Introduction To Basic Candlestick Patterns: Nicholas Tan & Lucas Lee Global Macro Department

GM
INTRODUCTION TO
BASIC CANDLESTICK
PATTERNS
10th September 2015
DISCLAIMER AND DISCLOSURES

NUS Invest Nicholas Tan & Lucas Lee
Please read the disclaimer and the disclosures which can be found
nusinvest.com Global Macro Department
within this report
Introduction to Basic Candlestick Patterns
10th September 2015
Disclaimer
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within this report
10th September 2015
Agenda
• Introduction to Candlestick Patterns
• Basic Candlestick Patterns
• Trading Strategies

within this report
10th September 2015
What are Candlestick Patterns?

• They are:
• A form of Technical
Analysis i.e. reading the
movement of the market
• Allows investors and

traders to make high-
probability guesses about
the direction of the market
• Offer insights into the

psychology of the market

within this report
10th September 2015
A Brief History of Candlesticks

• Candlestick Patterns:
• Originally Developed by Japanese

rice traders in the early 1600s
• White Candles when prices went

up; Black Candles when prices went
down
• Honma Munehisa (1724-1803): Rice

trader from Sakata, father of
candlestick analysis
• Popularised by Steve Nison in the

1991
within this report
10th September 2015
Understanding the Candlestick
• Anatomy of a
Candlestick
• Body
• Shadows
• Open/Close
• High/Low

within this report
10th September 2015
Market for Stock X on Thursday, 10th September

High$2.25
Open
$2.00
$1.25
Close
Low
$1.00
within this report
10th September 2015
What can we learn from Candlestick Patterns?
• From a candlestick pattern, we can know…
• The Open/Close/High/Low Prices
• The volume and strength of buying/selling

pressure
• Whether there is more greed or fear
• How to make our trades!

within this report
10th September 2015
Let’s make a guess!

within this report
10th September 2015
Bulls vs Bears
• Bulls want the price to
go up
• Bears want the price

to go down
• The Stock Market is a

constant battle
between the bulls and
bears/ between
buyers and sellers

within this report
10th September 2015
Bulls vs Bears

within this report
10th September 2015
Who is in control?

within this report
10th September 2015
Agenda
• Introduction to Candlestick

within this report
10th September 2015
Candlestick Patterns

within this report
10th September 2015
Single Candlestick
• Hammer (after a Patterns
Downtrend)
• Small body
• Long lower shadows at least

twice the length of the real
body
• No/Short upper shadows
• Suggests Bullish
Momentum/ Buying
Pressure
within this report
10th September 2015
Single Candlestick Patterns
High/Clos
e
Open
Low
within this report
10th September 2015
Where is the market headed?
Go Long!

within this report
10th September 2015

• Shooting Star (after an
Uptrend)
• Small real bodies
• Long upper shadows at

least twice the length of the
real body
• No/Short lower shadows
• Suggests Bearish
Momentum/ Selling Pressure

within this report
10th September 2015

High
Open
Low/Close

within this report
10th September 2015
Where is the market headed?

within this report
10th September 2015
• Doji
• Open and Close Prices

almost the same
• Market is two-sided
• Suggests indecision and

trepidation between
buyers and sellers

within this report
10th September 2015
High
Clos
e
Open
Low

within this report
10th September 2015
What’s happening in the market?

within this report
10th September 2015

• Marubozu (‘Shaven Top’)
• Long white/black body

with no shadows
• A full white body suggests

that bulls controlled the
price from open to close
• A full black body suggests

that bears controlled the
price from open to close

within this report
10th September 2015

Clos
e
High
Open Low
within this report
10th September 2015
Three White Soldiers: Where is the market going?

within this report
10th September 2015
Two Candlestick Patterns
• Bullish Engulfing Pattern
• Small Bearish Candle followed by a

Long Bullish Candle
• Engulfs the entire range of the

previous bearish candle
• Suggests higher than average

volumes and strong Bullish
Momentum

within this report
10th September 2015
Two Candlestick Patterns
• Bearish Engulfing Pattern
• Small Bullish Candle followed

by a Long Bearish Candle
• Engulfs the entire range of the

previous bullish candle
• Suggests higher than average

volumes and strong Bearish
Momentum

within this report
10th September 2015
Questions to Ask when using Technical Analysis:
• Key Questions:
• What is happening in the market?
• Who is in control? Bulls/Buyers? Bears/Sellers?
• What is the market telling you to do?

within this report
10th September 2015
Agenda
• Introduction to Candlestick

within this report
10th September 2015
Agenda for Trading Strategies
• Examples of failed candlestick patterns
• How to use candlesticks properly to create

trading strategies

within this report
10th September 2015
What is Shorting?
• Shorting is a trade that allows one to profit from

falling prices
• Exact mechanism of this trade will not be

examined

within this report
10th September 2015
Failed candlestick patterns(Hammer)

within this report
10th September 2015
Failed candlestick patterns(Shooting Star)

within this report
10th September 2015
Failed candlestick patterns(Bearish Engulfing)

within this report
10th September 2015
Failed candlestick patterns(Bullish Engulfing)

within this report
10th September 2015
Philosophy of Trading Candlesticks
• Candlesticks alone are of limited utility
• Create strategy to combat this problem

within this report
10th September 2015
Premise of a candlestick pattern
• Indicate a zone where reversal is likely
• This zone does not always lead to a high

probability reversal in prices
• Solution: Principle of zonal confirmation

within this report
10th September 2015
What is Zonal Confirmation
• Whenever a candlestick pattern appear, it

creates a possible ‘zone of reversal’
• We should not always expect a reversal there
• We have to learn how to ‘confirm’ that this zone

will indeed lead to a high probability reversal in
prices

within this report
10th September 2015
What is zonal confirmation?

within this report
10th September 2015
Creating a possible zone of reversal

within this report
10th September 2015
Zonal Confirmation

within this report
10th September 2015
Zonal Confirmation

within this report
10th September 2015
Summary of zonal confirmation strategy
• Identify a candlestick pattern and create a

possible ‘zone’ around it
• Once this zone is confirmed, we go ahead and

bet on reversal in prices

within this report
10th September 2015
Zonal strategy applied to Apple

within this report
10th September 2015

within this report
10th September 2015

within this report
10th September 2015
Theory of Ranges (Second Strategy)
• Market does not always move in one direction
• Most of the time, it will move around aimlessly without

a clear direction within a certain range
• When this happens, we call this a ‘ranging’ market

within this report
10th September 2015
Representation of range in candlestick

within this report
10th September 2015
How does knowing Theory of Ranges help?
• Market is either in Trend or range
• When ranging, it is prepared to transit into a trend
• Trade in that direction

within this report
10th September 2015
What usually happens to such traders?

within this report
10th September 2015

within this report
10th September 2015

within this report
10th September 2015
How to establish proper range
• Establish a possible range with a Doji Candlestick
• Prices must ‘respect’ the boundaries
• ‘Range confirmation’

within this report
10th September 2015

within this report
10th September 2015

within this report
10th September 2015

within this report
10th September 2015

within this report
10th September 2015
The End!
More men have become great

through practice than by nature."-
Democritus

within this report

Introduction To Basic Candlestick Patterns: Nicholas Tan & Lucas Lee Global Macro Department

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GM

DISCLAIMER AND DISCLOSURES

• Introduction to Candlestick Patterns

• Basic Candlestick Patterns

DISCLAIMER AND DISCLOSURES

What are Candlestick Patterns?

• Allows investors and

• Offer insights into the

DISCLAIMER AND DISCLOSURES

A Brief History of Candlesticks

• Originally Developed by Japanese

• White Candles when prices went

• Honma Munehisa (1724-1803): Rice

• Popularised by Steve Nison in the

Understanding the Candlestick

DISCLAIMER AND DISCLOSURES

Market for Stock X on Thursday, 10th September

What can we learn from Candlestick Patterns?

• From a candlestick pattern, we can know…

• The Open/Close/High/Low Prices

• The volume and strength of buying/selling

• Whether there is more greed or fear

• How to make our trades!

DISCLAIMER AND DISCLOSURES

Let’s make a guess!

DISCLAIMER AND DISCLOSURES

• Bears want the price

• The Stock Market is a

DISCLAIMER AND DISCLOSURES

DISCLAIMER AND DISCLOSURES

DISCLAIMER AND DISCLOSURES

• Basic Candlestick Patterns

DISCLAIMER AND DISCLOSURES

DISCLAIMER AND DISCLOSURES

• Long lower shadows at least

• No/Short upper shadows

Single Candlestick Patterns

Where is the market headed?

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns

• Small real bodies

• Long upper shadows at

• No/Short lower shadows

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns

DISCLAIMER AND DISCLOSURES

Where is the market headed?

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns

• Open and Close Prices

• Suggests indecision and

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns

DISCLAIMER AND DISCLOSURES

What’s happening in the market?

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns

• Long white/black body

• A full white body suggests

• A full black body suggests

DISCLAIMER AND DISCLOSURES

Single Candlestick Patterns