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 The candlesticks are used to identify trading patterns. Patterns in turn help the technical analyst to set up a trade. The patterns are formed by grouping two or more candles in a certain sequence. However, sometimes powerful trading signals can be identified by just a single candlestick pattern. Hence, candlesticks can be broken down into a single candlestick pattern and multiple candlestick patterns.  Under the single candlestick pattern, we will be learning the following... 1. Marubozu  i. Bullish Marubozu ii. Bearish Marubozu 2. Doji 3. Spinning Tops  4. Paper umbrella  i. Hammer  ii. Hanging man  5. Shooting star Multiple candlestick patterns are a combination of multiple candles. Under the multiple candlestick patterns we will learn the following: 1. Engulfing pattern  i. Bullish Engulfing  ii. Bearish Engulfing  2. Harami  i. Bullish Harami  ii. Bearish Harami  3. Piercing Pattern  4. Dark cloud cover 5. Mor...

 Before we jump in and start learning about the patterns, there are few more assumptions that we need to keep in mind. These assumptions are specific to candlesticks. Do pay a lot of attention to these assumptions as we will keep referring back to these assumptions quite often later. At this stage, these assumptions may not be very clear to you. I will explain them in greater detail as and when we proceed. However, do keep these assumptions in the back of your mind: Buy strength and sell weakness –   Strength is represented by a bullish (blue) candle and weakness by a bearish (red) candle. Hence whenever you are buying ensure it is a blue candle day and whenever you are selling, ensure it’s a red candle day. Be flexible with patterns (quantify and verify) –   While the textbook definition of a pattern could state certain criteria, there could be minor variations to the pattern owing to market conditions. So one needs to be a bit flexible. However one needs to be f...

Technical Analysis, what is it? Consider this analogy.  Imagine you are vacationing in a foreign country where everything including the language, culture, climate, and food is new to you. On day 1, you do the regular touristy activities, and by evening you are very hungry. You want to end your day by having a great dinner. You ask around for a good restaurant and you are told about a nice food street which is close by. You decide to give it a try.  To your surprise, there are many vendors selling different varieties of food. Everything looks different and interesting. You are absolutely clueless as to what to eat for dinner. To add to your dilemma you cannot ask around as you do not know the local language. So given all this, how will you make a decision on what to eat?  Well, you have two options to figure out what to eat.   Option 1 :  You visit a vendor, figure out what they are cooking/selling. Check on the ingredients used, cooking style, probably taste a ...

 Before we jump in, it is worth spending time to understand in brief the history of the Japanese Candlesticks. As the name suggests, the candlesticks originated from Japan. The earliest use of candlesticks dates back to the 18th century by a Japanese rice merchant named Homma Munehisa. Though the candlesticks have been in existence for a long time in Japan, and are probably the oldest form of price analysis, the western world traders were clueless about it. It is believed that sometime around 1980’s a trader named Steve Nison accidentally discovered candlesticks, and he actually introduced the methodology to the rest of the world. He authored the first ever book on candlesticks titled “Japanese Candlestick Charting Techniques” which is still a favorite amongst many traders.  Most of the pattern in candlesticks still retains the Japanese names; thus giving an oriental feel to technical analysis. Candlestick Anatomy   While in a bar chart the open and the close price...

 Unlike fundamental analysts, technical analysts don’t care whether a stock is undervalued or overvalued. In fact, the only thing that matters is the stocks past trading data (price and volume) and what information this data can provide about the future movement in security. Technical Analysis is based on few key assumptions. One needs to be aware of these assumptions to ensure the best results. 1) Markets discount everything –  This assumption tells us that, all known and unknown information in the public domain is reflected in the latest stock price. For example, there could be an insider in the company buying the company’s stock in large quantity in anticipation of a good quarterly earnings announcement. While he does this secretively, the price reacts to his actions thus revealing to the technical analyst that this could be a good buy.   2) The ‘how’ is more important than ‘why’ –   This is an extension of the first assumption. Going with the same example as ...

 The bar chart- The bar chart on the other hand is a bit more versatile. A bar chart displays all the four price variables namely open, high, low, and close. A bar has three components.  1. The central line – The top of the bar indicates the highest price the security has reached. The bottom end of the bar indicates the lowest price for the same period.  2. The left mark/tick – indicates the open  3. The right mark/tick – indicates the close   For example assume the OHLC data for a stock as follows:  Open – 65  High – 70  Low – 60  Close – 68  For the above data, the bar chart would look like this As you can see, in a single bar, we can plot four different price points. If you wish to view 5 days chart, as you would imagine we will have 5 vertical bars. So on and so forth.    Note the position of the left and right mark on the bar chart varies based on how the market has moved for the given day.  If the left mark,...