Charting & TA Ch4: Candlesticks Defined

Question 1

DOJI

Answer 1

DOJI is a name for candlesticks that form when a stock’s opening price and closing price are virtually equal. This DOJI tells us that during the trading day the stock moved higher and lower and neither the buyers nor sellers were more prominent.

When thinking in the perspective of a market trend moving higher or a downward trend moving lower, the DOJI is a very telling sign that the number of buyers and sellers has become equal. Therefore, after the market or stock been in a trend, either up or down, and suddenly a DOJI is formed, then this tells us that since the buying and selling has equaled out – then a reversal of the current trend may be ahead.

• Doji are used in technical analysis to help identify securities price patterns.
• A doji names a trading session in which a security has an open and close that are virtually equal, which resembles a candlestick on a chart.
• The word doji comes from the Japanese phrase meaning “the same thing.”
• A doji candlestick is a neutral indicator that provides little information. They are rare, so they are not reliable for spotting things like price reversals.
• Doji formations come in three major types: gravestone, long-legged, and dragonfly.

Question 2

The Shooting Star

Answer 2

The Shooting Star is a Bearish candle that forms after an advance in the stock or index price.

• A shooting star occurs after an advance and indicates the price could start falling.
• The formation is bearish because the price tried to rise significantly during the day, but then the sellers took over and pushed the price back down toward the open.
• Traders typically wait to see what the next candle (period) does following a shooting star. If the price declines during the next period they may sell or short.
• If the price rises after a shooting star, the formation may have been a false signal or the candle is marking a potential resistance area around the price range of the candle.

Question 3

The Evening Star

Answer 3

The Evening Star is a bearish candlestick pattern that forms after an advance in the stock price.

The Evening Star indicates inability to move higher, and the Bearish Engulfing candle the following day confirms the sellers have entered the market.

• An evening star is a candlestick pattern that’s used by technical analysts to predict future price reversals to the downside.
• The evening star pattern is rare but it’s considered by traders to be a reliable technical indicator.
• The evening star is the opposite of the morning star pattern.
• The candlestick pattern is bearish and the morning star pattern is bullish.

Question 4

The Hammer

Answer 4

The Hammer is normally found at the bottom and forms when a stock has been in a downtrend and finally reached a support level. The formation of the hammer occurs when a security trades significantly lower than its opening price, but rallies later in the day to close either above or very close to its opening price. This pattern forms a hammer-shaped candlestick. It is very similar to a mirror image of the Shooting Star at the top of an advance.

• Hammer candlesticks typically occur after a price decline. They have a small real body and a long lower shadow.
• The hammer candlestick occurs when sellers enter the market during a price decline. By the time of market close, buyers absorb selling pressure and push the market price near the opening price.
• The close can be above or below the opening price, although the close should be near the open for the real body of the candlestick to remain small.
• The lower shadow should be at least two times the height of the real body.
• Hammer candlesticks indicate a potential price reversal to the upside. The price must start moving up following the hammer; this is called confirmation.

Question 5

The Hanging Man

Answer 5

The Hanging Man is a bearish candlestick pattern that forms at the end of an uptrend. It looks like the Hammer, but it forms at the end of an advance instead of a decline like the Hammer. It is created when there is a significant sell-off near the market open, but buyers are able to push this stock back up to close at or near the opening price. Generally the large sell-off is seen as an early indication that the bulls (buyers) are losing control and demand for the asset is waning.

• The Hanging Man is a type of candlestick pattern that refers to the candle’s shape and appearance and represents a potential reversal in an uptrend.
• Candlesticks display a security’s high, low, opening, and closing prices for a specific time frame and reflect the impact of investors’ emotions on prices.
• The Hanging Man occurs when two criteria are present: an asset has been in an uptrend, and the candle has a small body and a long lower shadow.

Question 6

The Spinning Top

Answer 6

The Spinning Top is a candlestick formation where the real body is small despite a wide range of price movement throughout the trading day. This candle is often regarded as neutral and used to signla indecision about the future direction of the stock’s price. Most traders look at it as simply a ho-hum day and wait to see what the next day brings. The following day or two usually confirms if a reversal in trend is happening. Confirmation the following day should indicate whether the advance will continue or a decline will ensue. In the above case, the confirmation was a negative candle the following day certainly indicating a change in trend.

• A spinning top is a candlestick pattern that has a short real body that’s vertically centered between long upper and lower shadows.
• The real body should be small, showing little difference between the open and close prices.
• Since buyers and sellers both pushed the price, but couldn’t maintain it, the pattern shows indecision and that more sideways movement could follow.