reverse is in play where the stochastic is above the moving average this indicates that the momentum is increasing relative to the moving average. Using this logic, the buying points seen in the graph are selected where the stochastic intersects the moving average this is the point at which the decreasing momentum is changing to increasing momentum. Looking at “BUY ZONE 1” and “BUY ZONE 3”, this method worked very well in finding a good entry point into the trade however the method does not always deliver optimal entry points which can be seen in “BUY ZONE 2” where the buy signals were triggered, but the share price continued a sideways movement.

---

---

Now to use the same logic but to identify potential sell regions. Using the moving average method the selling price was chosen when the stochastic moves from a position above the moving average intersects the moving average and moves below the moving average. This is because when the stochastic is above the moving average the share momentum is still increasing upwards relative to past data but when the stochastic intersects and cuts through the moving average the momentum is decreasing relative to the past share data. Looking at “SELL ZONE 2” and “SELL ZONE 3”, this method worked very well in finding a good exit point out of the trade. Like the buy trigger the sell trigger to is not always triggered at the optimal sell point as seen in “SELL ZONE 1” with the red vertical line in the first sell trigger. Here a sell was triggered but the share continued to move upwards with the optimal sales point being triggered at the second sell trigger.

Changing the Stochastic settings can have a significant effect on the results that the stochastic displays. Knowing what settings to use can make a significant difference to the buy and sell signals that are displayed to the user. The three settings that will be discussed will be fast, moderate and slow moving Stochastics.

The slow stochastic is used to give a less sensitive reading of the momentum. Slow stochastics will usually provide less buy and less sell points as opposed to the fast and moderate stochastics, but the points at which the potential buys and sells are triggered will tend to be better entry and exit points. The potential problems with the slow stochastic is that it can sometimes show a buy or sell signal that its slightly too late or later then the optimal point. The settings that have been proven to work well are to set the stochastic to a 21 period with a 7 day moving average.

---

---

The medium setting is used to get a balance between the fast and the slow stochastic, traders will use this if they want a little more sensitivity in their stochastics as this will give more potential buy and sell signals. The settings that have been proven to work for a medium outlook are to set the period to 14 days with a 3 day moving average. An example of the 14 period stochastic with a 3 day moving average can be seen below

The last setting that will be discussed is the fast setting, this is used when a high sensitivity is desired. The setting will give the most potential buy and sell signals. The points at which these signals will be triggered is geared to faster trading, especially day trading where a high volume of signals is needed.